Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2020
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 001-37487
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
9635 Granite Ridge Drive, Suite 100
San Diego, California
(Address of principal executive office)
13-3632859
(I.R.S. Employer
Identification No.)
92123
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 459-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.001 PAR VALUE
TRADING SYMBOL
AEMD
NAME OF EACH EXCHANGE ON WHICH REGISTERED
NASDAQ CAPITAL MARKET
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one)
Large accelerated filer [_]
Non-accelerated filer [_]
Accelerated filer [_]
Smaller reporting company [X]
Emerging growth company [_]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the common stock held by non-affiliates of the registrant as of September 30, 2019 was approximately $4.5 million, computed by reference to the
closing sale price of the common stock of $3.45 per share on the Nasdaq Capital Market on September 30, 2019. Shares of common stock held by each executive officer and
director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the common stock of the registrant outstanding as of June 23, 2020 was 12,052,771.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A in connection with the registrant’s
2020 Annual Meeting of Stockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this annual report on Form 10-K. Such
proxy statement will be filed with the SEC not later than 120 days following the end of the registrant’s fiscal year ended March 31, 2020.
TABLE OF CONTENTS
PART I.
Item 1.
Description of Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statements
Item 16.
Form 10-K Summary
Signatures
Certifications
PART IV.
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CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K (the “Form 10-K”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections.
We may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,”
“will,” “would” or the negative of these terms, and similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Any
statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements and are based upon our current expectations, beliefs,
estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Such statements, include, but are not
limited to, statements contained in this Form 10-K relating to our business, business strategy, products and services we may offer in the future, the timing and results of future
regulatory filings, the timing and results of future clinical trials, and capital outlook. Forward-looking statements are based on our current expectations and assumptions
regarding our business, the economy and other future conditions. Because forward looking statements relate to the future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither
statement of historical fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements. Important
factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to, a decline in general economic conditions
nationally and internationally; the ability to protect our intellectual property rights; competition from other providers and products; risks in product development; inability to
raise capital to fund continuing operations; changes in government regulation; the ability to complete capital raising transactions, and other factors (including the risks
contained in Item 1A of this Form 10-K under the heading “Risk Factors”) relating to our industry, our operations and results of operations and any businesses that may be
acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from
those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them, nor can we assess the
impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We cannot guarantee future
results, levels of activity, performance or achievements. Except as required by applicable law, we undertake no obligation to and do not intend to update any of the forward-
looking statements to conform these statements to actual results.
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated or the context otherwise requires, references to the “Company”, “Aethlon”, “we”, “us” and “our” refer to Aethlon Medical, Inc., combined
with its majority-owned subsidiary, Exosome Sciences, Inc.
Overview and Corporate History
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:
·
·
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.
1
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 COVID-19 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 to 12 subjects at
a single center, will be safety, with secondary endpoints including measures of exosome clearance and characterization, as well as response and survival rates. This study, which
will be conducted at the UPMC Hillman Cancer Center in Pittsburgh, PA, has been approved by the Institutional Review Board, or IRB and is in the process of starting up.
We also believe the Hemopurifier can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not
addressed with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals infected with 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.
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 TauSome TM 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.
In addition to the foregoing, we are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the
health and safety of our employees while continuing our operations. Given the level of uncertainty regarding the duration and impact of the COVID-19 pandemic on capital
markets and the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting COVID-19 pandemic on our timelines and future
access to capital. We are continuing to monitor the spread of COVID-19 and its potential impact on our operations. The full extent to which the COVID-19 pandemic will
impact our business, results of operations, financial condition, clinical trials, and preclinical research will depend on future developments that are highly uncertain, including
actions taken to contain or treat COVID-19 and their effectiveness, as well as the economic impact on national and international markets.
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. All references to “us” or “we” are references to Aethlon Medical, Inc.
The Mechanism of the Hemopurifier
The Hemopurifier is an affinity hemofiltration device designed for the single-use removal of exosomes and life-threatening viruses from the human circulatory system.
In the United States, the Hemopurifier is classified as a combination product whose regulatory jurisdiction is The Center for Devices and Radiological Health, or CDRH, the
branch of FDA responsible for the premarket approval of all medical devices.
In application, our Hemopurifier can be used on the established infrastructure of continuous renal replacement therapy, or CRRT, and dialysis instruments located in
hospitals and clinics worldwide. It could also potentially be developed as part of a proprietary closed system with its own pump and tubing set, negating the requirement for
dialysis infrastructure. Incorporated within the Hemopurifier is a protein called a lectin that binds to a glycosylated, or sugar substituted, membrane, which exosomes and most
infectious viruses share.
2
The Hemopurifier - Clinical Trials In Viral Infections
The initial development of the Hemopurifier was focused on viral infections. In non-clinical bench experiments using a laboratory version of the Hemopurifier,
performed in Company labs as well as multiple other outside labs including the Centers for Disease Control, or CDC, the United States Army Medical Research Institute of
Infectious Diseases, or USAMRIID, Battelle Memorial Research Institute and others, we have demonstrated that the mini-Hemopurifier can bind and clear multiple different
glycosylated, or containing sugar molecules on their membranes, viruses. These viruses include HIV, hepatitis C, or HCV, Dengue, West Nile, multiple strains of influenza,
Ebola, Chikungunya, multiple herpes viruses, a MERS-CoV related pseudovirus and others.
Initial clinical trials on the Hemopurifier were conducted overseas on dialysis patients with HCV, with a subsequent Early Feasibility Study conducted in the U.S.
under an FDA approved Investigational Device Exemption, or IDE.
On March 13, 2017, we concluded an FDA-approved early feasibility study under an IDE in end stage renal disease patients on dialysis who were infected with HCV.
The study was conducted at DaVita MedCenter Dialysis in Houston, Texas. We reported that there were no device-related adverse events in enrolled subjects who met the study
inclusion-exclusion criteria. We also reported that an average capture of 154 million copies of HCV (in International Units, I.U.) within the Hemopurifier during four-hour
treatments. Prior to this approval, we collected supporting Hemopurifier data through investigational human studies conducted overseas.
SARS-CoV-2/COVID-19
SARS-COV-2, the causative agent of COVID-19 is a member of the coronavirus family which includes the original SARS virus, SARS-CoV, and the MERS virus.
SARS-CoV-2 like all coronaviruses is glycosylated which suggests that the Hemopurifier could potentially clear it from biologic fluids including blood. While we have not
tested the ability of the laboratory version of the Hemopurifier to clear live SARS-CoV-2 virus for safety reasons, we have demonstrated in our labs that the laboratory version
of the Hemopurifier clears substantial quantities of the protein that binds to cells allowing viral entry. Based on this observation, along with our in vitro data with a MERS
related virus we believe the Hemopurifier could potentially clear SARS-CoV-2 from the bloodstream. While COVID-19 initially targets the respiratory tract, accumulating
evidence suggests that virus circulating in the bloodstream may be associated with more severe disease. These observations suggest that the Hemopurifier could have a role in
treating severely affected patients during the current pandemic.
On June 17, 2020, the FDA approved a supplement to the Company’s open IDE for the Company’s Hemopurifier in viral disease to allow for the testing of the
Hemopurifier 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, orICU, 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.
The Hemopurifier – Clinical Trials Conducted Overseas in Viral Infections
EBOLA Virus
In December of 2014, Time Magazine named the Hemopurifier a “Top 25 Invention” as the result of treating an Ebola-infected physician at Frankfurt University
Hospital in Germany. The physician was comatose with multiple organ failure at the time of treatment with the Hemopurifier. At the American Society of Nephrology Annual
Meeting, Dr. Helmut Geiger, Chief of Nephrology at Frankfurt University Hospital reported that the patient received a single 6.5 hour Hemopurifier treatment. Prior to
treatment, viral load was measured at 400,000 copies/ml. Post-treatment viral load reported to be at 1,000 copies/ml. Dr. Geiger also reported that 242 million copies of Ebola
virus were captured within the Hemopurifier during treatment. The patient ultimately made a full recovery. Based on this experience, the Company filed an Expanded Access
protocol with the FDA to treat Ebola virus infected patients in up to ten centers in the U.S. and a corresponding protocol was approved by HealthCanada. These protocols remain
open allowing Hemopurifier treatment to be offered to patients presenting for care in both countries. In 2018, we applied for and were granted a Breakthrough Designation by
the FDA “… for the treatment of life-threatening viruses that are not addressed with approved therapies.”
3
Hepatitis C Virus (HCV)
Prior to FDA approval of the IDE feasibility study, we conducted investigational HCV treatment studies at the Apollo Hospital, Fortis Hospital and the Medanta
Medicity Institute in India. In the Medanta Medicity Institute study, twelve HCV-infected individuals were enrolled to receive three six-hour Hemopurifier treatments during the
first three days of a 48-week peginterferon+ribavirin treatment regimen. The study was conducted under the leadership of Dr. Vijay Kher. Dr. Kher’s staff reported that
Hemopurifier therapy was well tolerated and without device-related adverse events in the twelve treated patients.
Of these twelve patients, ten completed the Hemopurifier-peginterferon+ribavirin treatment protocol, including eight genotype-1 patients and two genotype-3 patients.
Eight of the ten patients achieved a sustained virologic response, which is the clinical definition of treatment cure and is defined as undetectable HCV in the blood 24 weeks
after the completion of the 48-week peginterferon+ribavirin drug regimen. Both genotype-3 patients achieved a sustained virologic response, while six of the eight genotype-1
patients achieved a sustained virologic response, which defines a cure of the infection.
Hemopurifier - Human Immunodeficiency Virus (HIV)
In addition to treating Ebola and HCV-infected individuals, we also conducted a single proof-of-principle treatment study at the Sigma New Life Hospital in an AIDS
patient who was not being administered HIV antiviral drugs. In the study, viral load was reduced by 93% as the result of 12 Hemopurifier treatments (each four hours in
duration) that were administered over the course of one month.
The Hemopurifier in Cancer
While hepatitis C is no longer a major commercial opportunity in developed markets due to the wide availability of curative, oral direct acting anti-viral agents, or
DAAs, we continue to investigate potential viral targets for the Hemopurifier. Recently, however, our primary focus has been on the evaluation of the Hemopurifier in cancer,
where we have shown in non-clinical studies that it is capable of clearing exosomes, which are subcellular particles that are secreted by both normal and malignant cells. Tumor
derived exosomes, have been shown in multiple laboratories to be critical components in the progression of cancers. They can mediate resistance to chemotherapy, resistance to
targeted agents such as trastuzumab (Herceptin), metastasis and resistance to the newer immuno-oncology agents, such as pembrolizumab (Keytruda). Based on these
observations and data, in November 2019 the FDA granted us a second Breakthrough Designation “…for 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.”
In June 2019, we met with the FDA in Bethesda, Maryland to discuss the development program for the Hemopurifier in cancer. Following this meeting, in September
2019, we filed an IDE to support initiating an Early Feasibility Study, or EFS, to investigate the Hemopurifier in patients with advanced and/or metastatic squamous cell
carcinoma of the head and neck in combination with pembrolizumab (Keytruda) which was recently approved in the front line setting. The IDE was approved on October 4,
2019. We are now preparing to initiate the trial, which will enroll 10 to 12 subjects at the UPMC Hillman Cancer Center in Pittsburgh. The trial has received IRB approval and
we expect it to open for enrollment in the September quarter. Endpoints for the trial will include safety, clearance and characterization of cleared exosomes and clinical tumor
response and survival. We are in contact with the UPMC Hillman Cancer Center to navigate and assess the impact, if any, of COVID-19 on our trial and current timelines.
Exosome Sciences, Inc. – Majority Owned Biomarker Discovery Company
We are the majority owner of Exosome Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening
disease conditions that may be current or future therapeutic targets for Aethlon Medical. At present, the priority of ESI is directed toward exosomal biomarkers to diagnose and
monitor cancer and neurological disorders.
Since it began operations in 2013, ESI researchers disclosed the discovery of an exosomal biomarker that may be associated with neurodegenerative diseases that
involve the abnormal accumulation of tau protein in the brain. These diseases, known as tauopathies, are a family of 21 different neurological disorders that include Alzheimer’s
disease and Chronic Traumatic Encephalopathy, or CTE. Related to CTE, the ESI team was invited to participate in an NIH-funded research study with The Boston University
CTE Center. In the study, ESI researchers investigated an exosomal tau biomarker, or TauSome, as a candidate to diagnose and monitor CTE in living individuals. At the
present time, CTE can only be diagnosed through post-mortem brain autopsy.
4
The results of the study indicated that TauSome levels in the blood of former professional American football players, a high CTE risk group, were significantly higher
as compared to same-age group control subjects who did not participate in activities that involved repetitive head trauma. Additionally, high TauSome levels also correlated
with poor performance in cognitive decline testing. These results were published in an article entitled “Preliminary Study of Plasma Exosomal Tau as a Potential Biomarker for
Chronic Traumatic Encephalopathy” in the Journal of Alzheimer’s Disease on April 12, 2016.
To further validate these observations, ESI has initiated a follow-on study to evaluate TauSome levels in up to 200 former professional football players and control
subjects. If fully enrolled, the study would be the largest study to date related to the advancement of a candidate biomarker to diagnose and monitor CTE in the living.
Enrollment of study participants began in March 2018 at the Translational Genomics Research Institute, or TGEN, in Phoenix, AZ. Kendall Van Keuren-Jensen, Ph.D., Co-
Director of TGEN’s Center for Noninvasive Diagnostics is the principal investigator at this site location. Dr. Van Keuren-Jensen is neurodegenerative disease thought leader
whose research includes discovery and detection of biomarkers for central nervous system disorders. Additional site locations are anticipated.
In September 2019, we announced that ESI had entered into a collaboration with the Hoag Hospital Presbyterian in Newport Beach, California to identify and
characterize potential early disease markers for cancer diagnostics, cancer progression and treatment resistance. The Principal Investigator on this study is Michael Demeure,
M.D., program director of Precision Medicine at Hoag. Samples from patients at Hoag will be analyzed by ESI scientists to identify and characterize exosomal “liquid biopsy”
markers of cancer incidence and progression. We believe that our recently announced NCI-SBIR Phase II contract to develop a benchtop instrument to isolate and characterize
exosomes could substantially expand the capabilities of the ESI programs.
U.S. GOVERNMENT CONTRACTS
We have entered into the following three contracts/grants with the National Cancer Institute, or NCI, part of the NIH over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the NCI awarded to us a Small Business Innovation Research, or SBIR, Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device
Prototype for Isolation of Melanoma Exosomes for Diagnostics and Treatment Monitoring”, referred to as the Award Contract. The Award Contract amount is $1,860,561 and
runs for the period from September 16, 2019 through September 15, 2021.
The work to be performed pursuant to this Award Contract will focus on melanoma exosomes. This work follows from our completion of a Phase I contract for the
Topic 359 solicitation that ran from September 2017 through June 2018 (see Phase 1 Melanoma Cancer Contract below). Following on the Phase I work, the deliverables in the
Phase II program 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, 2020, we recognized $620,187 in government contract revenue under this contract as a result of the work involved completing
the first three milestones in the project as reported in the kick-off presentation to the NCI and the first and second quarterly reports. The kick-off presentation covered the
Company's organization and project status, recent achievements, the status of the field, the status of commercial and academic competitors, where the proposed project was
positioned against the state of the art, the IP landscape, a refresher on the proposed technology, the detailed plan for the first budget period of the contract and technical risks and
alternative approaches. The first and second quarterly reports covered a summary of technical objectives, a description of activities accomplished in the quarter, an analysis of
experimental data, comments regarding the timeliness of performance, and a brief explanation of activities to be pursued in the following quarter.
Phase 1 Melanoma Cancer Contract
We entered into a contract with the NCI in September 2017. This award was under the NIH’s SBIR program. The title of the award was “SBIR Topic 359 Phase 1
Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.” The award from NIH was a firm, fixed-price contract with potential total payments to us
of $299,250 over the course of nine months.
Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also had the
unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800. Under the terms of the contract, we were required to
perform certain incremental work toward the achievement of specific milestones against which we invoiced the government for fixed payment amounts. The Phase 1 Melanoma
Cancer Contract was completed in June 2018.
5
In the fiscal year ended March 31, 2019, we performed work under the contract covering the remainder of the technical objectives of the contract (Aim 1: To validate
the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma, and Aim 2: To validate a method of melanoma exosome isolation consisting of the
Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes, and Aim 3: To evaluate the functional integrity
of melanoma exosomes purified by the Hemopurifier and immunocapture isolation steps). As a result we invoiced NIH for $149,625 during the fiscal year ended March 31,
2019. The Melanoma Cancer Contract is now completed.
Breast Cancer Grant
In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of this SBIR Phase I grant is “The Hemopurifier Device for
Targeted Removal of Breast Cancer Exosomes from the Blood Circulation.”
This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month
extension on this grant, so the expiration date was extended to August 31, 2020. The total amount of the firm grant is $298,444. The grant calls for two subcontractors to work
with us. Those subcontractors are University of Pittsburgh and Massachusetts General Hospital.
During the fiscal year ended March 31, 2020, we recognized $30,000 in government contract revenue under this grant as a result of the work involved in one of the
three technical objectives of the contract (Aim 2. “Elution of a population of breast cancer exosomes from Hemopurifier cartridges that bear the signatures of malignancy based
on expression of CSPG4 and HER2, for triple-negative or HER2-overexpressing cancers, respectively”). We also invoiced the NCI for an additional $100,000 during the fiscal
year ended March 31, 2020 in order to pay our subcontractors under the contract. As we did not complete any additional technical objectives beyond Aim 2 noted above during
the period, we recorded this $100,000 as deferred revenue as of March 31, 2020.
During the fiscal year ended March 31, 2019, we recognized $80,000 in government contract revenue under this grant as a result of the work involved in completing
one of the three technical objectives of the contract (Aim 1. “To evaluate Hemopurifier-mediated capture of breast cancer exosomes”).
Research and Development Costs
A substantial portion of our operating budget is used for research and development activities. The cost of research and development, all of which has been charged to
operations, amounted to approximately $927,000 and $896,000 in the fiscal years ended March 31, 2020 and 2019, respectively.
Intellectual Property
We currently own or have license rights to a number of U.S. and foreign patents and patent applications and endeavor to continually improve our intellectual property
position. We consider the protection of our technology, whether owned or licensed, to the exclusion of use by others, to be vital to our business. While we intend to focus
primarily on patented or patentable technology, we may also rely on trade secrets, unpatented property, know-how, regulatory exclusivity, patent extensions and continuing
technological innovation to develop our competitive position. We also own certain trademarks.
Our success depends in large part on our ability to protect our proprietary technology, including the Hemopurifier product platform, and to operate without infringing
the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright and trademark laws, as well as confidentiality agreements, licensing
agreements and other agreements, to establish and protect our proprietary rights. Our success also depends, in part, on our ability to avoid infringing patents issued to others. If
we were judicially determined to be infringing on any third-party patent, we could be required to pay damages, alter our products or processes, obtain licenses or cease sales of
products or certain activities.
To protect our proprietary medical technologies, including the Hemopurifier product platform and other scientific discoveries, we have a portfolio of over 50 issued
patents and pending applications worldwide. We currently have five issued U.S. patents and 33 issued patents in countries outside of the United States. In addition, we have 17
patent applications worldwide related to our Hemopurifier product platform and other technologies. We are seeking additional patents on our scientific discoveries. In 2020, we
filed several provisional patent applications related to our products and technologies.
6
It is possible that our pending patent applications may not result in issued patents, that we will not develop additional proprietary products that are patentable, that any
patents issued to us may not provide us with competitive advantages or will be challenged by third parties and that the patents of others may prevent the commercialization of
products incorporating our technology. Furthermore, others may independently develop similar products, duplicate our products or design around our patents. U.S. patent
applications are not immediately made public, so it is possible that a third party may obtain a patent on a technology we are actively using.
There is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and declared invalid or
unenforceable. For many of our pending applications, patent interference proceedings may be instituted with the U.S. Patent and Trademark Office, or the USPTO when more
than one person files a patent application covering the same technology, or if someone wishes to challenge the validity of an issued patent. At the completion of the interference
proceeding, the USPTO will determine which competing applicant is entitled to the patent, or whether an issued patent is valid. Patent interference proceedings are complex,
highly contested legal proceedings, and the USPTO’s decision is subject to appeal. This means that if an interference proceeding arises with respect to any of our patent
applications, we may experience significant expenses and delay in obtaining a patent, and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a
competitor rather than to us. Third parties can file post-grant proceedings in the USPTO, seeking to have issued patent invalidated, within nine months of issuance. This means
that patents undergoing post-grant proceedings may be lost, or some or all claims may require amendment or cancellation, if the outcome of the proceedings is unfavorable to
us. Post-grant proceedings are complex and could result in a reduction or loss of patent rights. The institution of post-grant proceedings against our patents could also result in
significant expenses.
Patent law outside the United States is uncertain and in many countries, is currently undergoing review and revisions. The laws of some countries may not protect our
proprietary rights to the same extent as the laws of the United States. Third parties may attempt to oppose the issuance of patents to us in foreign countries by initiating
opposition proceedings. Opposition proceedings against any of our patent filings in a foreign country could have an adverse effect on our corresponding patents that are issued
or pending in the United States. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have
been issued in countries other than the United States. This could result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a
material adverse effect on our results of operations and financial condition. Outside of the United States, we currently have pending patent applications or issued patents in
Europe, India, Russia, Australia, Canada and Hong Kong.
In addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. It is possible that others could independently develop or
otherwise acquire substantially equivalent technology, somehow gain access to our trade secrets and proprietary technological expertise or disclose such trade secrets, or that we
may not successfully ultimately protect our rights to such unpatented trade secrets and proprietary technological expertise. We rely, in part, on confidentiality agreements with
our marketing partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise. We cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any breach or that our unpatented trade secrets and proprietary technological expertise will not
otherwise become known or be independently discovered by competitors.
Patents
The following table lists our issued patents and patent applications, including their ownership status:
PATENT #
9,707,333
9,364,601
8,288,172
7,226,429
10,022,483
Patents Issued in the United States
PATENT NAME
Extracorporeal removal of microvesicular particles
Extracorporeal removal of microvesicular particles
Extracorporeal removal of microvesicular particles
Method for removal of viruses from blood by lectin affinity hemodialysis
Method for removal of viruses from blood by lectin affinity hemodialysis
ISSUANCE
DATE
7/18/17
6/14/16
10/16/12
6/5/07
7/17/18
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
EXPIRATION
DATE
1/6/29
10/2/29
3/30/29
1/20/24
1/20/24
7
Patent Applications Pending in the United States
APPLICATION #
APPLICATION NAME
16/415,713
16/506,864
16/036,608
16/459,220
15/777,168
16/636,297
Provisional
Provisional
Provisional
Provisional
Affinity capture of circulating biomarkers
Brain specific exosome based diagnostics and extracorporeal therapies
Method for removal of viruses from blood by lectin affinity hemodialysis
Methods and compositions for quantifying exosomes
Plasma exosomal tau as a biomarker for chronic traumatic encephalopathy
Multiplex cerebrospinal fluid processing system
Devices and Methods for Mediating SARS-COV-2 (COVID-19)
Methods of improving the efficacy of immune checkpoint inhibitors
Methods of improving the efficacy of monoclonal antibodies
Systems and methods for capturing circulating exosomes
PATENT #
PATENT NAME
Foreign Patents
3110977
3110977
3110977
3110977
3110977
3110977
3110977
3110977
2353399
1624785
1624785
1624785
1624785
1624785
1624785
2516403
2591359
2591359
2591359
2591359
2644855
1993600
1993600
1993600
1993600
1993600
1993600
1993600
1993600
3366784
3366784
3366784
3366784
Brain specific exosome based diagnostics and extracorporeal therapies (Denmark)
Brain specific exosome based diagnostics and extracorporeal therapies (France)
Brain specific exosome based diagnostics and extracorporeal therapies (Germany)
Brain specific exosome based diagnostics and extracorporeal therapies (Ireland)
Brain specific exosome based diagnostics and extracorporeal therapies (Great Britain)
Brain specific exosome based diagnostics and extracorporeal therapies (Sweden)
Brain specific exosome based diagnostics and extracorporeal therapies (Netherlands)
Brain specific exosome based diagnostics and extracorporeal therapies (Switzerland)
Method for removal of viruses from blood by lectin affinity hemodialysis (Russia)
Method for removal of viruses from blood by lectin affinity hemodialysis (Belgium)
Method for removal of viruses from blood by lectin affinity hemodialysis (Ireland)
Method for removal of viruses from blood by lectin affinity hemodialysis (Italy)
Method for removal of viruses from blood by lectin affinity hemodialysis (Great Britain)
Method for removal of viruses from blood by lectin affinity hemodialysis (France)
Method for removal of viruses from blood by lectin affinity hemodialysis (Germany)
Method for removal of viruses from blood by lectin affinity hemodialysis (Canada)
Methods for quantifying exosomes (Germany)
Methods for quantifying exosomes (France)
Methods for quantifying exosomes (Great Britain)
Methods for quantifying exosomes (Spain)
Extracorporeal removal of microvesicular particles (Canada)
Extracorporeal removal of microvesicular particles (Germany)
Extracorporeal removal of microvesicular particles (Switzerland)
Extracorporeal removal of microvesicular particles (Spain)
Extracorporeal removal of microvesicular particles (France)
Extracorporeal removal of microvesicular particles (Great Britain)
Extracorporeal removal of microvesicular particles (Italy)
Extracorporeal removal of microvesicular particles (Netherlands)
Extracorporeal removal of microvesicular particles (Sweden)
Brain specific exosome based diagnostics and extracorporeal therapies (Denmark)
Brain specific exosome based diagnostics and extracorporeal therapies (France)
Brain specific exosome based diagnostics and extracorporeal therapies (Germany)
Brain specific exosome based diagnostics and extracorporeal therapies (Ireland)
FILING
DATE
5/17/19
7/09/19
1/16/18
7/01/19
5/17/18
2/03/20
Filed
Filed
Filed
Filed
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
EXPIRATION
DATE
9/12/36
9/12/36
9/12/36
9/12/36
9/12/36
9/12/36
9/12/36
9/12/36
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
7/07/31
7/07/31
7/07/31
7/07/31
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
1/20/24
9/12/36
9/12/36
9/12/36
9/12/36
ISSUANCE
DATE
5/16/18
5/16/18
5/16/18
5/16/18
5/16/18
5/16/18
5/16/18
5/16/18
4/27/09
7/17/13
7/17/13
7/17/13
7/17/13
7/17/13
7/17/13
8/12/14
3/01/17
3/01/17
3/01/17
3/01/17
11/19/19
4/24/19
4/24/19
4/24/19
4/24/19
4/24/19
4/24/19
4/24/19
4/24/19
11/13/19
11/13/19
11/13/19
11/13/19
8
Foreign Patent Applications
APPLICATION #
APPLICATION NAME
FILING DATE
DE 112016001400.7 Methods of delivering regional citrate anticoagulation (RCA) during extracorporeal blood treatments
EP19161598.8
9104740.6
8139/DELNP/2008
3061952
2939652
18166085.3
16867003.2
Extracorporeal removal of microvesicular particles (exosomes) (Europe)
Extracorporeal removal of microvesicular particles (exosomes) (Hong Kong)
Extracorporeal removal of microvesicular particles (exosomes) (India)
Extracorporeal removal of microvesicular particles (Canada)
Brain specific exosome based diagnostics and extracorporeal therapies (Canada)
Brain specific exosome based diagnostics and extracorporeal therapies (Europe)
Plasma exosomal tau as a biomarker for chronic traumatic encephalopathy
10/23/17
3/8/19
3/9/07
3/9/07
11/18/19
8/12/06
4/6/18
11/16/16
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
International Patent Applications
APPLICATION NAME
Multiplex cerebrospinal fluid processing system
FILING
DATE
7/31/18
OWNED OR
LICENSED
Owned
APPLICATION #
PCT/US2018/
044576
Licensing and Assignment Agreements
On November 7, 2006, we executed an assignment agreement with the London Health Science Center Research, Inc. under which an invention and related patent
rights for a method to treat cancer were assigned to us. The invention provides for the "Extracorporeal removal of microvesicular particles" for which the U.S. Patent and
Trademark Office allowed a patent (Patent NO.8,288,172) in the U.S. as of October 2012. The agreement provided for an upfront payment of 800 shares of unregistered
common stock and a 2% royalty on any future net sales of all products or services, the sale of which would infringe in the absence of the assignment granted under this
agreement. We are also responsible for paying certain patent application and filing costs. Under the assignment agreement, we own the patents until their expiration in May
2029. Under certain circumstances, ownership of the patents may revert to the London Health Science Center Research, Inc. if there is an uncured substantial breach of the
assignment agreement.
Industry & Competition
The industry for treating infectious disease and cancer is extremely competitive, and companies developing new treatment procedures face significant capital and
regulatory challenges. As our Hemopurifier is a clinical-stage device, we have the additional challenge of establishing medical industry support, which will be driven by
treatment data resulting from human clinical studies. Should our device become market cleared by FDA or the regulatory body of another country, we may face significant
competition from well-funded pharmaceutical organizations. Additionally, we would likely need to establish large-scale production of our device in order to be competitive.
We believe that our Hemopurifier is a first-in-class therapeutic candidate and we are not aware of any affinity hemofiltration device being market cleared in any country for the
single-use removal of circulating viruses or tumor-derived exosomes.
Government Regulation
The Hemopurifier is subject to regulation by numerous regulatory bodies, primarily the FDA, and comparable international regulatory agencies. These agencies require
manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing, storage, distribution,
advertising and promotion, and post-marketing surveillance reporting of medical devices. As the primary mode of action of the Hemopurifier is attributable to the device
component of this combination product, the FDA’s Center for Devices and Radiological Health, or the CDRH, has primary jurisdiction over its premarket development, review
and approval. Failure to comply with applicable requirements may subject a device and/or its manufacturer to a variety of administrative sanctions, such as issuance of warning
letters, import detentions, civil monetary penalties and/or judicial sanctions, such as product seizures, injunctions and criminal prosecution.
9
FDA’s Pre-market Clearance and Approval Requirements
Each medical device we seek to commercially distribute in the United States will require either a prior 510(k) clearance, unless it is exempt, or a pre-market approval
from the FDA. Generally, if a new device has a predicate that is already on the market under a 510(k) clearance, the FDA will allow that new device to be marketed under a
510(k) clearance; otherwise, a premarket approval, or PMA, is required. Medical devices are classified into one of three classes—Class I, Class II or Class III—depending on
the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurance of safety and effectiveness. Class I devices are deemed
to be low risk and are subject to the general controls of the Federal Food, Drug and Cosmetic Act, such as provisions that relate to: adulteration; misbranding; registration and
listing; notification, including repair, replacement, or refund; records and reports; and good manufacturing practices. Most Class I devices are classified as exempt from pre-
market notification under section 510(k) of the FD&C Act, and therefore may be commercially distributed without obtaining 510(k) clearance from the FDA. Class II devices
are subject to both general controls and special controls to provide reasonable assurance of safety and effectiveness. Special controls include performance standards, post market
surveillance, patient registries and guidance documents. A manufacturer may be required to submit to the FDA a pre-market notification requesting permission to commercially
distribute some Class II devices. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not
substantially equivalent to a previously cleared 510(k) device, are placed in Class III. A Class III device cannot be marketed in the United States unless the FDA approves the
device after submission of a PMA. However, there are some Class III devices for which FDA has not yet called for a PMA. For these devices, the manufacturer must submit a
pre-market notification and obtain 510(k) clearance in orders to commercially distribute these devices. The FDA can also impose sales, marketing or other restrictions on
devices in order to assure that they are used in a safe and effective manner. We believe that the Hemopurifier will be classified as a Class III device and as such will be subject
to PMA submission and approval.
Pre-market Approval Pathway
A pre-market approval application must be submitted to the FDA for Class III devices for which the FDA has required a PMA. The pre-market approval application
process is much more demanding than the 510(k) pre-market notification process. A pre-market approval application must be supported by extensive data, including but not
limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction reasonable evidence of safety and effectiveness of the device.
After a pre-market approval application is submitted, the FDA has 45 days to determine whether the application is sufficiently complete to permit a substantive review
and thus whether the FDA will file the application for review. The FDA has 180 days to review a filed pre-market approval application, although the review of an application
generally occurs over a significantly longer period of time and can take up to several years. During this review period, the FDA may request additional information or
clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device.
Although the FDA is not bound by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In addition,
the FDA may conduct a preapproval inspection of the manufacturing facility to ensure compliance with the Quality System Regulation, or QSR. The agency also may inspect
one or more clinical sites to assure compliance with FDA’s regulations.
Upon completion of the PMA review, the FDA may: (i) approve the PMA which authorizes commercial marketing with specific prescribing information for one or
more indications, which can be more limited than those originally sought; (ii) issue an approvable letter which indicates the FDA’s belief that the PMA is approvable and states
what additional information the FDA requires, or the post-approval commitments that must be agreed to prior to approval; (iii) issue a not approvable letter which outlines steps
required for approval, but which are typically more onerous than those in an approvable letter, and may require additional clinical trials that are often expensive and time
consuming and can delay approval for months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable letter, the applicant has 180 days to
respond, after which the FDA’s review clock is reset.
Emergency Use Authorizations, or EUAs, are granted by FDA in public health emergencies but allow use of the authorized device only during the period of the
respective public health emergency, and do not change the requirement to ultimately seek PMA approval after the authorization period has ended.
10
Clinical Trials
Clinical trials are almost always required to support pre-market approval and are sometimes required for 510(k) clearance. In the United States, for significant risk
devices, these trials require submission of an application for an IDE to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory
testing results, showing it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a
specific number of patients at specified study sites. During the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring,
reporting and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of
investigational devices and comply with all reporting and recordkeeping requirements. Clinical trials for significant risk devices may not begin until the IDE application is
approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. An IRB is an appropriately constituted group that has been formally
designated to review and monitor medical research involving subjects and which has the authority to approve, require modifications in, or disapprove research to protect the
rights, safety and welfare of human research subjects. The FDA or the IRB at each site at which a clinical trial is being performed may withdraw approval of a clinical trial at
any time for various reasons, including a belief that the risks to study subjects outweigh the benefits or a failure to comply with FDA or IRB requirements. Even if a trial is
completed, the results of clinical testing may not demonstrate the safety and effectiveness of the device, may be equivocal or may otherwise not be sufficient to obtain approval
or clearance of the product. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the impact, if any, of COVID-19 on our
clinical trials and current timelines, including delays or difficulties in enrolling patients and/or delays or difficulties in clinical site initiation.
Ongoing Regulation by the FDA
Even after a device receives clearance or approval and is placed on the market, numerous regulatory requirements apply. These include:
·
·
·
·
·
·
establishment registration and device listing;
the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality
assurance procedures during all aspects of the manufacturing process;
labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to
promotional activities;
medical device reporting regulations, which require that manufactures report to the FDA if their device may have caused or contributed to a death or serious
injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or
serious injury if the malfunction were to recur;
corrections and removal reporting regulations, which require that manufactures report to the FDA field corrections or removals if undertaken to reduce a risk to
health posed by a device or to remedy a violation of the FDCA that may present a risk to health; and
post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and
effectiveness data for the device.
Some changes to an approved PMA device, including changes in indications, labeling or manufacturing processes or facilities, require submission and FDA approval
of a new PMA or PMA supplement, as appropriate, before the change can be implemented. Supplements to a PMA often require the submission of the same type of information
required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the device covered by the original
PMA. The FDA uses the same procedures and actions in reviewing PMA supplements as it does in reviewing original PMAs.
11
Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or state authorities, which may
include any of the following sanctions:
·
·
·
·
·
·
warning or untitled letters, fines, injunctions, consent decrees and civil penalties;
customer notifications, voluntary or mandatory recall or seizure of our products;
operating restrictions, partial suspension or total shutdown of production;
delay in processing submissions or applications for new products or modifications to existing products;
withdrawing approvals that have already been granted; and
criminal prosecution.
The Medical Device Reporting laws and regulations require us to provide information to the FDA when we receive or otherwise become aware of information that
reasonably suggests our device may have caused or contributed to a death or serious injury as well as a device malfunction that likely would cause or contribute to death or
serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for off-label use. The FDA and other agencies actively
enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant liability, including substantial monetary penalties and criminal prosecution.
Newly discovered or developed safety or effectiveness data may require changes to a product’s labeling, including the addition of new warnings and contraindications,
and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be
established, or the FDA’s policies may change, which could delay or prevent regulatory clearance or approval of our products under development.
Healthcare Regulation
In addition to the FDA’s restrictions on marketing of pharmaceutical products, the U.S. healthcare laws and regulations that may affect our ability to operate include:
the federal fraud and abuse laws, including the federal anti-kickback and false claims laws; federal data privacy and security laws; and federal transparency laws related to
payments and/or other transfers of value made to physicians and other healthcare professionals and teaching hospitals. Many states have similar laws and regulations that may
differ from each other and federal law in significant ways, thus complicating compliance efforts. For example, states have anti-kickback and false claims laws that may be
broader in scope than analogous federal laws and may apply regardless of payor. In addition, state data privacy laws that protect the security of health information may differ
from each other and may not be preempted by federal law. Moreover, several states have enacted legislation requiring pharmaceutical manufacturers to, among other things,
establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales and marketing activities, report information related to
drug pricing, require the registration of sales representatives, and prohibit certain other sales and marketing practices. These laws may adversely affect our sales, marketing and
other activities with respect to any product candidate for which we receive approval to market in the United States by imposing administrative and compliance burdens on us.
Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities,
particularly any sales and marketing activities after a product candidate has been approved for marketing in the United States, could be subject to legal challenge and
enforcement actions. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we
may be subject to significant civil, criminal, and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in
government healthcare programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve
allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and
our results of operations.
12
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval,
manufacture and marketing of regulated products or the reimbursement thereof. For example, in the U.S., the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010, or collectively, PPACA, among other things, reduced and/or limited Medicare reimbursement to certain providers and
imposed an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions. However, the
2020 federal spending package permanently eliminated, effective January 1, 2020, this PPACA-mandated medical device tax. On December 14, 2018, a Texas U.S. District
Court Judge ruled that the PPACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the legislation enacted in 2017,
informally titled the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the
individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well. On
March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and has allotted one hour for oral arguments, which are expected
to occur in the fall of 2020. In addition, the Budget Control Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments to providers by two
percent through fiscal year 2030. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which was signed into law in March 2020 and is designed to provide
financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended the two percent Medicare sequester from May 1, 2020 through
December 31, 2020, and extended the sequester by one year, through 2030. These reductions may reduce providers’ revenues or profits, which could affect their ability to
purchase new technologies. Furthermore, the healthcare industry in the U.S. has experienced a trend toward cost containment as government and private insurers seek to control
healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. Legislation could be adopted in the future that limits payments
for our products from governmental payors. It is possible that additional governmental action will be taken to address the COVID-19 pandemic.
Coverage and Reimbursement
In both the U.S. and international markets, the use of medical devices is dependent in part on the availability of reimbursement from third-party payors, such as
government and private insurance plans. Healthcare providers that use medical devices generally rely on third-party payors to pay for all or part of the costs and fees associated
with the medical procedures being performed or to compensate them for their patient care services. Should our products under development be approved for commercialization
by the FDA, any such products may not be considered cost-effective, reimbursement may not be available in the U.S. or other countries, if approved, and reimbursement may
not be sufficient to allow sales of our future products on a profitable basis. The coverage decisions of third-party payors will be significantly influenced by the assessment of our
future products by health technology assessment bodies. If approved for use in the U.S., we expect that any products that we develop will be purchased primarily by medical
institutions, which will in turn bill various third-party payors for the health care services provided to patients at their facility. Payors may include the Centers for Medicare &
Medicaid Services, or CMS, which administers the Medicare program and works in partnership with state governments to administer Medicaid, other government programs and
private insurance plans. The process involved in applying for coverage and reimbursement from CMS is lengthy and expensive. Further, Medicare coverage is based on our
ability to demonstrate that the treatment is “reasonable and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon Hemopurifier® technology receive
FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor, including by CMS. Many private payors use coverage
decisions and payment amounts determined by CMS as guidelines in setting their coverage and reimbursement policies and amounts. However, no uniform policy for coverage
and reimbursement for medical devices exists among third-party payors in the United States. Therefore, coverage and reimbursement can differ significantly from payor to
payor.
Manufacturing
Manufacturing of our Hemopurifier occurs in collaboration with two contract manufacturers based in California that are compliant with the Good Manufacturing
Practice regulations promulgated by the FDA. Our contract manufacturers are registered with the FDA. Previously, we did receive an export license from FDA that allows for
the export of our Hemopurifier to support clinical studies in India. To date, our manufacture of the Hemopurifier has been limited to quantities necessary to support our clinical
studies. Although we have not yet been impacted, we are continuing to assess the interruption of, or delays in receiving, our Hemopurifier from our contract manufacturers due
to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems contributable to COVID-19.
Our costs of compliance with federal, state and local environmental laws have been immaterial to date.
13
Sources and Availability of Raw Materials and the Names of Principal Suppliers
Our Hemopurifiers are assembled by Aethlon personnel in a manufacturing facility provided and maintained following current Good Manufacturing Practices by Life
Science Outsourcing, Inc, or LSO. Aethlon personnel assemble the various components of the Hemopurifier with materials from our various suppliers, which are purchased and
released by Aethlon and stored at LSO prior to use in manufacturing. Specifically, the Hemopurifier contains three critical components with limited available suppliers. The
base cartridge on which the Hemopurifier is constructed is sourced from Medica S.p.A and we are dependent on the continued availability of these cartridges. Although there
are other suppliers, the process of qualifying a new supplier takes time and regulatory approvals must be obtained. We currently purchase the diatomaceous earth from Janus
Scientific, Inc., as the distributor; however, the product is manufactured by Imerys Minerals Ltd. There potentially are other suppliers of this product, but as with the cartridges,
qualifying and obtaining required regulatory approvals takes time and resources. The GNA lectin is sourced from Vector Laboratories Inc. and also is available from other
suppliers; however, Sigma Aldrich is the only approved back up supplier at this time. A business interruption at any of these sources could have a material impact on our ability
to manufacture the Hemopurifier.
Sales and Marketing
We do not currently have any sales and marketing capability. With respect to commercialization efforts in the future, we intend to build or contract for distribution,
sales and marketing capabilities for any product candidate that is approved. From time to time, we have had and are having strategic discussions with potential collaboration
partners for our product candidates, although no assurance can be given that we will be able to enter into one or more collaboration agreements for our product candidates on
acceptable terms, if at all.
Product Liability
The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing, marketing and sale of medical products.
We have limited clinical trial liability insurance coverage. It is possible that future insurance coverage may not be adequate or available. We may not be able to secure product
liability insurance coverage on acceptable terms or at reasonable costs when needed. Any liability for mandatory damages could exceed the amount of our coverage. A
successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about
our products and business and inhibit or prevent commercialization of other future product candidates.
Employees
We have eight full-time employees. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
We believe our employee relations are good. None of our employees are represented by a labor union or are subject to collective-bargaining agreements.
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below as well as the other information in this Annual
Report before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be an all-inclusive list of all of the potential risks
relating to an investment in our securities. Any of the risk factors described below could significantly and adversely affect our business, prospects, financial condition and
results of operations. Additional risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely affect our
business. As a result, the trading price or value of our securities could be materially adversely affected and you may lose all or part of your investment.
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Risks Relating to Our Financial Position and Need for Additional Capital
We have incurred significant losses and expect to continue to incur losses for the foreseeable future.
We have never been profitable. We have generated revenues during the fiscal years ended March 31, 2020 and March 31, 2019, in the amounts of $650,187, and
$229,625, respectively, primarily from our contracts with the NIH. Our revenues, from research grants, continue to be insufficient to cover our cost of operations. It is possible
that we may not be able to enter into future government contracts beyond our current contract with the NIH. Future profitability, if any, will require the successful
commercialization of our Hemopurifier technology, other products that may emerge from our potential diagnostic products or from additional government contract or grant
income. We may not be able to successfully commercialize one or more of our products, and even if commercialization is successful, we may never be profitable.
We will require additional financing to sustain our operations.
We will require significant additional financing for our operations and for expected additional future clinical trials in the U.S., as well as to fund all of our continued
research and development activities for the Hemopurifier and other future products. In addition, as we expand our activities, our overhead costs to support personnel, laboratory
materials and infrastructure will increase. If the financing we may require to sustain our working capital needs be unavailable to us on reasonable terms, or at all, we may be
unable to support our research and FDA development activities, including our planned clinical trials. The failure to implement our research and clearance activities would have a
material adverse effect on our ability to commercialize our products or continue our business.
We also will need to raise additional funds through debt or equity financings to achieve our business objectives and to satisfy our cash obligations, which may dilute the
ownership of our existing stockholders.
We will need to raise additional funds through debt and/or equity financings in order to complete our ultimate business objectives, including funding working capital to
support development and regulatory clearance of our potential products. We also may choose to raise additional funds in debt or equity financings if they are available to us on
reasonable terms to increase our working capital and to strengthen our financial position. Any sales of additional equity or convertible debt securities could result in dilution of
the equity interests of our existing stockholders, which could be substantial. Also, new investors may require that we and certain of our stockholders enter into voting
arrangements that give them additional voting control or representation on our Board of Directors.
Risks Related to Our Business Operations
We face intense competition in the medical device industry.
We compete with numerous U.S. and foreign companies in the medical device industry, and many of our competitors have greater financial, personnel, operational and
research and development resources than we do. We believe that because the field of exosome research is burgeoning, multiple competitors are or will be developing competing
technologies to address exosomes in cancer. Progress is constant in the treatment and prevention of viral diseases, so the opportunities for the Hemopurifier may be reduced
there as well. Diagnostic technology may be developed that can supplant diagnostics we are developing for neurodegenerative diseases and cancer. Our commercial
opportunities will be reduced or eliminated if our competitors develop and market products for any of the diseases we target that:
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are more effective;
have fewer or less severe adverse side effects;
are better tolerated;
are more adaptable to various modes of dosing;
are easier to administer; or
are less expensive than the products or product candidates we are developing.
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Even if we are successful in developing the Hemopurifier and potential diagnostic products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other successful products. Researchers are continually learning more about diseases, which may lead to
new technologies for treatment. Our competitors may succeed in developing and marketing products that are either more effective than those that we may develop, alone or
with our collaborators, or that are marketed before any products we develop are marketed. Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research institutions. Many of the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater experience in product development and in obtaining regulatory approvals, and greater marketing
capabilities than we do. If our competitors develop more effective pharmaceutical treatments for infectious disease or cancer, or bring those treatments to market before we can
commercialize the Hemopurifier for such uses, we may be unable to obtain any market traction for our products, or the diseases we seek to treat may be substantially addressed
by competing treatments. If we are unable to successfully compete against larger companies in the pharmaceutical industry, we may never generate significant revenue or be
profitable.
We have limited experience in identifying and working with large-scale contracts with medical device manufacturers; manufacture of our devices must comply with good
manufacturing practices in the U.S.
To achieve the levels of production necessary to commercialize our Hemopurifier and any other future products, we will need to secure large-scale manufacturing
agreements with contract manufacturers which comply with good manufacturing practice standards and other standards prescribed by various federal, state and local regulatory
agencies in the U.S. and any other country of use. We have limited experience coordinating and overseeing the manufacture of medical device products on a large-scale. It is
possible that manufacturing and control problems will arise as we attempt to commercialize our products and that manufacturing may not be completed in a timely manner or at
a commercially reasonable cost. In addition, we may not be able to adequately finance the manufacture and distribution of our products on terms acceptable to us, if at all. If we
cannot successfully oversee and finance the manufacture of our products if they obtain regulatory clearances, we may never generate revenue from product sales and we may
never be profitable.
Our Hemopurifier technology may become obsolete.
Our Hemopurifier product may be made unmarketable prior to commercialization by us by new scientific or technological developments by others with new treatment
modalities that are more efficacious and/or more economical than our products. The homeland security industry is growing rapidly with many competitors that are trying to
develop products or vaccines to protect against infectious disease. Any one of our competitors could develop a more effective product which would render our technology
obsolete. Further, our ability to achieve significant and sustained penetration of our key target markets will depend upon our success in developing or acquiring technologies
developed by other companies, either independently, through joint ventures or through acquisitions. If we fail to develop or acquire, and manufacture and sell, products that
satisfy our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing competitive products, then market
acceptance of our products could be reduced and our business could be adversely affected. Our products may not remain competitive with products based on new technologies.
Our success is dependent in part on our executive officers.
Our success depends to a critical extent on the continued services of our Chief Executive Officer, Timothy Rodell, MD, and our Chief Financial Officer, James B.
Frakes. If one or both of these key executive officers were to leave us, we would be forced to expend significant time and money in the pursuit of a replacement, which would
result in both a delay in the implementation of our business plan and the diversion of limited working capital. The unique knowledge and expertise of these individuals would be
difficult to replace within the biotechnology field. We do not currently carry key man life insurance policies on any of our key executive officers which would assist us in
recouping our costs in the event of the loss of those officers. If either of our key officers were to leave us, it could make it impossible, if not cause substantial delays and costs, to
implement our long-term business objectives and growth.
Our inability to attract and retain qualified personnel could impede our ability to achieve our business objectives.
We have eight full-time employees, consisting of our Chief Executive Officer, our Chief Financial Officer, a recently hired Vice President, Manufacturing and Product
Development, four research scientists and an executive assistant. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
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Although we believe that these employees and consultants will be able to handle most of our additional administrative, research and development and business
development in the near term, we will nevertheless be required over the longer-term to hire highly skilled managerial, scientific and administrative personnel to fully implement
our business plan and growth strategies, including to mitigate the material weakness in our internal control over financial reporting described above. Due to the specialized
scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. Competition for these
individuals, especially in San Diego, California, where many biotechnology companies are located, is intense and we may not be able to attract, assimilate or retain additional
highly qualified personnel in the future. We may not be able to engage the services of qualified personnel at competitive prices or at all, particularly given the risks of
employment attributable to our limited financial resources and lack of an established track record. Also, if we are required to attract personnel from other parts of the U.S. or
abroad, we may have significant difficulty doing so due to the high cost of living in the Southern California area and due to the costs incurred with transferring personnel to the
area. If we cannot attract and retain qualified staff and executives, we will be unable to develop our products and achieve regulatory clearance, and our business could fail.
We plan to grow rapidly which will strain our resources; our inability to manage our growth could delay or derail implementation of our business objectives.
We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple
relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties. This expansion and these
expanded relationships will require us to significantly improve or replace our existing managerial, operational and financial systems, procedures and controls; to improve the
coordination between our various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may
place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be
available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems,
procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly
manage, train, motivate and retain our anticipated increased employee base. If we cannot manage our growth initiatives, we will be unable to commercialize our products on a
large-scale in a timely manner, if at all, and our business could fail.
As a public company with limited financial resources undertaking the launch of new medical technologies, we may have difficulty attracting and retaining executive
management and directors.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims,
as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations
and liabilities on management and directors. Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of
directors’ and officers’ liability insurance to pay on a timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’ liability
insurance, such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’ liability insurance at affordable rates or at all, it
may become increasingly more difficult to attract and retain qualified outside directors to serve on our Board of Directors. We may lose potential independent board members
and management candidates to other companies in the biotechnology field that have greater directors’ and officers’ liability insurance to insure them from liability or to
biotechnology companies that have revenues or have received greater funding to date which can offer greater compensation packages. The fees of directors are also rising in
response to their increased duties, obligations and liabilities. In addition, our products could potentially be harmful to users, and we are exposed to claims of product liability
including for injury or death. We have limited insurance and may not be able to afford robust coverage even as our products are introduced into the market. As a company with
limited resources and potential exposures to management, we will have a more difficult time attracting and retaining management and outside independent directors than a more
established public or private company due to these enhanced duties, obligations and potential liabilities.
If we fail to comply with extensive regulations of U.S. and foreign regulatory agencies, the commercialization of our products could be delayed or prevented entirely.
Our Hemopurifier product is subject to extensive government regulations related to development, testing, manufacturing and commercialization in the U.S. and other
countries. The determination of when and whether a product is ready for large-scale purchase and potential use will be made by the U.S. Government through consultation with
a number of governmental agencies, including the FDA, the National Institutes of Health, the Centers for Disease Control and Prevention and the Department of Homeland
Security. Our product candidates are in the pre-clinical and clinical stages of development and have not received required regulatory approval from the FDA, or any foreign
regulatory agencies, to be commercially marketed and sold. The process of obtaining and complying with FDA and other governmental regulatory approvals and regulations in
the U.S. and in foreign countries is costly, time consuming, uncertain and subject to unanticipated delays. Obtaining such regulatory approvals, if any, can take several years.
Despite the time and expense exerted, regulatory approval is never guaranteed. We also are subject to the following risks and obligations, among others:
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the FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied;
the FDA may require additional testing for safety and effectiveness;
the FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them;
if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and
the FDA may change their approval policies and/or adopt new regulations.
Failure to comply with these or other regulatory requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:
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warning letters;
civil penalties;
criminal penalties;
injunctions;
product seizure or detention;
product recalls; and
total or partial suspension of productions.
Delays in successfully completing our planned clinical trials could jeopardize our ability to obtain regulatory approval.
Our business prospects will depend on our ability to complete studies, clinical trials, including our currently planned EFS trial in 10 to 12 patients, obtain satisfactory
results, obtain required regulatory approvals and successfully commercialize our Hemopurifier product candidate. Completion of our clinical trials, announcement of results of
the trials and our ability to obtain regulatory approvals could be delayed for a variety of reasons, including:
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slow patient enrollment;
serious adverse events related to our medical device candidates;
unsatisfactory results of any clinical trial;
the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules;
different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results; and
delays resulting from the coronavirus pandemic.
Our development costs will increase if we have material delays in any clinical trial or if we need to perform more or larger clinical trials than planned. If the delays are
significant, or if any of our product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial results and the commercial
prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory
approval.
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If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these
products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities
for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular,
we and our third-party suppliers may be required to comply with the FDA’s Quality System Regulation, or QSR. These FDA regulations cover the methods and documentation
of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory
requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to QSR
requirements in the U.S., this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including
injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
In addition, the FDA assesses compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by
us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse
inspectional observations or product safety issues, could result in any of the following enforcement actions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
withdrawing 510(k) clearances or premarket approvals that have already been granted;
refusal to grant export approval for our products; or
criminal prosecution.
Moreover, the FDA strictly regulates the promotional claims that may be made about approved products. In particular, a product may not be promoted for uses that are
not approved by the FDA as reflected in the product’s approved labeling. However, companies may share truthful and not misleading information that is otherwise consistent
with a product’s FDA approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that
is found to have improperly promoted off-label uses may be subject to significant civil, criminal and administrative penalties. The COVID-19 pandemic could also potentially
affect the business of the FDA and comparable authorities in other countries, which could result in delays in meetings related to planned clinical trials and ultimately of reviews
and approvals of our product candidates.
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component
suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on
a timely basis and in the required quantities, if at all.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can
result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused
or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of
our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such
adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or
enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital,
distract management from operating our business, and may harm our reputation and financial results.
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We outsource almost all of our operational and development activities, and if any party to which we have outsourced certain essential functions fails to perform its
obligations under agreements with us, the development and commercialization of our lead product candidate and any future product candidates that we may develop could
be delayed or terminated.
We generally rely on third-party consultants or other vendors to manage and implement the day-to-day conduct of our operations, including conducting clinical trials
and manufacturing our current product candidates and any future product candidates that we may develop. Accordingly, we are and will continue to be dependent on the
timeliness and effectiveness of their efforts. Our dependence on third parties includes key suppliers and third-party service providers supporting the development, manufacture
and regulatory approval of our products as well as support for our information technology systems and other infrastructure. While our management team oversees these
vendors, failure of any of these third parties to meet their contractual, regulatory and other obligations or the development of factors that materially disrupt the performance of
these third parties could have a material adverse effect on our business. For example, all of the key oversight responsibilities for the development and manufacture of our lead
product candidate are conducted by our management team, but all other activities are the responsibility of third-party vendors. It is possible that the current COVID-19
epidemic might constrain the ability of needed third-party vendors to provide services that we require.
If a clinical research organization that we utilize is unable to allocate sufficient qualified personnel to our studies in a timely manner or if the work performed by it does
not fully satisfy the requirements of the FDA or other regulatory agencies, we may encounter substantial delays and increased costs in completing our development efforts. Any
manufacturer that we select may encounter difficulties in the manufacture of new products in commercial quantities, including problems involving product yields, product
stability or shelf life, quality control, adequacy of control procedures and policies, compliance with FDA regulations and the need for further FDA approval of any new
manufacturing processes and facilities. If any of these occur, the development and commercialization of our product candidates could be delayed, curtailed or terminated
because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own. If we rely on only one source for the
manufacture of the clinical or commercial supplies of any of our product candidates or products, any production problems or supply constraints with that manufacturer could
adversely impact the development or commercialization of that product candidate or product.
If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect our
ability to develop, market and sell our product candidates and any other or future product candidates that we may develop and may harm our reputation.
If we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to regulatory
actions, which could affect our ability to develop, market and sell our current product candidates or any future product candidates under development successfully and could
harm our reputation and lead to reduced or non-acceptance of our proposed product candidates by the market. Even technical recommendations or evidence by the FDA through
letters, site visits, and overall recommendations to academia or biotechnology companies may make the manufacturing of a clinical product extremely labor intensive or
expensive, making the product candidate no longer viable to manufacture in a cost-efficient manner. The mode of administration may make the product candidate not
commercially viable. The required testing of the product candidate may make that candidate no longer commercially viable. The conduct of clinical trials may be critiqued by
the FDA, or a clinical trial site’s Institutional Review Board or Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate.
The Institutional Review Board for a clinical trial may stop a trial or deem a product candidate unsafe to continue testing. This would have a material adverse effect on the value
of the product candidate and our business prospects.
We will need to outsource and rely on third parties for the clinical development and manufacture, sales and marketing of our current product candidates or any future
product candidates that we may develop, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.
We do not have the required financial and human resources to carry out on our own all the pre-clinical and clinical development for our current product candidates or
any other or future product candidates that we may develop, and do not have the capability and resources to manufacture, market or sell our current product candidates or any
future product candidates that we may develop. Our business model calls for the partial or full outsourcing of the clinical and other development and manufacturing, sales and
marketing of our product candidates in order to reduce our capital and infrastructure costs as a means of potentially improving our financial position. Our success will depend on
the performance of these outsourced providers. If these providers fail to perform adequately, our development of product candidates may be delayed and any delay in the
development of our product candidates would have a material and adverse effect on our business prospects.
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We are and will be exposed to product liability risks, and clinical and preclinical liability risks, which could place a substantial financial burden upon us should we be
sued.
Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices. Claims
may be asserted against us. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and
results of operations. We may not be able to continue to obtain or maintain adequate product liability insurance on acceptable terms, if at all, and such insurance may not
provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability insurance coverage that we may obtain could have a material adverse
effect on our business, financial condition and results of operations.
Our Hemopurifier product may be used in connection with medical procedures in which it is important that those products function with precision and accuracy. If our
products do not function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical
personnel or their patients suffer injury as a result of any failure of our products to function as designed, or our products are designed inappropriately, we may be subject to
lawsuits seeking significant compensatory and punitive damages. The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing,
manufacturing, marketing and sale of medical products. We have recently obtained general clinical trial liability insurance coverage. However, our insurance coverage may not
be adequate or available. We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when needed. Any product recall or
lawsuit seeking significant monetary damages may have a material effect on our business and financial condition. Any liability for mandatory damages could exceed the
amount of our coverage. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of
other future product candidates.
We have not received, and may never receive, approval from the FDA to market a medical device in the United States.
Before a new medical device can be marketed in the U.S., it must first receive a PMA or 510(k) clearance from the FDA, unless an exemption applies. A PMA
submission, which is a higher standard than a 510(k) clearance, is used to demonstrate to the FDA that a new or modified device is safe and effective. The 510(k) is used to
demonstrate that a device is “substantially equivalent” to a predicate device (one that has been cleared by the FDA). We expect that any product we seek regulatory approval
for, including the Hemopurifier, will require a PMA. The FDA approval process involves, among other things, successfully completing clinical trials and filing for and obtaining
a PMA. The PMA process requires us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process, which includes preclinical studies and
clinical trials, can take many years and requires the expenditure of substantial resources and may include post-marketing surveillance to establish the safety and efficacy of the
product. Notwithstanding the effort and expense incurred, the process may never result in the FDA granting a PMA. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in governmental
policies for medical devices during the period of product development. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
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our inability to demonstrate safety or effectiveness of the Hemopurifier or any other product we develop to the FDA’s satisfaction;
insufficient data from our preclinical studies and clinical trials, including for our Hemopurifier, to support approval;
failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements;
inadequate compliance with preclinical, clinical or other regulations;
our failure to meet the FDA’s statistical requirements for approval; and
changes in the FDA’s approval policies, or the adoption of new regulations that require additional data or additional clinical studies.
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Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared
through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA is
much costlier and more uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the
FDA until an approval is obtained. Any of our products considered to be a class III device, which are considered to pose the greatest risk and the approval of which is governed
by the strictest guidelines, will require the submission and approval of a PMA in order for us to market it in the U.S. We also may design new products in the future that could
require the clearance of a 510(k).
Although we have received approval to proceed with clinical trials of the Hemopurifier in the U.S. under the investigational device exemption, the current approval
from the FDA to proceed could be revoked, the study could be unsuccessful, or the FDA PMA approval may not be obtained or could be revoked. Even if we obtain approval,
the FDA or other regulatory authorities may require expensive or burdensome post-market testing or controls. Any delay in, or failure to receive or maintain, clearance or
approval for our future products could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities
have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some physicians from using our products and adversely
affect our reputation and the perceived safety and efficacy of our products.
The approval requirements for medical products used to fight bioterrorism are still evolving, and any products we develop for such uses may not meet these requirements.
We are advancing product candidates under governmental policies that regulate the development and commercialization of medical treatment countermeasures against
bioterror and pandemic threats. While we intend to pursue FDA market clearance to treat infectious bioterror and pandemic threats, it is often not feasible to conduct human
studies against these deadly high threat pathogens. For example, the Hemopurifier is an investigational device that has not yet received FDA approval for any indication. We
continue to investigate the potential for the use of the Hemopurifier in viral diseases under an open IDE and our FDA Breakthrough Designation for “…the treatment of life-
threatening glycosylated viruses that are not addressed with an approved therapy.” We currently have an open FDA approved Expanded Access Protocol for the treatment of
Ebola infected patients in the U.S. and a corresponding HealthCanada approval in Canada. Based on our studies to date, the Hemopurifier can potentially clear many viruses that
are pathogenic in humans, including HCV, HIV and Ebola. We do have preclinical data suggesting that it could clear a closely related coronavirus (MERS). We have tested the
ability of a lab version of the Hemopurifier to clear a component of SARS-CoV-2, the causative agent in COVID-19, but cannot test the whole virus in our labs for safety
reasons. Furthermore, we also do not know whether clearing SARS-CoV-2 from the blood, which is what the Hemopurifier is designed to do, would have a positive effect on
this disease, which primarily targets the lung; and even if effective, the Hemopurifier would only potentially be indicated in those patients with the most severe and life-
threatening manifestations. Additionally, we have a very limited supply of Hemopurifiers and therefore any use in this pandemic will be only investigational in a very small
number of patients, even if it appears that the device can help those patients.
Thus, we may not be able to demonstrate the effectiveness of our treatment countermeasures through controlled human efficacy studies. Additionally, a change in
government policies could impair our ability to obtain regulatory approval and the FDA may not approve any of our product candidates.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Any research and development, pre-clinical testing and clinical trial activities involving any products that we are developing or may develop will be subject to
extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. In the future, we may conduct clinical trials to support approval of new
products. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may
ultimately be used to support market clearance for these products. Even if our clinical trials are completed as planned, the results of these trials may not support our product
candidate claims and the FDA may not agree with our conclusions regarding the trial results. Success in pre-clinical studies and early clinical trials does not ensure that later
clinical trials will be successful, and the later trials may not replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our
product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay
or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It
is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
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U.S. legislative or FDA regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market
and distribute our products after approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval,
manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in
ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or
lengthen review times of future products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and
what the impact of such changes, if any, may be or new product development efforts.
Our current and future business activities may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency,
health information privacy and security and other healthcare laws and regulations, which could expose us to significant penalties.
We are currently or will in the future be subject to healthcare regulation and enforcement by the U.S. federal government and the states in which we will conduct our
business once our product candidates are approved by the FDA and commercialized in the United States. In addition to the FDA’s restrictions on marketing of approved
products, the U.S. healthcare laws and regulations that may affect our ability to operate include: the federal fraud and abuse laws, including the federal anti-kickback and false
claims laws; federal data privacy and security laws; and federal transparency laws related to payments and/or other transfers of value made to physicians and other healthcare
professionals and teaching hospitals. Many states have similar laws and regulations that may differ from each other and federal law in significant ways, thus complicating
compliance efforts. These laws may adversely affect our sales, marketing and other activities with respect to any product candidate for which we receive approval to market in
the United States by imposing administrative and compliance burdens on us.
Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities,
particularly any sales and marketing activities after a product candidate has been approved for marketing in the United States, could be subject to legal challenge and
enforcement actions. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we
may be subject to significant civil, criminal, and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in
government healthcare programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve
allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and
our results of operations.
Should our products be approved for commercialization, lack of third-party coverage and reimbursement for our devices could delay or limit their adoption.
In both the U.S. and international markets, the use of medical devices is dependent in part on the availability of reimbursement from third-party payors, such as
government and private insurance plans. Healthcare providers that use medical devices generally rely on third-party payors to pay for all or part of the costs and fees associated
with the medical procedures being performed or to compensate them for their patient care services. Should our products under development be approved for commercialization
by the FDA, any such products may not be considered cost-effective, reimbursement may not be available in the U.S. or other countries, if approved, and reimbursement may
not be sufficient to allow sales of our future products, including the Hemopurifier, on a profitable basis. The coverage decisions of third-party payors will be significantly
influenced by the assessment of our future products by health technology assessment bodies. These assessments are outside our control and any such evaluations may not be
conducted or have a favorable outcome.
If approved for use in the U.S., we expect that any products that we develop, including the Hemopurifier, will be purchased primarily by medical institutions, which
will in turn bill various third-party payors for the health care services provided to patients at their facility. Payors may include the Centers for Medicare & Medicaid Services, or
CMS, which administers the Medicare program and works in partnership with state governments to administer Medicaid, other government programs and private insurance
plans. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Further, Medicare coverage is based on our ability to
demonstrate that the treatment is “reasonable and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon Hemopurifier technology receive FDA and other
regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor, including by CMS. For some governmental programs, such as Medicaid,
coverage and adequate reimbursement differ from state to state and some state Medicaid programs may not pay adequate amounts for the procedure necessary to utilize products
utilizing our technology system, or any payment at all. Moreover, many private payors use coverage decisions and payment amounts determined by CMS as guidelines in
setting their coverage and reimbursement policies and amounts. However, no uniform policy requirement for coverage and reimbursement for medical devices exists among
third-party payors in the United States. Therefore, coverage and reimbursement can differ significantly from payor to payor. If CMS or other agencies limit coverage or
decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors for any products that
we develop.
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Should any of our potential products, including the Hemopurifier, be approved for commercialization, adverse changes in reimbursement policies and procedures by
payors may impact our ability to market and sell our products.
Healthcare costs have risen significantly over the past decade, and there have been and continue to be proposals by legislators, regulators and third-party payors to
decrease costs. Third-party payors are increasingly challenging the prices charged for medical products and services and instituting cost containment measures to control or
significantly influence the purchase of medical products and services.
For example, in the U.S., the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively,
PPACA, among other things, reduced and/or limited Medicare reimbursement to certain providers. However, on December 14, 2018, a Texas U.S. District Court Judge ruled
that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017.
Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and
remanded the case back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well. On March 2, 2020, the United States Supreme
Court granted the petitions for writs of certiorari to review this case, and has allotted one hour for oral arguments, which are expected to occur in the fall. The Budget Control
Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments to providers by two percent through fiscal year 2030. The Coronavirus Aid, Relief and
Economic Security Act, or CARES Act, which was signed into law in March 2020 and is designed to provide financial support and resources to individuals and businesses
affected by the COVID-19 pandemic, suspended the two percent Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year,
through 2030. These reductions may reduce providers’ revenues or profits, which could affect their ability to purchase new technologies. Furthermore, the healthcare industry in
the U.S. has experienced a trend toward cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and negotiating
reduced contract rates with service providers. Legislation could be adopted in the future that limits payments for our products from governmental payors. It is possible that
additional governmental action is taken to address the COVID-19 pandemic. In addition, commercial payors such as insurance companies, could adopt similar policies that limit
reimbursement for medical device manufacturers’ products. Therefore, it is possible that our product or the procedures or patient care performed using our product will not be
reimbursed at a cost-effective level. We face similar risks relating to adverse changes in reimbursement procedures and policies in other countries where we may market our
products. Reimbursement and healthcare payment systems vary significantly among international markets. Our inability to obtain international reimbursement approval, or any
adverse changes in the reimbursement policies of foreign payors, could negatively affect our ability to sell our products and have a material adverse effect on our business and
financial condition.
Our ability to use net operating loss carryforwards and certain other tax attributes to offset future taxable income or taxes may be limited.
Under the Tax Cuts and Jobs Act of 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, federal net operating losses
incurred in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in tax years beginning
after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act of 2017 or the
CARES Act. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes
an “ownership change,” which is generally defined as a greater than 50% change in its equity ownership value over a three-year period, the corporation’s ability to use its pre-
change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We believe we have not experienced an
ownership change in the past three years, however, we could experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which
may be outside of our control. If we achieve profitability and an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it
would harm our future operating results by effectively increasing our future tax obligations. In addition, at the state level, there may be periods during which the use of net
operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Our use of hazardous materials, chemicals and viruses exposes us to potential liabilities for which we may not have adequate insurance.
Our research and development involves the controlled use of hazardous materials, chemicals and viruses. The primary hazardous materials include chemicals needed to
construct the Hemopurifier cartridges and the infected plasma samples used in preclinical testing of the Hemopurifier. All other chemicals are fully inventoried and reported to
the appropriate authorities, such as the fire department, who inspect the facility on a regular basis. We are subject to federal, state, local and foreign laws governing the use,
manufacture, storage, handling and disposal of such materials. Although we believe that our safety procedures for the use, manufacture, storage, handling and disposal of such
materials comply with the standards prescribed by federal, state, local and foreign regulations, we cannot completely eliminate the risk of accidental contamination or injury
from these materials. We have had no incidents or problems involving hazardous chemicals or biological samples. In the event of such an accident, we could be held liable for
significant damages or fines.
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We currently carry a limited amount of insurance to protect us from damages arising from hazardous materials. Our product liability policy has a $3,000,000 limit of
liability that would cover certain releases of hazardous substances away from our facilities. For our facilities, our property policy provides $25,000 in coverage for contaminant
clean-up or removal and $50,000 in coverage for damages to the premises resulting from contamination. Should we violate any regulations concerning the handling or use of
hazardous materials, or should any injuries or death result from our use or handling of hazardous materials, we could be the subject of substantial lawsuits by governmental
agencies or individuals. We may not have adequate insurance to cover all or any of such claims, if any. If we were responsible to pay significant damages for violations or
injuries, if any, we might be forced to cease operations since such payments could deplete our available resources.
Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority,
including a third-country authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or
defects in design or manufacture. For the FDA, the authority to require a recall must be based on a finding that there is reasonable probability that the device would cause
serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design
or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of
recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall by us or one of our international distributors
could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues.
Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which
could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to liability claims, be
required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits. Companies are required to maintain
certain records of recalls, even if they are not reportable to the FDA or another third-country competent authority. We may initiate voluntary recalls involving our products in the
future that we determine do not require notification of the FDA or another third-country competent authority. If the FDA disagrees with our determinations, they could require
us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take
enforcement action for failing to report recalls. We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and
removals.
Our business is subject to risks arising from the recent COVID-19 pandemic.
The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, communities
and business operations, as well as the U.S. and global economy and financial markets.
International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of
“stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have implemented a work from home policy for all non-laboratory employees,
following the guidelines or directives issued by federal, state and local government agencies in the U.S.
To date, we do not currently anticipate any interruptions in supply. In addition, while we are continuing the process of getting our clinical trial underway, we expect
that COVID-19 precautions may directly or indirectly impact the timeline for the trial. As the COVID-19 pandemic continues to spread around the globe, we may experience
disruptions that could severely impact our business, clinical trials and manufacturing and supply chains, including:
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further delays or difficulties in enrolling patients in our clinical trials;
delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff
supporting the conduct of our clinical trials;
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interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state
governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and
clinical study endpoints;
interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production
slowdowns or stoppages and disruptions in delivery systems;
delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials and interruption in global shipping that may affect the transport
of clinical trial materials;
limitations on employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their
families or the desire of employees to avoid contact with large groups of people;
delays in receiving feedback or approvals from the FDA or other regulatory authorities with respect to future clinical trials or regulatory submissions;
changes in local regulations as part of a response to COVID-19 which may require us to change the ways in which our clinical trials are conducted, which may
result in unexpected costs, or to discontinue the clinical trials altogether;
delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources
or forced furlough of government employees;
refusal of the FDA to accept data from clinical trials in affected geographies; and
difficulties launching or commercializing products, including due to reduced access to doctors as a result of social distancing protocols.
In addition, the spread of COVID-19 has had and may continue to impact the trading price of shares of our common stock and could further negatively impact our
ability to raise additional capital on a timely basis or at all.
The COVID-19 pandemic continues to rapidly evolve. The extent to which COVID-19 may impact our business, including our clinical trials, manufacturing and
supply chains and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the continued
geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, continued business closures or
business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Our products are manufactured with raw materials that are sourced from specialty suppliers with limited competitors and we may therefore be unable to access the
materials we need to manufacture our products.
Specifically, the Hemopurifier contains three critical components with limited supplier numbers. The base cartridge on which the Hemopurifier is constructed is
sourced from Medica S.p.A and we are dependent on the continued availability of these cartridges. We currently purchase the diatomaceous earth from Janus Scientific Inc., our
distributor; however, the product is manufactured by Imerys Minerals Ltd., which is the only supplier of this product. The Galanthus nivalis agglutinin, or GNA, is sourced from
Vector Laboratories, Inc. and also is available from other suppliers; however, Sigma Aldrich is the only approved back up supplier at this time. A business interruption at any of
these sources, including interruption resulting from the coronavirus pandemic, could have a material impact on our ability to manufacture the Hemopurifier.
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Even though we have received breakthrough device designation for the Hemopurifier for two independent indications, this designation may not expedite the development
or review of the Hemopurifier and does not provide assurance ultimately of PMA submission or approval by the FDA.
The Breakthrough Devices Program is a voluntary program intended to expedite the review, development, assessment and review of certain medical devices that
provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human diseases or conditions for which no approved or cleared treatment exists
or that offer significant advantages over existing approved or cleared alternatives. All submissions for devices designated as Breakthrough Devices will receive priority review,
meaning that the review of the submission is placed at the top of the appropriate review queue and receives additional review resources, as needed.
Although breakthrough designation or access to any other expedited program may expedite the development or approval process, it does not change the standards for
approval. Although we obtained breakthrough device designation for the Hemopurifier for two indications, we may not experience faster development timelines or achieve
faster review or approval compared to conventional FDA procedures. For example, the time required to identify and resolve issues relating to manufacturing and controls, the
acquisition of a sufficient supply of our product for clinical trial purposes or the need to conduct additional nonclinical or clinical studies may delay approval by the FDA, even
if the product qualifies for breakthrough designation or access to any other expedited program. Access to an expedited program may also be withdrawn by the FDA if it believes
that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not ensure that
we will ultimately obtain regulatory approval for the product.
Compliance with laws, regulations, and related interpretations and related legal claims or other regulatory enforcement actions could impact our business, and we face
additional risks and uncertainties related to any potential actions resulting from the Securities and Exchange Commission’s, or the SEC, ongoing investigation, or any
other investigation or action.
On February 7, 2020, the SEC issued an Order of Suspension of Trading, or SEC Order, temporarily suspending trading in our stock for a period of ten days. The SEC
Order stated that the suspension was due to concerns regarding the accuracy and adequacy of information in the marketplace that appeared to be disseminated by third party
promotors and recent and unusual market activity since at least January 22, 2020. Although our stock resumed trading upon expiration of the SEC Order, we are unable to
predict the outcome of the SEC investigation or any other actions the SEC may take in connection therewith. Furthermore, the Company’s reputation may be negatively
impacted. As a result, the potential impact to the Company’s business, if any, cannot be determined.
Our bylaws designate the Eighth Judicial District Court of Clark County, Nevada, as the sole and exclusive forum for certain types of actions and proceedings that may be
initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or
agents.
Our bylaws require that, to the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial
District Court of Clark County, Nevada, will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the following:
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any derivative action or proceeding brought in the name or right of the Company or on its behalf,
any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the
Company’s stockholders,
any action arising or asserting a claim arising pursuant to any provision of NRS Chapters 78 or 92A or any provision of our articles of incorporation or bylaws,
or
any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the
validity of our articles of incorporation or bylaws.
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However, our bylaws provide that the exclusive forum provisions do not apply to suits brought to enforce any liability or duty created by the Securities Exchange Act
of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction. We note that there is uncertainty as to whether a court would enforce the
provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by
providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against
our directors and officers.
Risks Related to Our Intellectual Property and Related Litigation
We rely upon licenses and patent rights from third parties which are subject to termination or expiration.
We rely in part upon third-party licenses and ownership rights assigned from third parties for the development of specific uses for our Hemopurifier devices. For
example, we are researching, developing and testing cancer-related applications for our devices under patents assigned from the London Health Science Center Research, Inc.
Should any of our licenses be prematurely terminated for any reason, or if the patents and intellectual property assigned to us or owned by such entities that we have licensed are
challenged or defeated by third parties, our research efforts could be materially and adversely affected. Our licenses and patents assigned to us may not continue in force for as
long as we require for our research, development and testing of cancer treatments. It is possible that, if our licenses terminate or the underlying patents and intellectual property
is challenged or defeated or the patents and intellectual property assigned to us is challenged or defeated, suitable replacements may not be obtained or developed on terms
acceptable to us, if at all. There is also the related risk that we may not be able to make the required payments under any patent license or assignment agreement, in which case
we may lose to ability to use one or more of the licensed or assigned patents.
We could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent
us from selling our commercially available products and/or reduce the margins we may realize from our products.
The medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a
product infringes a patent involves complex legal and factual issues, and the determination is often uncertain. There may be existing patents of which we are unaware that our
products under development may inadvertently infringe. The likelihood that patent infringement claims may be brought against us increases as the number of participants in the
infectious market increases and as we achieve more visibility in the market place and introduce products to market.
Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant strain on our financial resources, divert
the attention of management from our core business, and harm our reputation. In some cases, litigation may be threatened or brought by a patent holding company or other
adverse patent owner who has no relevant product revenues and against whom our patents may provide little or no deterrence. If we are found to infringe any patents, we could
be required to pay substantial damages, including triple damages if an infringement is found to be willful. We also could be required to pay royalties and could be prevented
from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling us to sell our
products on reasonable terms, or at all. If we fail to obtain any required licenses or make any necessary changes to our technologies or the products, we may be unable to
commercialize one or more of our products or may have to withdraw products from the market, all of which would have a material adverse effect on our business, financial
condition and results of operations.
If the combination of patents, trade secrets and contractual provisions upon which we rely to protect our intellectual property is inadequate, our ability to commercialize our
products successfully will be harmed.
Our success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products. We currently have five issued U.S.
patents and nine pending U.S. patent applications. We also have 33 issued foreign patents and have applied for nine additional international patents. Our issued patents begin to
expire in 2024, with the last of these patents expiring in 2036, although terminal disclaimers, patent term extension or patent term adjustment can shorten or lengthen the patent
term. We rely on a combination of patent protection, trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology.
However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.
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The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in
litigation or proceedings before the U.S. Patent and Trademark Office or foreign patent offices where our applications are pending. The U.S. Patent and Trademark Office or
foreign offices may deny or require significant narrowing of claims in our pending patent applications. Patents issued as a result of the pending patent applications, if any, may
not provide us with significant commercial protection or be issued in a form that is advantageous to us. Proceedings before the U.S. Patent and Trademark Office or foreign
offices could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. The laws of some foreign countries
may not protect our intellectual property rights to the same extent as the laws of the U.S., if at all. Some of our patents may expire before we receive FDA approval to market
our products in the U.S. or we receive approval to market our products in a foreign country. Although we believe that certain patent applications and/or other patents issued
more recently will help protect the proprietary nature of the Hemopurifier treatment technology, this protection may not be sufficient to protect us during the development of
that technology.
Our competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may issue in the future, which could
prevent or limit our ability to market our products and could limit our ability to stop competitors from marketing products that are substantially equivalent to ours. In addition,
competitors may be able to design around our patents or develop products that provide outcomes that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and assignment of intellectual property agreements with all of our employees, consultants and advisors directly involved in
the development of our technology as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these agreements may not be
enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of
the agreements.
In the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be difficult, time consuming and expensive,
and would divert management’s attention from managing our business. We may not be successful on the merits in any enforcement effort. In addition, we may not have
sufficient resources to litigate, enforce or defend our intellectual property rights.
We may rely on licenses for new technology, which may affect our continued operations with respect thereto.
As we develop our technology, we may need to license additional technologies to optimize the performance of our products. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to
obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain
any necessary third-party licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results of our
operations.
New technology may lead to our competitors developing superior products which would reduce demand for our products.
Research into technologies similar to ours is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the
development of products similar to ours. These new technologies may, if successfully developed, offer significant performance or price advantages when compared with our
technologies. Our existing patents or our pending and proposed patent applications may not offer meaningful protection if a competitor develops a novel product based on a new
technology.
If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely
impact our ability to remain in business.
Our ability to successfully commercialize our products will depend on our ability to protect those products and our technology with domestic and foreign patents. We
will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The
patent positions of technology companies, including us, are uncertain and involve complex legal and factual issues. Our patents may not prevent other companies from
developing similar products or products which produce benefits substantially the same as our products, and other companies may be issued patents that may prevent the sale of
our products or require us to pay significant licensing fees in order to market our products.
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From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our
products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented.
Our pending patent applications may not result in issued patents, patent protection may not be secured for any particular technology, and our issued patents may not be valid or
enforceable or provide us with meaningful protection.
If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, such litigation could be very costly and the results of such
litigation may not be satisfactory.
Although we have entered into invention assignment agreements with our employees and with certain advisors, and we routinely enter into confidentiality agreements
with our contract partners, if those employees, advisors or contract partners develop inventions or processes independently that may relate to products or technology under
development by us, disputes may arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine
the scope of our rights under these agreements. In addition, we may be required to commence litigation to enforce such agreements if they are violated, and it is certainly
possible that we will not have adequate remedies for breaches of our confidentiality agreements as monetary damages may not be sufficient to compensate us. We may be
unable to fund the costs of any such litigation to a satisfactory conclusion, which could leave us without recourse to enforce contracts that protect our intellectual property rights.
Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be
time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.
Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, it is possible that our products or technology could be
found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights,
trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid
costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business. We may not
prevail in any such litigation. If we are found to have infringed on a third-party’s intellectual property rights, we may be liable for money damages, encounter significant delays
in bringing products to market or be precluded from manufacturing particular products or using particular technology.
Other parties may challenge certain of our foreign patent applications. If any such parties are successful in opposing our foreign patent applications, we may not gain
the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well
as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in other jurisdictions.
Risks Related to U.S. Government Contracts
We may not obtain additional U.S. Government contracts to further develop our technology.
We may not be successful in obtaining additional government grants or contracts. The process of obtaining government contracts is lengthy with the uncertainty that
we will be successful in obtaining announced grants or contracts for therapeutics as a medical device technology. Accordingly, we may not be awarded any additional U.S.
Government grants or contracts utilizing our Hemopurifier platform technology.
U.S. Government agencies have special contracting requirements, including a right to audit us which create additional risks; a negative audit would be detrimental to us.
Our business plan to utilize the Aethlon Hemopurifier technology is likely to continue to involve contracts with the U.S. Government, such as our contract with the
National Institute of Health and the National Cancer Institute, effective September 12, 2019. Contracts such as this one, typically contain unfavorable termination provisions
and are subject to audit and modification by the government at its sole discretion, which subjects us to additional risks. These risks include the ability of the U.S. Government to
unilaterally:
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suspend or prevent us for a period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or
regulations;
audit and object to our contract-related costs and fees, including allocated indirect costs;
control and potentially prohibit the export of our products; and
change certain terms and conditions in our contracts.
As a U.S. Government contractor, we are required to comply with applicable laws, regulations and standards relating to our accounting practices and would be subject
to periodic audits and reviews. As part of any such audit or review, the U.S. Government may review the adequacy of, and our compliance with, our internal control systems
and policies, including those relating to our purchasing, property, estimating, compensation and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity, we
would possibly be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension of payments, fines
and suspension or prohibition from doing business with the U.S. Government. We could also suffer serious harm to our reputation if allegations of impropriety were made
against us. Although we have not had any government audits and reviews to date, future audits and reviews could cause adverse effects. In addition, under U.S. Government
purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some
marketing expenses, would possibly not be reimbursable or allowed under such contracts. Further, as a U.S. Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
Government contractors must comply with specific procurement regulations and other requirements. These requirements, although customary in government contracts,
impact our performance and compliance costs. In addition, current U.S. Government budgetary constraints could lead to changes in the procurement environment, including the
Department of Defense’s recent initiative focused on efficiencies, affordability and cost growth and other changes to its procurement practices. If and to the extent such changes
occur, they could impact our results of operations and liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms under which we are able
to do so.
In addition, failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, and the
assessment of penalties and fines, which could negatively impact our results of operations and financial condition. Our failure to comply with these regulations and requirements
could also lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of
various statutes, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment,
accuracy of records and the recording of costs, and foreign corruption. The termination of our government contract as a result of any of these acts could have a negative impact
on our results of operations and financial condition and could have a negative impact on our reputation and ability to procure other government contracts in the future.
Risks Relating to Our Common Stock and Our Corporate Governance
Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a de-listing of our common stock.
If we fail to satisfy the continued listing requirements of The Nasdaq Capital Market, or Nasdaq, such as the minimum stockholders’ equity requirement or the
minimum closing bid price requirement, Nasdaq may take steps to de-list our common stock. For example, in May 2019 we received a letter from Nasdaq indicating that
Nasdaq has determined that we have failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that
companies listed on the Nasdaq Capital Market maintain a minimum closing bid price of at least $1.00 per share. In July 2019, we received another letter from Nasdaq
indicating that Nasdaq has determined that we have failed to comply with the minimum stockholder’s equity requirement of Nasdaq Listing Rule 5550(b)(1). Nasdaq Listing
Rule 5550(b)(1) requires that companies listed on the Nasdaq Capital Market maintain a minimum of $2,500,000 in stockholder’s equity. If we fail to maintain compliance with
these, or any other of the continued listing requirements of The Nasdaq Capital Market, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have
a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we
would take actions to restore our compliance with Nasdaq’s listing requirements, but any such action taken by us may not be successful.
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Historically we have not paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We intend to retain our future earnings, if any, to fund operational and capital expenditure needs of our
business, and do not anticipate paying any cash dividends in the foreseeable future. As a result, capital appreciation, if any, of our common stock will be the sole source of gain
for our common stockholders in the foreseeable future.
Our stock price is speculative, and there is a risk of litigation.
The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:
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failure to raise additional funds when needed;
announcements regarding our ongoing development of the Hemopurifier;
results from our clinical trials with the Hemopurifier;
failure to maintain our listing on Nasdaq;
results of operations or revenue in any quarter failing to meet the expectations, published or otherwise, of the investment community;
reduced investor confidence in equity markets;
speculation in the press or analyst community;
wide fluctuations in stock prices, particularly with respect to the stock prices for other medical device companies;
announcements of technological innovations by us or our competitors;
new products or the acquisition of significant customers by us or our competitors;
changes in interest rates;
changes in investors’ beliefs as to the appropriate price-earnings ratios for us and our competitors;
changes in recommendations or financial estimates by securities analysts who track our common stock or the stock of other medical device companies;
changes in management;
sales of common stock by directors and executive officers;
rumors or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and other rapid-dissemination methods;
conditions and trends in the medical device industry generally;
the announcement of acquisitions or other significant transactions by us or our competitors;
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adoption of new accounting standards affecting our industry;
changes in the structure of healthcare payment systems;
general market conditions;
domestic or international terrorism and other factors, including the effects of the ongoing pandemic; and
the other factors described in this section.
Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently pending against us
and we are not aware that any such lawsuit is threatened to be filed in the future, future lawsuits are possible as a result of fluctuations in the price of our common stock.
Defending against any such suits could result in substantial cost and divert management’s attention and resources. In addition, any settlement or adverse determination of such
lawsuits could subject us to significant liability.
If at any time our common stock is subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity
in our securities may be adversely affected.
If at any time our common stock is not listed on a national securities exchange or we have net tangible assets of $2,000,000 or less, or we have an average revenue of
less than $6,000,000 for the last three years, and our common stock has a market price per share of less than $5.00, transactions in our common stock will be subject to the
SEC’s “penny stock” rules. If our common stock is subject to the “penny stock” rules promulgated under the Exchange Act, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely affected. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks;
furnish the investor a disclosure document describing the risks of investing in penny stocks;
disclose to the investor the current market quotation, if any, for the penny stock;
disclose to the investor the amount of compensation the firm and its broker will receive for the trade; and
The broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose
of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to
both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
Our common stock has had an unpredictable trading volume which means you may not be able to sell our shares at or near trading prices or at all.
Trading in our common shares historically has been volatile and often has been thin, meaning that the number of persons interested in purchasing our common shares
at or near trading prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume,
and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or
recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading
activity in our shares is minimal, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without
an adverse effect on share price. A broader or more active public trading market for our common shares may not develop or be sustained, and current trading levels may
decrease.
The market price for our common stock is volatile; you may not be able to sell our common stock at or above the price you have paid for them, which may result in losses to
you.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to
be more volatile than a seasoned issuer for the indefinite future. During the 52-week period ended March 31, 2020, the high and low closing sale prices for a share of our
common stock were $13.74 and $0.84, respectively. The volatility in our share price is attributable to a number of factors. First, as noted above, trading in our common stock
often has been thin. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price
of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the
market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a
speculative investment due to our limited operating history, limited amount of cash and revenue, lack of profit to date, and the uncertainty of future market acceptance for our
potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative
news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
The following factors also may add to the volatility in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results;
announcements regarding our clinical trials and the development of the Hemopurifier; acceptance of our proprietary technology as a viable method of augmenting the immune
response of clearing viruses and toxins from human blood; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our
capital commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares
regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time,
including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any
time will have on the prevailing market price.
Our issuance of additional shares of common stock or convertible securities, could be dilutive.
We are entitled under our articles of incorporation to issue up to 30,000,000 shares of common stock. We have reserved for issuance 2,072,492 of those shares of
common stock for outstanding restricted stock units, stock options and warrants. As of March 31, 2020, we had issued and outstanding 9,367,171 shares of common stock. As a
result, as of March 31, 2020 we had 18,560,337 shares of common stock available for issuance to new investors or for use to satisfy indebtedness or pay service providers.
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Our Board of Directors may generally issue shares of common stock, restricted stock units or stock options or warrants to purchase those shares, without further
approval by our stockholders, based upon such factors as our Board of Directors may deem relevant at that time. It is likely that we will be required to issue a large amount of
additional securities to raise capital to further our development. It is also likely that we will be required to issue a large amount of additional securities to directors, officers,
employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our stock plans.
Our officers and directors are entitled to indemnification from us for liabilities under our articles of incorporation, which could be costly to us and may discourage the
exercise of stockholder rights.
Our articles of incorporation provide that we possess and may exercise all powers of indemnification of our officers, directors, employees, agents and other persons
and our bylaws also require us to indemnify our officers and directors as permitted under the provisions of the Nevada Revised Statutes, or NRS. We may also have contractual
indemnification obligations under our agreements with our directors, officers and employees. The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards against directors and officers. These provisions and resultant costs may also discourage our company
from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our
stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and stockholders.
Our bylaws and Nevada law may discourage, delay or prevent a change of control of our company or changes in our management, would have the result of depressing the
trading price of our common stock.
Certain anti-takeover provisions of Nevada law could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition arguably could
benefit our stockholders.
Nevada’s “combinations with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified types of business “combinations” between
certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person first becomes an “interested stockholder” unless the
corporation’s board of directors approves the combination (or the transaction by which such person becomes an “interested stockholder”) in advance, or unless the combination
is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder, its affiliates and associates.
Further, in the absence of prior approval certain restrictions may apply even after such two year period. However, these statutes do not apply to any combination of a
corporation and an interested stockholder after the expiration of four years after the person first became an interested stockholder. For purposes of these statutes, an “interested
stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation,
or (2) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the
voting power of the then outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most significant transactions between a
corporation and an “interested stockholder.” A Nevada corporation may elect in its articles of incorporation not to be governed by these particular laws, but if such election is
not made in the corporation’s original articles of incorporation, the amendment (1) must be approved by the affirmative vote of the holders of stock representing a majority of
the outstanding voting power of the corporation not beneficially owned by interested stockholders or their affiliates and associates, and (2) is not effective until 18 months after
the vote approving the amendment and does not apply to any combination with a person who first became an interested stockholder on or before the effective date of the
amendment. We did not make such an election in our original articles of incorporation and have not amended our articles of incorporation to so elect.
Nevada’s “acquisition of controlling interest” statutes (NRS 78.378 through 78.3793, inclusive) contain provisions governing the acquisition of a controlling interest in
certain Nevada corporations. These “control share” laws provide generally that any person that acquires a “controlling interest” in certain Nevada corporations may be denied
voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. These laws would apply to us if we were to have 200 or
more stockholders of record (at least 100 of whom have addresses in Nevada appearing on our stock ledger) and do business in the State of Nevada directly or through an
affiliated corporation, unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling interest provide otherwise. These laws provide
that a person acquires a “controlling interest” whenever a person acquires shares of a subject corporation that, but for the application of these provisions of the NRS, would
enable that person to exercise (1) one fifth or more, but less than one third, (2) one third or more, but less than a majority or (3) a majority or more, of all of the voting power of
the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold and within
the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become “control shares” to which the voting
restrictions described above apply. These laws may have a chilling effect on certain transactions if our articles of incorporation or bylaws are not amended to provide that these
provisions do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in the control shares.
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Various provisions of our bylaws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder might consider in his or her best interest. Our
bylaws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the
election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal the bylaws by a vote of not less than a
majority of our directors. The interests of these stockholders and directors may not be consistent with your interests, and they may make changes to the bylaws that are not in
line with your concerns.
Nevada law also provides that directors may resist a change or potential change in control if the directors determine that the change is opposed to, or not in the best
interests of, the corporation. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in
the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your
common stock in an acquisition.
We incur substantial costs as a result of being a public company and our management expects to devote substantial time to public company compliance programs.
As a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public company reporting. We intend to
invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert
management’s time and attention from product development and commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the
activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business
may be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer liability insurance for our directors and officers, and we
may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain
qualified executive officers and qualified members of our Board of Directors, particularly to serve on our audit and compensation committees. In addition, if we are unable to
continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain the quotation of our common stock on the
Nasdaq Capital Market or on any other senior market to which we may apply for listing, which would likely have a material adverse effect on the trading price of our common
stock.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock
price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our
research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover us downgrade our
stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in
the financial markets, which in turn could cause our stock price or trading volume to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently lease approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123 under a 39-month
gross plus utilities lease that commenced on December 1, 2014 and expires on August 31, 2021. The current rental rate under the lease extension is $8,265 per month. We
believe this leased facility will be satisfactory for our office needs over the term of the lease.
We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $4,700 per
month on a one-year lease that originally was to expire on November 30, 2019. In October 2019, we entered into a lease extension for an additional twelve months running from
December 1, 2019 through November 30, 2020, at the rate of $5,961 per month.
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ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits, and/or disputes with third parties or breach of contract actions incidental to the normal course of our
business operations. We are currently not involved in any litigation or any pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
We have no disclosure applicable to this item.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is traded on the Nasdaq Capital Market under the trading symbol “AEMD.” On July 7, 2015, The Nasdaq Stock Market LLC approved our
application for listing our common stock on the Nasdaq Capital Market under the symbol “AEMD,” and we commenced trading on the Nasdaq Capital Market on July 13,
2015. Previously, our common stock was quoted on the OTCQB Marketplace under the trading symbol “AEMD.”
Holders of Record
There were approximately 64 record holders of our common stock at June 22, 2020. The number of registered stockholders includes any beneficial owners of common
shares held in street name.
Dividend Policy
We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash
dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital
requirements and other factors that the board of directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of
our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
Other than as previously disclosed in our past Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the Company did not have any sales of unregistered
securities for the period covered by this Annual Report.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to furnish information under this Item 6.
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.
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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:
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the treatment of individuals with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in
which exosomes have been shown to participate in the development or severity of the disease; and
the treatment of life-threatening viruses that are not addressed with approved therapies.
We believe the Hemopurifier can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that
promote the growth and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients with advanced and metastatic
cancers. We are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal cancers and other cancers.
On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier
in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). The primary endpoint for the EFS, which will enroll 10-12 subjects at a
single center, will be safety, with secondary endpoints including measures of exosome clearance and characterization, as well as response and survival rates. This study, which
will be conducted at the UPMC Hillman Cancer Center in Pittsburgh, PA, has been approved by the Institutional Review Board, or IRB, and is in the process of starting up.
We also believe the Hemopurifier can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not
addressed with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals infected with 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 the Company’s open IDE for the Company’s 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, orICU 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.
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 TauSome™ 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 pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains and created significant volatility and disruption of financial markets.
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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, 2020 and 2019
Results of Operations
Government Contract Revenues
We recorded government contract revenue in the fiscal years ended March 31, 2020 and 2019. This revenue resulted from work performed under our government
contracts with the NIH as follows:
Phase 2 Melanoma Cancer Contract
Phase 1 Melanoma Cancer Contract
Breast Cancer Grant
Total Government Contract and Grant Revenue
Fiscal Year
Ended 3/31/20
Fiscal Year
Ended 3/31/19
Change in
Dollars
$
$
620,187
–
30,000
650,187
$
$
–
149,625
80,000
229,625
$
$
620,187
(149,625)
(50,000)
420,562
We have entered into the following three contracts/grants with the NCI, part of the NIH over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the NCI awarded to us an SBIR Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma
Exosomes for Diagnostics and Treatment Monitoring”, or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019
through September 15, 2021.
The work to be performed pursuant to this Award Contract will focus on melanoma exosomes. This work follows from our completion of a Phase I contract for the
Topic 359 solicitation that ran from September 2017 through June 2018, as described below. Following on the Phase I work, the deliverables in the Phase II program involve
the design and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
During the fiscal year ended March 31, 2020, we recognized $620,187 in government contract revenue under this contract as a result of the work involved completing
the first three milestones in the project as reported in the kick-off presentation to the NCI and the first and second quarterly reports. The kick-off presentation covered the
Company's organization and project status, recent achievements, the status of the field, the status of commercial and academic competitors, where the proposed project was
positioned against the state of the art, the IP landscape, a refresher on the proposed technology, the detailed plan for the first budget period of the contract and technical risks and
alternative approaches. The first and second quarterly reports covered a summary of technical objectives, a description of activities accomplished in the quarter, an analysis of
experimental data, comments regarding the timeliness of performance, and a brief explanation of activities to be pursued in the following quarter.
40
Phase 1 Melanoma Cancer Contract
We entered into a contract with NCI in September 2017. This award was under the NIH’s SBIR program. The title of the award was “SBIR Topic 359 Phase 1 Device
Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.” The award from NIH was a firm, fixed-price contract with potential total payments to us of
$299,250 over the course of nine months.
Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also had the
unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800. Under the terms of the contract, we were required to
perform certain incremental work toward the achievement of specific milestones against which we invoiced the government for fixed payment amounts. The Phase 1 Melanoma
Cancer Contract was completed in June 2018.
In the fiscal year ended March 31, 2019, we performed work under the contract covering the remainder of the technical objectives of the contract (Aim 1: To validate
the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma, and Aim 2: To validate a method of melanoma exosome isolation consisting of the
Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes, and Aim 3: To evaluate the functional integrity
of melanoma exosomes purified by the Hemopurifier and immunocapture isolation steps). As a result we invoiced NIH for $149,625 during the fiscal year ended March 31,
2019. The Melanoma Cancer Contract is now completed.
Breast Cancer Grant
In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of this Small Business Innovation Research, or SBIR, Phase I
grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation.”
This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month
extension on this grant, so the expiration date was extended to August 31, 2020. The total amount of the firm grant is $298,444. The grant calls for two subcontractors to work
with us. Those subcontractors are University of Pittsburgh and Massachusetts General Hospital.
During the fiscal year ended March 31, 2020, we recognized $30,000 in government contract revenue under this grant as a result of the work involved in one of the
three technical objectives of the contract (Aim 2. “Elution of a population of breast cancer exosomes from Hemopurifier cartridges that bear the signatures of malignancy based
on expression of CSPG4 and HER2, for triple-negative or HER2-overexpressing cancers, respectively”). We also invoiced the NCI for an additional $100,000 during the fiscal
year ended March 31, 2020 in order to pay our subcontractors under the contract. As we did not complete any additional technical objectives beyond Aim 2 noted above during
the period, we recorded this $100,000 as deferred revenue as of March 31, 2020.
During the fiscal year ended March 31, 2019, we recognized $80,000 in government contract revenue under this grant as a result of the work involved in completing
one of the three technical objectives of the contract (Aim 1. “To evaluate Hemopurifier-mediated capture of breast cancer exosomes”).
Operating Costs and Expenses
Consolidated operating expenses were $6,580,175 for the fiscal year ended March 31, 2020, compared to $6,228,642 for the fiscal year ended March 31, 2019, an
increase of $351,533. The $351,533 increase was due to increases in professional fees of $536,977 and general and administrative expense of $595,073, which were partially
offset by a decrease of $780,517 in payroll and related expenses.
The $536,977 increase in fiscal year ended March 21, 2020 in our professional fees was primarily arose from increases of $693,609 in legal fees and $110,829 in
accounting fees, which were partially offset by decreases of $123,480 in investor relations expenses and $121,986 in scientific consulting fees.
The $595,073 increase in fiscal year ended March 21, 2020 in our general and administrative expenses primarily arose from increases of $316,232 in our clinical trial
expenses, $197,542 in subcontracting and other costs related to our government contracts, and $87,102 in laboratory supplies.
41
The $780,517 decrease in fiscal year ended March 21, 2020 in our payroll and related expenses was due to a combination of a decrease in our stock-based
compensation of $475,003 and a decrease of $305,514 in cash-based compensation, primarily due to the termination of consulting and severance payments to our former Chief
Executive Office and former president.
Other Expense
In the fiscal year ended March 31, 2020, we recognized other expenses of $450,053, compared to $220,487 of other expense in the fiscal year ended March 31, 2019.
The following table breaks out the various components of our other expense over the fiscal years ended March 31, 2020 and 2019:
Loss on debt extinguishment
(Gain) on share for warrant exchanges
Interest and other debt expenses
Total other expense
Loss on Debt Extinguishment
Components of Other Expense
in Fiscal Year Ended
March 31,
2019
March 31,
2020
Change
$
$
447,011
$
–
$
447,011
(51,190)
54,232
–
220,487
(51,190)
(166,255)
450,053
$
220,487
$
229,566
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.
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.
Interest and other debt expenses
Our interest and other debt expense decreased by $166,255 in the fiscal year ended March 31, 2020, from the fiscal year ended March 31, 2019. The following table
breaks out the various components of our interest expense over the fiscal years ended March 31, 2020 and 2019:
Components of Interest Expense and Other Debt
Expenses in Fiscal Year Ended
March 31,
2019
March 31,
2020
Change
Interest expense and financing charges
Amortization of note discounts
Total interest and other debt expenses
$
$
23,945
$
99,339
$
30,287
121,148
(75,394)
(90,861)
54,232
$
220,487
$
(166,255)
42
As noted in the above table, the factors in the $166,255 overall decrease in fiscal year ended March 21, 2020 in interest and other debt expenses were a $90,861
decrease in the amortization of note discounts and a $75,394 decrease in interest expense in fiscal year ended March 31, 2020.
As a result of the above factors, our net loss before noncontrolling interests increased to $6,380,041 for the fiscal year ended March 31, 2020, from $6,219,504 for the
fiscal year ended March 31, 2019.
Liquidity and Capital Resources
At March 31, 2020, we had a cash balance of $9,604,780 and working capital of $8,973,393. This compares to a cash balance of $3,828,074 and working capital of
$2,214,230 at March 31, 2019. We expect our existing cash as of March 31, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance
date of this Form 10-K.
Our primary sources of capital during the fiscal year ended March 31, 2020 were our public offering in December 2019, or the December 2019 Public Offering, and
our registered direct offering and related private placement in January 2020, as well as from at the market sales of our common stock under our Common Stock Sales
Agreement with H.C. Wainwright LLC, or Wainwright, and exercises of certain of the warrants from the December 2019 Public Offering. The cash raised from those activities
is noted below.
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.
December 2019 Public Offering
On December 13, 2019, we entered into an underwriting agreement with Wainwright as representative of the several underwriters named therein, relating to the public
offering, issuance and sale of 3,333,334 shares of common stock (which includes pre-funded warrants to purchase shares of common stock in lieu thereof), and common
warrants to purchase up to an aggregate of 3,333,334 shares of common stock at a public offering price of $1.50 per share. Each share of common stock (or pre-funded warrant
in lieu thereof) was sold together with a common warrant to purchase one share of common stock. The common warrants have an exercise price of $1.50 per share, were
immediately exercisable, and will expire five years from the date of issuance. The offering closed on December 17, 2019.
The gross proceeds of the December 2019 Public Offering were approximately $5 million, prior to deducting underwriting discounts and commissions and estimated
offering expenses and excluding the exercise of any common warrants and the underwriter's option to purchase additional securities. The net proceeds from the December 2019
Public Offering were $4,091,437.
Subsequent to the completion of the December 2019 Public Offering and prior to March 31, 2020, all of the holders of pre-funded warrants exercised their pre-funded
warrants in full.
In the event of a Fundamental Transaction, defined in the common warrants issued in the December 2019 Public Offering as a transfer of ownership of the Company
within our control, the holders of the unexercised common stock warrants exercisable for $1.50 per share, are entitled to receive cash consideration equal to a Black-Scholes
valuation, as defined in the warrant. If such Fundamental Transaction is not within our control, the warrant holders would only be entitled to receive the same form of
consideration (and in the same proportion) as the holders of our common stock, hence these warrants are classified as a component of permanent equity.
43
January 2020 Registered Direct Offering and Private Placement
On January 16, 2020, we engaged Wainwright to act as our exclusive placement agent in connection with the private placement and a concurrent registered direct
offering, referred to together, as the Offering, of an aggregate of 1,885,378 shares of our common stock, at a purchase price per share of $2.00 per share, for aggregate gross
proceeds to us of approximately $3.77 million, before deducting fees payable to Wainwright and other estimated offering expenses payable by us. We also entered into a
securities purchase agreement with certain institutional investors, pursuant to which we agreed to sell and issue to the investors warrants, or the Purchase Warrants, to purchase
up to an aggregate of 942,689 shares of our common stock. We agreed to pay Wainwright a cash fee of 6.0% of the aggregate gross proceeds in the Offering, excluding the
proceeds, if any, from the exercise of the warrants. We paid Wainwright an additional 1.0% of the aggregate gross proceeds in the Offering as a management fee and also paid
Wainwright an additional $70,000 for certain expenses in connection with the Offering. In addition, Wainwright received placement agent warrants on substantially the same
terms as the investor warrants in an amount equal to 3.0% of the aggregate number of shares sold in the offering, or 56,561 shares of common stock, at an exercise price of
$2.50 per share and a term expiring on January 17, 2025.
On January 22, 2020, the Company closed the Offering and issued the warrants to the investors. The warrants are exercisable immediately at an exercise price of $2.75
per share and will expire five and one-half years from the issuance date.
The net proceeds from the Offering were $3,364,878.
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement, or the Agreement, with Wainwright, which established an at-the-market equity program
pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement. The Agreement provides 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 Agreement with Wainwright, effective as of the same date. The amendment provides that references in the
Agreement to the registration statement shall refer to the registration statement on Form S-3 (File No. 333-237269), originally filed with the SEC on March 19, 2020, declared
effective by the SEC on March 30, 2020.
Subject to the terms and conditions set forth in the Agreement Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and
sales practices to sell the shares under the Agreement from time to time, based upon our instructions. We have provided Wainwright with customary indemnification rights, and
Wainwright is entitled to a commission at a fixed rate equal to three percent of the gross proceeds per share sold. In addition, we agreed to pay certain expenses incurred by
Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the
shares under the Agreement, unless terminated earlier by either party as permitted under the Agreement.
Sales of the Shares, if any, under the Agreement will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities
Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with Wainwright. We
have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.
In the fiscal year ended March 31, 2020, we raised aggregate net proceeds of $896,031, net of $27,896 in commissions to Wainwright and $5,929 in other offering
expenses, under the Agreement through the sale of 161,149 shares at an average price of $5.56 per share of net proceeds.
Warrant Exercises
In fiscal year ended March 31, 2020, investors that participated in the December 2019 Public Offering exercised 2,700,000 warrants for aggregate cash proceeds to us
of $3,807,162.
44
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):
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash
Net Cash Used in Operating Activities
(In thousands)
For the year ended
March 31,
2020
March 31,
2019
$
$
(5,198)
(152)
11,126
5,776
$
$
(4,293)
–
1,147
(3,146)
We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately $5,198,000 in fiscal 2020, compared
to net cash used in operating activities of approximately $4,293,000 in fiscal 2019, an increase of approximately $905,000. The primary factors in this $905,000 increase in cash
used in operations were a $475,000 decrease in stock-based compensation, a $407,000 decrease in accounts payable and a $282,000 increase in accounts receivable, which were
partially offset by a $447,000 increase in loss on extinguishment of debt.
Net Cash Used in Investing Activities
During the fiscal year ended March 31, 2020, we purchased approximately $152,000 of equipment. During the fiscal year ended March 31, 2019, we did not purchase
any equipment.
Net Cash from Financing Activities
Net cash generated from financing activities increased to approximately $11,126,000 in the fiscal year ended March 31, 2020, from approximately $1,147,000 in the
fiscal year ended March 31, 2019. In fiscal 2020, we raised approximately $12,160,000 from the issuance of common stock, compared to approximately $1,341,000 raised from
the issuance of common stock in fiscal year ended March 31, 2019. We used approximately $993,000 to pay off our convertible notes in the fiscal year ended March 31, 2020.
We used approximately $41,000 to pay for the tax withholding on restricted stock units in fiscal 2020, compared to paying approximately $194,000 in fiscal 2019.
Recent Events
Management Update
In June 2020, Thomas L. Taccini joined our management team as Vice President, Manufacturing and Product Development. Mr. Taccini has over 35 years of experience in
leading teams in engineering, product development, project management, quality systems and regulatory affairs for multiple different classes of medical devices.
RSU Grants
On April 3, 2020, pursuant to the terms of the Company’s 2012 Non-Employee Directors Compensation Program, as modified on August 9, 2016, or the Directors
Plan, the Compensation Committee of the Board granted restricted stock units, or RSUs, under the Company’s 2010 Stock Incentive Plan, or the 2010 Plan, to each non-
employee director of the Company. The Director’s Plan provides for a grant of $35,000 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 $1.41 per share as of April 3, 2020. Each eligible director was granted an RSU in the amount of 23,893
shares under the 2010 Plan, as the number of available shares under the 2010 Plan was not sufficient for each director’s full grant. The RSU’s are subject to vesting in four equal
quarterly installments on June 30, September 30, December 31, 2020, and March 31, 2021, subject to the recipient's continued service with the Company on each such vesting
date. Each eligible director will receive the remaining portion of the annual RSU grants, or 929 RSU’s, contingent upon stockholder approval at the 2020 annual meeting of the
Company’s stockholders, of a new 2020 Equity Incentive Plan.
45
IDE Supplement
On June 17, 2020, the FDA approved a supplement to the Company’s open IDE for the Company’s Hemopurifier in viral disease to allow for the testing of the
Hemopurifier 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 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.
Sales Under ATM Facility
In June 2020, 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
Agreement described above through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.
COVID-19 Update
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains and created significant volatility and disruption of financial markets.
We are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health and safety of our
employees while continuing our operations, including clinical trials. Given the level of uncertainty regarding the duration and impact of the COVID-19 pandemic on capital
markets and the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting COVID-19 pandemic on our future access to
capital. Further, while we have not experienced significant disruptions to our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or
preclinical research to date, we are unable to assess the potential impact this pandemic could have on our manufacturing supply chain, business, results of operations, financial
condition, clinical trials, or preclinical research in the future.
As we continue to actively advance our clinical trials, we remain in close contact with our clinical sites and are assessing the impact of COVID-19 on our trials,
expected timelines and costs on an ongoing basis. We will assess any potential delays in our ability to timely ship clinical trial materials, including internationally, due to
transportation interruptions. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration
and spread of the outbreak, impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot
reasonably estimate the related impact to our business, operating results and financial condition, if any.
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,
2020 and 2019, we recognized revenues totaling $650,187 and $229,625, 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.
46
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, 2020 or March 31, 2019.
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, 2020.
Restricted Stock Unit Grants to Non-Employee Directors
In 2012, as amended on August 9, 2016, our Board of Directors established the Directors Plan, to provide for cash and equity compensation for persons serving as
non-employee directors of the Company. Under this program, each new director receives either stock options or a grant of restricted stock unites, or RSUs, as well as an annual
grant of RSUs at the beginning of each fiscal year. The RSUs are subject to vesting and represent the right to be issued on a future date shares of our common stock for upon
vesting.
In April 2019, pursuant to the Directors Plan, we issued RSUs with a value of $35,000, in accordance with the terms of the plan, to each of our non-employee
directors, as the stock-based compensation element of their overall directors’ compensation, for the fiscal year ended March 31, 2020. Those grants were based on the closing
price of our common stock on the grant date, or $14.25 per share, resulting in 2,456 RSUs being issued to each of our five non-employee directors, for a total of 12,280 RSUs.
All of the RSUs were subject to vesting in equal quarterly installments on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020.
47
During the fiscal year ended March 31, 2020, 12,280 vested RSUs held by our outside directors were exchanged into the same number of shares of our common stock.
As four of our five independent directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 3,926 of the
RSUs were cancelled and we paid $11,230 in cash to those independent directors.
In addition, during the fiscal year ended March 31, 2020, 8,793 vested RSUs then held by our executive officers were exchanged into the same number of shares of
our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance,
4,657 of the RSUs were cancelled and we issued a net 4,136 shares to our executives.
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.
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
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.
48
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, 2020. 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, 2020.
(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, 2020 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.
49
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
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
2020 Annual Meeting of Stockholders, the Proxy Statement, within 120 days after the end of the fiscal year ended December 31, 2020, 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.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
The following documents are filed as part of this report on Form 10-K:
1. Consolidated Financial Statements for the years ended March 31, 2020 and 2019:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Exhibits
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Exhibit Description
Form
SEC File No.
Exhibit
Number
Date
Filed
Herewith
Incorporated by Reference
Articles of Incorporation.
S-3 333-211151
Amended and Restated Bylaws of the Company.
8-K 001-37487
Form of Common Stock Certificate.
S-1 333-201334
Form of Common Stock Purchase Warrant dated August
29, 2012.
8-K 000-21846
Form of Common Stock Purchase Warrant dated
10-Q 000-21846
October, November and December 2012.
Form of Common Stock Purchase Warrant dated June
10-Q 000-21846
14, 2013.
Form of Common Stock Purchase Warrant dated June
8-K 000-21846
24, 2014.
Form of Common Stock Purchase Warrant dated July
8-K 000-21846
24, 2014.
Form of Common Stock Purchase Warrant dated August
10-Q 000-21846
and September 2014.
Form of Warrant to Purchase Common Stock dated June
8-K 000-21846
25, 2015.
51
3.1
3.1
4.1
4.1
4.1
4.1
4.1
4.1
4.3
4.1
May 5, 2016
September 12, 2019
December 31, 2014
September 6, 2012
February 13, 2013
August 13, 2013
June 30, 2014
July 28, 2014
November 10, 2014
June 24, 2015
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Form of Purchase Agent Warrant dated June 25, 2015.
8-K 000-21846
Form of Warrant Agreement dated March 27, 2017.
8-K 001-37487
Form of Warrant dated _______, 2017.
S-1/A 333-219589
Form of Placement Agent Warrant dated _______, 2017. S-1/A 333-219589
Form of Warrant to Purchase Common Stock.
S-1/A 333-234712
Form of Underwriter Warrant.
S-1/A 333-234712
Form of Common Stock Purchase Warrant.
8-K 001-37487
4.1
4.1
4.29
4.30
4.14
4.15
4.1
June 26, 2015
March 22, 2017
September 18, 2017
September 22, 2017
December 11, 2019
December 11, 2019
January 17, 2020
Description of Aethlon Medical, Inc.’s Securities.
X
Amended 2010 Stock Incentive Plan. ++
8-K 001-37487
10.1
March 30, 2016
Standard Industrial Net Lease, by and between
Glenborough Aventine, LLC and Aethlon Medical, Inc.,
dated September 28, 2009.
10-Q
000-21846
November 16, 2009
8-K
000-21846
April 15, 2015
Second Amendment to Standard Industrial Net Lease, by
and between AGP Sorrento Business Complex and
Aethlon Medical, Inc., dated October 10, 2014.
S-1
333-201334
Office Lease, by and between T-C Stonecrest LLC and
Aethlon Medical, Inc., dated November 13, 2014.
8-K/A
000-21846
UCI Clinical Trial Agreement, by and between The
Regents of the University of California, on behalf of its
Irvine campus and Aethlon Medical, Inc., dated March
24, 2015.
Securities Purchase Agreement, by and among the
Investors set forth on the signature pages therein and
Aethlon Medical, Inc., dated June 23, 2015.
8-K
000-21846
Registration Rights Agreement, by and among the
investors listed on the Schedule of Buyers therein and
Aethlon Medical, Inc., dated June 23, 2015.
8-K
000-21846
Third Amendment to Standard Industrial Net Lease, by
and between AGP Sorrento Business Complex, L.P. and
Aethlon Medical, Inc., dated October 21, 2015.
10-Q
001-37487
Common Stock Sales Agreement, by and between H.C.
Wainwright & Co., LLC and Aethlon Medical, Inc.,
dated June 28, 2016.
8-K
001-37487
52
10.6
10.52
10.1
December 31, 2014
November 19, 2014
10.1
10.1
10.2
10.5
10.1
June 24, 2015
June 24, 2015
November 16, 2015
June 28, 2016
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Amendment No. 1 to Common Stock Sales Agreement, by
and between H.C. Wainwright & Co., LLC and Aethlon
Medical, Inc., dated June 28, 2016.
Amendment No. 2 to Common Stock Sales Agreement, by
and between H.C. Wainwright & Co., LLC and Aethlon
Medical, Inc., dated March 30, 2020.
8-K
001-37487
10.1
August 12, 2019
X
Aethlon Medical, Inc. 2012 Non-Employee Directors
Compensation Program, as Modified on August 9, 2016. ++
8-K
001-37487
10.1
August 10, 2016
Fourth Amendment to Standard Industrial Net Lease, by and
between AGP Sorrento Business Complex, L.P. and Aethlon
Medical, Inc., dated October 5, 2016.
Form of Securities Purchase Agreement, by and among each
purchaser identified on the signature pages therein and
Aethlon Medical, Inc., dated March 22, 2017. ++
Form of Securities Purchase Agreement, by and among each
purchaser identified on the signature pages therein and
Aethlon Medical, Inc., dated September ______, 2017. ++
Fifth Amendment to Standard Industrial Net Lease, by and
between AGP Sorrento Business Complex, L.P. and Aethlon
Medical, Inc., dated October 16, 2017.
Sixth Amendment to Standard Industrial Net Lease, by and
between AGP Sorrento Business Complex, L.P. and Aethlon
Medical, Inc., dated September 18, 2018.
Employment Agreement, by and between Aethlon Medical,
Inc. and James Frakes, dated December 12, 2018. ++
Form of Indemnification Agreement for Officers and
Directors. ++
10-K
001-37487
10.80
June 28, 2017
8-K
001-37487
10.1
March 22, 2017
S-1
333-220490
10.84
September 15, 2017
10-Q
001-37487
10.1
November 2, 2017
10-Q
001-37487
10.1
November 6, 2018
10-Q
001-37487
10.3
February 11, 2019
10-Q
001-37487
10.4
February 11, 2019
Form of Option Grant Agreement for Officers and Directors.
++
10-Q
001-37487
10.5
February 11, 2019
Form of Restricted Stock Unit Grant Notice and Restricted
Stock Unit Agreement for Directors. ++
Form of Restricted Stock Unit Grant Notice and Restricted
Stock Unit Agreement for Executives. ++
10-Q
001-37487
10.6
February 11, 2019
10-Q
001-37487
10.7
February 11, 2019
53
10.23
10.24
10.25
10.26
10.27
10.28
21.1
23.1
31.1
31.2
32.1
32.2
Strategic Joint Cross-Licensing Agreement, by and between
the Registrant and SeaStar Medical, Inc., dated June 30, 2019.
10-Q
001-37487
Seventh Amendment to Standard Industrial Net Lease, by and
between Aethlon Medical, Inc. and San Diego Inspire 1, LLC.,
dated September 9, 2019.
10-Q
001-37487
10.1
10.1
August 14, 2019
November 1, 2019
SBIR Phase II Award Contract, by and among Aethlon
Medical, Inc., the National Institutes of Health and the
National Cancer Institute, dated September 12, 2019.
Assignment Agreement, by and between Aethlon Medical,
Inc. and London Health Sciences Center Research Inc., dated
November 7, 2006.
Form of Securities Purchase Agreement, by and between
Aethlon Medical, Inc. and the Purchasers thereto, dated
January 17, 2020.
Amended and Restated Executive Employment Agreement for
Timothy C. Rodell, M.D., FCCP, dated March 17, 2020, by
and between Aethlon Medical, Inc. and Timothy C. Rodell,
M.D., FCCP
10-Q
001-37487
10.2
November 1, 2019
S-1
001-37487
10.27
November 15, 2019
8-K
001-37487
10.1
January 17, 2020
8-K
001-37487
10.1
March 23, 2020
List of Subsidiaries.
S-1
333-201334
21.1
December 31, 2014
Consent of Independent Registered Public Accounting Firm
(Squar Milner LLP).
Certification of our Chief Executive Officer, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
Certification of our Chief Financial Officer, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
Statement of our Chief Executive Officer under Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Statement of our Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Schema Document
XBRL Calculation Linkbase Document
XBRL Definition Linkbase Document
XBRL Label Linkbase Document
XBRL Presentation Linkbase Document
___________________
++ Indicates management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
54
X
X
X
X
X
X
X
X
X
X
X
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 25 day of June, 2020.
SIGNATURES
By:
/s/ TIMOTHY C. RODELL, M.D.
Timothy C. Rodell, 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
/s/ TIMOTHY C. RODELL
Timothy C. Rodell, M.D.
/s/ JAMES B. FRAKES
James B. Frakes
/s/ EDWARD G. BROENNIMAN
Edward G. Broenniman
/s/ CHETAN S. SHAH
Chetan S. Shah
/s/ CHARLES J. FISHER, JR., MD
Charles J. Fisher, Jr., MD
/s/ SABRINA MARTUCCI JOHNSON
Sabrina Martucci Johnson
/s/ GUY CIPRIANI
Guy Cipriani
Chief Executive Officer and Principal Executive Officer
Date
June 25, 2020
Chief Financial Officer and Principal Accounting Officer
June 25, 2020
Director
Director
Chairman and Director
Director
Director
55
June 25, 2020
June 25, 2020
June 25, 2020
June 25, 2020
June 25, 2020
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended March 31, 2020 and 2019
Consolidated Statements of Equity for the Years Ended March 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended March 31, 2020 and 2019
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
To the Stockholders and the Board of Directors of Aethlon Medical, Inc.
Report of Independent Registered Public Accounting Firm
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, 2020 and 2019, 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, 2020 and 2019, 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.
Squar Milner LLP
We have served as the Company’s auditor since 2001.
San Diego, California
June 25, 2020
F-2
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2020
March 31, 2019
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Property and equipment, net
Right-of-use lease asset
Patents, net
Deposits
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Due to related parties
Convertible notes payable, net
Deferred revenue
Lease liability, current portion
Other current liabilities
TOTAL CURRENT LIABILITIES
Lease liability, less current portion
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 30,000,000 shares authorized at March 31, 2020 and 2019; 9,367,171 and
1,266,979 issued and outstanding at March 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated deficit
TOTAL AETHLON MEDICAL, INC. STOCKHOLDERS’ EQUITY BEFORE NONCONTROLLING INTERESTS
NONCONTROLLING INTERESTS
TOTAL STOCKHOLDERS’ EQUITY
$
$
$
$
9,604,780
206,729
229,604
10,041,113
140,484
136,426
57,504
12,159
3,828,074
–
210,042
4,038,116
6,021
–
66,668
12,159
10,387,686
$
4,122,964
$
285,036
111,707
–
100,000
98,557
472,420
131,931
83,654
962,301
–
–
646,000
1,067,720
1,823,886
42,540
–
1,110,260
1,823,886
9,368
121,426,563
(112,026,381)
9,409,550
(132,124)
9,277,426
1,267
108,076,275
(105,652,433)
2,425,109
(126,031)
2,299,078
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
10,387,686
$
4,122,964
See accompanying notes to the consolidated financial statements.
F-3
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
REVENUES:
Government contract and grant revenue
Total revenues
OPERATING COSTS AND EXPENSES
Professional fees
Payroll and related expenses
General and administrative
Total operating expenses
OPERATING LOSS
OTHER EXPENSE
Loss on debt extinguishment
(Gain) on share for warrant exchanges
Interest and other expenses
Total other expense
NET LOSS BEFORE NONCONTROLLING INTERESTS
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted net loss per share attributable to common stockholders
Weighted average number of common shares outstanding - basic and diluted
$
$
$
Years Ended March 31,
2020
2019
650,187
650,187
$
2,729,025
2,302,599
1,548,551
6,580,175
229,625
229,625
2,192,048
3,083,116
953,478
6,228,642
(5,929,988)
(5,999,017)
447,011
(51,190)
54,232
450,053
–
–
220,487
220,487
(6,380,041)
(6,219,504)
(6,093)
(6,373,948)
(1.87)
$
$
(24,785)
(6,194,719)
(5.13)
3,414,840
1,208,314
See accompanying notes to the consolidated financial statements.
F-4
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
BALANCE - MARCH 31, 2018
Issuances of common stock for cash under at the market program
Issuances of common stock for cash under warrant exercises
Issuance of common shares upon vesting of restricted stock units.
Common stock issued for services
Stock-based compensation expense
Net loss
BALANCE - MARCH 31, 2019
ATTRIBUTABLE TO AETHLON MEDICAL, INC.
COMMON STOCK
SHARES
1,182,630
$
AMOUNT
1,182
ADDITIONAL
PAID IN
CAPITAL
105,590,572
$
ACCUMULATED
DEFICIT
NON-
CONTROLLING
INTERESTS
TOTAL
EQUITY
$
(99,457,714) $
(101,246) $
6,032,794
51,581
18,887
12,881
1,000
–
–
52
19
13
1
–
–
1,048,319
292,913
(193,879)
19,349
1,319,001
–
–
–
–
–
–
–
–
–
–
1,048,371
292,932
(193,866)
19,350
1,319,001
–
(6,194,719)
(24,785)
(6,219,504)
1,266,979
$
1,267
$
108,076,275
$
(105,652,433) $
(126,031) $
2,299,078
Issuances of common stock for cash under at the market program
Loss on debt extinguishment
161,149
–
162
–
895,869
447,011
Issuances of common stock for cash under warrant exercises
2,700,000
2,700
3,804,462
Issuance of common shares upon vesting of restricted stock units.
12,393
12
(40,950)
Proceeds from the issuance of common stock in public offerings, net
5,218,712
5,219
7,451,096
Issuances of common stock upon warrant exchanges
Par value of DTC roundup of shares following reverse split
Stock-based compensation expense
Net loss
BALANCE - MARCH 31, 2020
3,992
3,946
–
–
4
4
–
–
(51,194)
(4)
843,998
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
896,031
447,011
3,807,162
(40,938)
7,456,315
(51,190)
–
843,998
–
(6,373,948)
(6,093)
(6,380,041)
9,367,171
$
9,368
$
121,426,563
$
(112,026,381) $
(132,124) $
9,277,426
See accompanying notes to the consolidated financial statements.
F-5
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2020 AND 2019
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Gain on share for warrant exchanges
Loss on debt extinguishment
Stock based compensation
Amortization of debt discount and deferred financing costs
Non-cash rent expense
Fair market value of common stock issued for services
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable and other current liabilities
Deferred revenue
Due to related parties
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Tax withholding payments or tax equivalent payments for net share settlement of restricted stock units
Principal repayments of notes payable
Net proceeds from the issuance of common stock and exercise of warrants
Net cash provided by financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Supplemental information of non-cash investing and financing activities:
Issuance of shares under vested restricted stock units
Issuance of common stock upon warrant exchanges
Initial recognition of right-of-use lease asset and lease liability
2020
2019
$
(6,380,041)
$
(6,219,504)
26,366
(51,190)
447,011
843,998
30,287
964
–
(206,729)
(19,562)
–
(16,765)
100,000
28,053
(5,197,608)
(151,665)
(151,665)
(40,938)
(992,591)
12,159,508
11,125,979
5,776,706
3,828,074
9,604,780
$
30,695
–
–
1,319,001
121,148
–
19,350
74,813
(28,675)
6,111
390,340
–
(6,712)
(4,293,433)
–
–
(193,866)
–
1,341,303
1,147,437
(3,145,996)
6,974,070
3,828,074
–
$
95,388
12
51,190
228,694
$
$
$
13
–
–
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-6
1. ORGANIZATION, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Aethlon Medical, Inc. and its subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”), is 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:
·
·
the treatment of individuals with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in
which exosomes have been shown to participate in the development or severity of the disease; and
the treatment of life-threatening viruses that are not addressed with approved therapies.
We believe the Hemopurifier can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote the
growth and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients with advanced and metastatic cancers. We
are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal cancers and other cancers. As we advance our clinical trials, we are in
close contact with our clinical sites to navigate and assess the impact of COVID-19 on our clinical trials and current timelines.
On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients
with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). The primary endpoint for the EFS, which will enroll 10-12 subjects at a single
center, will be safety, with secondary endpoints including measures of exosome clearance and characterization, as well as response and survival rates. This study, which will be
conducted at the UPMC Hillman Cancer Center in Pittsburgh, PA, has been approved by the Institutional Review Board, or IRB, and is in the process of starting up.
We also believe the Hemopurifier can be a part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed
with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals infected with 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 studies were conducted in collaboration with leading government or non-government research institutes.
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 TauSome™ 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.
In addition to the foregoing, we are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health and
safety of our employees while continuing our operations. Given the level of uncertainty regarding the duration and impact of the COVID-19 pandemic on capital markets and
the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting COVID-19 pandemic on our timelines and future access to
capital. We are continuing to monitor the spread of COVID-19 and its potential impact on our operations. The full extent to which the COVID-19 pandemic will impact our
business, results of operations, financial condition, clinical trials, and preclinical research will depend on future developments that are highly uncertain, including actions taken
to contain or treat COVID-19 and their effectiveness, as well as the economic impact on national and international markets.
F-7
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.”
REVERSE STOCK SPLIT
Effective October 14, 2019, the Company completed a 1-for-15 reverse stock split. Accordingly, 15 shares of outstanding common stock then held by stockholders were
combined into one share of common stock. Any fractional shares resulting from the reverse split were rounded up to the next whole share. Authorized common stock remained
at 30,000,000 shares (see Note 14). The accompanying consolidated financial statements and accompanying notes have been retroactively revised to reflect such reverse stock
split as if it had occurred on April 1, 2018. All shares and per share amounts have been revised accordingly.
LIQUIDITY AND GOING CONCERN
Management expects existing cash as of March 31, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned (80% ownership) and controlled subsidiary,
Exosome Sciences, Inc., or ESI. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has classified the (20%
ownership) noncontrolling interests in ESI as part of consolidated net loss in the fiscal years ended March 31, 2020 and 2019 and includes the accumulated amount of
noncontrolling interests as part of equity.
The losses at ESI during the fiscal year ended March 31, 2020 reduced the noncontrolling interests on our consolidated balance sheet by $6,093 from $(126,031) at March 31,
2019 to $(132,124) at March 31, 2020.
RISKS AND UNCERTAINTIES
We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are subject to significant risk and
uncertainties including financial, operational, technological, regulatory, and including the potential risk of business failure.
USE OF ESTIMATES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, which 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.
F-8
CASH AND CASH EQUIVALENTS
Accounting standards define “cash and cash equivalents” as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their
maturity that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement presentation, we consider all highly
liquid investment instruments with original maturities of three months or less when purchased, or any investment redeemable without penalty or loss of interest to be cash
equivalents. As of March 31, 2020 and 2019, we had no assets that were classified as cash equivalents.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at one financial institution in checking accounts. Accounts at this institution are secured by the Federal Deposit Insurance Corporation up to $250,000. Our
March 31, 2020 cash balances were approximately $9,415,000 over such insured amount. We do not believe that the Company is exposed to any significant risk with respect to
its cash.
All of our accounts receivable at March 31, 2020 and all of our revenue in the fiscal years ended March 31, 2020 and 2019 were directly from the National Cancer Institute.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to
five years. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale or retirement of property and equipment, the accounts
are relieved of the cost and the related accumulated depreciation with any gain or loss included in the consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities 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.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a
long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. We believe no impairment charges were
necessary during the fiscal years ended March 31, 2020 and 2019.
LOSS PER SHARE
Basic loss per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period of
computation. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that
would have been outstanding if potential common shares had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented,
basic and diluted loss per share are the same, and additional potential common shares have been excluded as their effect would be antidilutive.
F-9
As of March 31, 2020 and 2019, a total of 2,072,492 and 437,784 potential common shares, consisting of shares underlying outstanding stock options, restricted stock units,
warrants and convertible notes payable were excluded as their inclusion would be antidilutive.
SEGMENTS
Historically, we operated in one segment that was based on our development of therapeutic devices. However, in the December 2013 quarter, we initiated the operations of ESI
to develop diagnostic tests. As a result, we now operate in two segments, Aethlon for therapeutic applications and ESI for diagnostic applications (See Note 10).
We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in order to make decisions about resources to be
allocated to the ESI segment and to assess its performance.
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized as a deduction to our convertible notes based on the new accounting standard on imputation of interest, and amortized to
interest expense over the life of the related debt using the effective interest method. There was no amortization related to our deferred financing costs in the fiscal years ended
March 31, 2020 and 2019.
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, 2020 and
2019, we recognized revenues totaling $650,187 and $229,625, 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 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.
We identify the deliverables included within these agreements and evaluate which deliverables represent separate units of accounting based on if certain criteria are met,
including whether the delivered element has standalone value to the collaborator. The consideration received is allocated among the separate units of accounting, and the
applicable revenue recognition criteria are applied to each of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does
not necessarily mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.
(3) If achieved, the event would result in additional payments being due to the vendor.
A milestone does not include events for which the occurrence is either: (a) contingent solely upon the passage of time; or (b) the result of a counterparty’s performance.
The policy for recognizing deliverable consideration contingent upon achievement of a milestone must be applied consistently to similar deliverables.
F-10
The assessment of whether a milestone is substantive is performed at the inception of the arrangement. The consideration earned from the achievement of a milestone must
meet all of the following for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a
result of a specific outcome resulting from the vendor’s performance to achieve the milestone;
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
A milestone is not considered substantive if any portion of the associated milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not
relate solely to past performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone is achieved, the milestone must be
substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and nonsubstantive components. In addition, if a portion of the consideration earned
from achieving a milestone may be refunded or adjusted based on future performance, the related milestone is not considered substantive.
We have entered into the following three contracts/grants with the NCI, part of the NIH over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the NCI awarded to us an SBIR Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes
for Diagnostics and Treatment Monitoring”, or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019 through
September 15, 2021.
The work to be performed pursuant to this Award Contract will focus on melanoma exosomes. This work follows from our completion of a Phase I contract for the Topic 359
solicitation that ran from September 2017 through June 2018 (see Phase 1 Melanoma Cancer Contract below). Following on the Phase I work, the deliverables in the Phase II
program involve the design and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
During the fiscal year ended March 31, 2020, we recognized $620,187 in government contract revenue under this contract as a result of the work involved completing the first
three milestones in the project as reported in the kick-off presentation to the NCI and the first and second quarterly reports. The kick-off presentation covered the Company's
organization and project status, recent achievements, the status of the field, the status of commercial and academic competitors, where the proposed project was positioned
against the state of the art, the IP landscape, a refresher on the proposed technology, the detailed plan for the first budget period of the contract and technical risks and alternative
approaches. The first and second quarterly reports covered a summary of technical objectives, a description of activities accomplished in the quarter, an analysis of experimental
data, comments regarding the timeliness of performance, and a brief explanation of activities to be pursued in the following quarter.
Phase 1 Melanoma Cancer Contract
We entered into a contract with the NCI in September 2017. This award was under the NIH’s SBIR program. The title of the award was “SBIR Topic 359 Phase 1 Device
Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.” The award from NIH was a firm, fixed-price contract with potential total payments to us of
$299,250 over the course of nine months.
Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also had the unilateral
right to require us to perform additional work under an option period for an additional fixed amount of $49,800. Under the terms of the contract, we were required to perform
certain incremental work toward the achievement of specific milestones against which we invoiced the government for fixed payment amounts. The Phase 1 Melanoma Cancer
Contract was completed in June 2018.
F-11
In the fiscal year ended March 31, 2019, we performed work under the contract covering the remainder of the technical objectives of the contract (Aim 1: To validate the
Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma, and Aim 2: To validate a method of melanoma exosome isolation consisting of the
Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes, and Aim 3: To evaluate the functional integrity
of melanoma exosomes purified by the Hemopurifier and immunocapture isolation steps). As a result we invoiced NIH for $149,625 during the fiscal year ended March 31,
2019. The Melanoma Cancer Contract is now completed.
Breast Cancer Grant
In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of this Small Business Innovation Research, or SBIR Phase I grant is “The
Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation.”
This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month
extension on this grant, so the expiration date was extended to August 31, 2020. The total amount of the firm grant is $298,444. The grant calls for two subcontractors to work
with us. Those subcontractors are University of Pittsburgh and Massachusetts General Hospital.
During the fiscal year ended March 31, 2020, we recognized $30,000 in government contract revenue under this grant as a result of the work involved in one of the three
technical objectives of the contract (Aim 2. “Elution of a population of breast cancer exosomes from Hemopurifier cartridges that bear the signatures of malignancy based on
expression of CSPG4 and HER2, for triple-negative or HER2-overexpressing cancers, respectively”). We also invoiced the NCI for an additional $100,000 during the fiscal year
ended March 31, 2020 in order to pay our subcontractors under the contract. As we did not complete any additional technical objectives beyond Aim 2 noted above during the
period, we recorded this $100,000 as deferred revenue as of March 31, 2020.
During the fiscal year ended March 31, 2019, we recognized $80,000 in government contract revenue under this grant as a result of the work involved in completing one of the
three technical objectives of the contract (Aim 1. “To evaluate Hemopurifier-mediated capture of breast cancer exosomes”).
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation plans are accounted for under the fair value method. Accordingly, share-based compensation is
measured when all granting activities have been completed, generally the grant date, based on the fair value of the award. The exercise price of options is generally equal to the
market price of the Company’s common stock (defined as the closing price as quoted on the Nasdaq Capital Market or OTCBB on the date of grant). Compensation cost
recognized by the Company includes (a) compensation cost for all equity incentive awards granted prior to April 1, 2006, but not yet vested, based on the grant-date fair value
estimated in accordance with the original provisions of the then current accounting standards, and (b) compensation cost for all equity incentive awards granted subsequent to
March 31, 2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting standards. We use a Binomial Lattice option pricing
model for estimating fair value of options granted (see Note 5).
The following table summarizes share-based compensation expenses relating to shares and options granted and the effect on loss per common share during the years ended
March 31, 2020 and 2019:
Our total stock-based compensation for fiscal years ended March 31, 2020 and 2019 included the following:
Vesting of Stock Options and Restricted Stock Units
Total Stock-Based Compensation Expense
Weighted average number of common shares outstanding – basic and diluted
Basic and diluted loss per common share
F-12
Fiscal Years Ended
March 31, 2020
March 31, 2019
843,998
843,998
$
$
3,414,840
1,319,001
1,319,001
1,208,314
(0.25)
$
(1.09)
$
$
$
We record share-based compensation expenses for awards of stock options and restricted stock units, or RSUs, under ASC 718, Share-based compensation, or ASC 718. For
awards to non-employees for periods prior to the adoption of ASU 2018-07, Compensation-Stock Compensation: Improvements to Non-employee Share-Based Payment
Accounting, on April 1, 2019, the Company had applied ASC 505-50, Equity – Equity-based payments to non-employees, or ASC 505-50. ASC 718 establishes guidance for
the recognition of expenses arising from the issuance of share-based compensation awards at their fair value at the grant date.
We recognize share-based compensation expense related to stock options and SARs granted to employees, directors and consultants based on the estimated fair value of the
awards on the date of grant. We estimate the grant date fair value, and the resulting share-based compensation expense, for stock options that only have service vesting
requirements or performance-based vesting requirements without market conditions using the binomial lattice option-pricing model. The grant date fair value of the share-based
awards with service vesting requirements is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective
awards. Determining the appropriate amount to expense for performance-based awards based on the achievement of stated goals requires judgment. The estimate of expense is
revised periodically based on the probability of achieving the required performance targets and adjustments are made as appropriate. The cumulative impact of any revisions is
reflected in the period of change. If any applicable financial performance goals are not met, no compensation cost is recognized and any previously recognized compensation
cost is reversed. For performance-based awards with market conditions, we determine the fair value of awards as of the grant date using a Monte Carlo simulation model.
We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting
the forfeiture rate for all expense amortization after March 31, 2007 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the
fiscal year ended March 31, 2020 was insignificant.
PATENTS
Patents include both foreign and domestic patents. We capitalize the cost of patents, some of which were acquired, and amortize such costs over the shorter of the remaining
legal life or their estimated economic life, upon issuance of the patent. The unamortized costs of patents are subject to our review for impairment under our long-lived asset
policy above.
STOCK PURCHASE WARRANTS
We grant warrants in connection with the issuance of common stock for cash. Warrants issued in connection with common stock for cash, if classified as equity, are considered
issued in connection with equity transactions and the warrant fair value is recorded to additional paid-in-capital.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of conversion that is below market value. Such feature is normally characterized as a Beneficial Conversion
Feature, or BCF. We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required to be separated from the host instrument and
accounted for separately, and record that value in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest
expense over the term of the notes.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs are expensed as incurred. We incurred approximately $927,000 and $896,000 of research and development expenses for the years ended
March 31, 2020 and 2019, respectively, which are included in various operating expenses in the accompanying consolidated statements of operations.
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 material effect on our consolidated financial
statements.
F-13
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, or ASU
No. 2018-07. ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU No.
2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. Entities must apply the guidance
retrospectively with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption of ASU No. 2018-07 on April 1, 2019 did
not have a material impact on the Company's consolidated financial position, results of operations and related disclosures.
During the fiscal year ended March 31, 2020, the Company adopted ASU Topic 842 on April 1, 2019 utilizing the alternative transition method allowed for under this guidance.
As a result, the Company recorded lease liabilities and right-of-use lease assets of $228,694 on its balance sheet as of April 1, 2019. The lease liabilities represent the present
value of the remaining lease payments of the Company’s corporate headquarters lease (see Note 13), discounted using the Company’s incremental borrowing rate as of April 1,
2019. The corresponding right-of-use lease assets are recorded based on the lease liabilities and the cumulative difference between rent expense and amounts paid under its
corporate headquarters lease. The Company also elected the short-term lease recognition exemption for its laboratory lease. For the laboratory lease that qualified as short-term,
the Company did not recognize ROU assets or lease liabilities at adoption.
Topic 842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:
·
Transitional practical expedients, which must be elected as a package and applied consistently to all of the Company’s leases:
°
°
°
The Company need not reassess whether any expired or existing contracts are or contain leases.
The Company need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in
accordance with the previous guidance will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with the
previous guidance will be classified as finance leases).
The Company need not reassess initial direct costs for any existing leases.
·
Hindsight practical expedient. The Company elected the hindsight practical expedient in determining the lease term (that is, when considering lessee options to
extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the Company’s right-of-use assets.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
Furniture and office equipment, at cost
Accumulated depreciation
Depreciation expense for the fiscal years ended March 31, 2020 and 2019 was $17,202 and $21,531, respectively.
F-14
March 31, 2020
March 31, 2019
$
$
526,029
(385,545)
140,484
$
$
374,364
(368,343)
6,021
3. PATENTS, NET
Patents, net consist of the following:
Patents
Accumulated amortization
March 31, 2020
March 31, 2019
$
$
211,645
(154,141)
57,504
$
$
211,645
(144,977)
66,668
Amortization expense for capitalized patents for each of the fiscal years ended March 31, 2020 and 2019 was $9,164. As several patents expired during the fiscal year ended
March 31, 2020 and only one capitalized patent remains to be amortized, future amortization expense on patents is estimated to be approximately $550 per year based on the
estimated life of the patent. The weighted average remaining life of our remaining capitalized patent is approximately 6 years.
4. CONVERTIBLE NOTES PAYABLE
We paid off our convertible notes in full in July 2019. The following table shows the activity related to our convertible notes during the fiscal year ended March 31, 2020:
Total Convertible Notes Payable at March 31, 2019
Less Principal Payments in Cash on Convertible Notes During the Fiscal Year Ended March 31, 2020
Total Convertible Notes Payable at March 31, 2020
$
$
992,591
(992,591)
–
During the fiscal year ended March 31, 2020, we recorded interest expense of $23,759 related to the contractual interest rates of our convertible notes and interest expense of
$30,287 related to the amortization of the note discount, for a total interest expense of $54,046 related to our convertible notes in the fiscal year ended March 31, 2020.
Convertible Notes Payable, Net consisted of the following at March 31, 2019:
Convertible Notes Payable, Net:
November 2014 10% Convertible Notes (due July 1, 2019)
December 2016 10% Convertible Notes (due July 1, 2019)
Total Convertible Notes Payable, Net
Principal
Unamortized
Discount
Net
Amount
Accrued
Interest
$
$
612,811
379,780
992,591
$
$
(18,701)
(11,589)
(30,290)
$
$
594,110
368,191
962,301
$
$
37,309
22,264
59,573
During the fiscal year ended March 31, 2019, we recorded interest expense of $99,260 related to the contractual interest rates of our convertible notes and interest expense of
$121,148 related to the amortization of the note discount for a total interest expense of $220,408 related to our convertible notes in the fiscal year ended March 31, 2019.
5. EQUITY TRANSACTIONS
ISSUANCES OF COMMON STOCK AND WARRANTS
Equity Transactions in the Fiscal Year Ended March 31, 2020.
December 2019 Public Offering
On December 13, 2019, we entered into an underwriting agreement with H.C. Wainwright and Co., or Wainwright, as representative of the several underwriters named therein,
relating to the public offering, issuance and sale of 3,333,334 shares of common stock (which includes pre-funded warrants to purchase shares of common stock in lieu thereof),
and common warrants to purchase up to an aggregate of 3,333,334 shares of common stock, at a public offering price of $1.50 per share and common warrant. Each share of
common stock (or pre-funded warrant in lieu thereof) was sold together with a common warrant to purchase one share of common stock. The common warrants have an
exercise price of $1.50 per share, were immediately exercisable, and will expire five years from the date of issuance. The offering closed on December 17, 2019.
F-15
The gross proceeds of the December 2019 Public Offering were approximately $5 million, prior to deducting underwriting discounts and commissions and estimated offering
expenses and excluding the exercise of any common warrants and the underwriter's option to purchase additional securities. The net proceeds from the December 2019 Public
Offering were $4,091,437.
Subsequent to the completion of the December 2019 Public Offering and prior to March 31, 2020, all of the holders of pre-funded warrants exercised their pre-funded warrants
in full.
In the event of a Fundamental Transaction (a transfer of ownership of the Company as defined in the common warrants issued in the December 2019 Public Offering) within our
control, the holders of the unexercised common stock warrants exercisable for $1.50 per share, are entitled to receive cash consideration equal to a Black-Scholes valuation, as
defined in the warrant. If such Fundamental Transaction is not within our control, the warrant holders would only be entitled to receive the same form of consideration (and in
the same proportion) as the holders of our common stock, hence these warrants are classified as a component of permanent equity.
January 2020 Registered Direct Offering and Private Placement
On January 16, 2020, we engaged Wainwright to act as our exclusive placement agent in connection with the private placement and a concurrent registered direct offering, or
together, the Offering, of an aggregate of 1,885,378 shares of our common stock at a purchase price per share of $2.00, or the Shares, for aggregate gross proceeds to us of
approximately $3.77 million, before deducting fees payable to Wainwright and other estimated offering expenses payable by us. We also entered into a securities purchase
agreement, or the Purchase Agreement with certain institutional investors, or the Purchasers, pursuant to which we agreed to sell and issue to the Purchasers warrants, or the
Purchase Warrants, to purchase up to an aggregate of 942,689 shares of our common stock, or the Purchase Warrant Shares. We agreed to pay Wainwright a cash fee of 6.0% of
the aggregate gross proceeds in the Offering, excluding the proceeds, if any, from the exercise of the Purchase Warrants. We paid Wainwright an additional 1.0% of the
aggregate gross proceeds in the Offering as a management fee and also paid Wainwright an additional $70,000 for certain expenses in connection with the Offering. In addition,
Wainwright received placement agent warrants on substantially the same terms as the Purchase Warrants in an amount equal to 3.0% of the aggregate number of Shares sold in
the offering, or 56,561 shares of Common Stock, at an exercise price of $2.50 per share and a term expiring on January 17, 2025, or the Placement Agent Warrants, and the
shares of common stock issuable thereunder, or the Placement Agent Warrant Shares.
On January 22, 2020, the Company closed the Offering and issued the Purchase Warrants to the Purchasers. The Purchase Warrants are exercisable immediately at an exercise
price of $2.75 per share and will expire five and one-half years from the issuance date.
The net proceeds from the January 2020 Registered Direct Offering and Private Placement were $3,364,878.
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement, or the Agreement, with H.C. Wainwright & Co., LLC, or H.C. Wainwright, which established an at-the-
market equity program pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement. The Agreement provides for the
sale of shares, or the Shares, of our common stock having an aggregate offering price of up to $12,500,000.
On March 30, 2020, we executed Amendment No. 2 to the Agreement with Wainwright, effective as of the same date. The amendment provides that references in the
Agreement to the registration statement shall refer to the registration statement on Form S-3 (File No. 333-237269), originally filed with the SEC on March 19, 2020, declared
effective by the SEC on March 30, 2020.
Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and sales
practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, and H.C. Wainwright is
entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we agreed to pay certain expenses incurred by H.C.
Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the
Shares under the Agreement, unless terminated earlier by either party as permitted under the Agreement.
F-16
Sales of the Shares, if any, under the Agreement will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act,
including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We
have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.
In the fiscal year ended March 31, 2020, we raised aggregate net proceeds of $896,031 (net of $27,896 in commissions to H.C. Wainwright and $5,929 in other offering
expenses) under this Agreement through the sale of 161,149 shares at an average price of $5.56 per share of net proceeds.
Warrant Exercises
In fiscal year ended March 31, 2020, investors that participated in the December 2019 public offering exercised 2,700,000 warrants for aggregate cash proceeds to us of
$3,807,162.
Restricted Stock Unit Grants to Non-Employee Directors
In 2012, as amended on August 9, 2016, 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 unites, or
RSUs, as well as an annual grant of RSUs at the beginning of each fiscal year. The RSUs are subject to vesting and represent the right to be issued on a future date shares of our
common stock for upon vesting.
In April 2019, pursuant to the Non-Employee Directors Compensation Program, we issued RSUs with a value of $35,000, in accordance with the terms of the plan, to each of
our non-employee directors, as the stock-based compensation element of their overall directors’ compensation, for the fiscal year ending March 31, 2020. Those grants were
based on the closing price of our common stock on the grant date, or $14.25 per share, resulting in 2,456 RSUs being issued to each of our five non-employee directors, for a
total of 12,280 RSUs. All of the RSUs were subject to vesting in equal quarterly installments on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020.
During the fiscal year ended March 31, 2020, 12,280 vested RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As four
of our five independent directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 3,926 of the RSUs
were cancelled and we paid $11,230 in cash to those independent directors.
In addition, during the fiscal year ended March 31, 2020, 8,793 vested RSUs then held by our executive officers were exchanged into the same number of shares of our
common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 4,657
of the RSUs were cancelled and we issued a net 4,136 shares to our executives.
There were no vested RSUs outstanding as of March 31, 2020.
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.
Equity Transactions in the Fiscal Year Ended March 31, 2019.
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement, or the Agreement, with H.C. Wainwright & Co., LLC, or Wainwright, which establishes an at-the-market
equity program pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement. The Agreement provides for the sale of
shares of our common stock having an aggregate offering price of up to $12,500,000, or the Shares.
F-17
Subject to the terms and conditions set forth in the Agreement, Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to
sell the Shares from time to time, based upon our instructions. We have provided Wainwright with customary indemnification rights, and Wainwright will be entitled to a
commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by Wainwright in
connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the Shares under
the Agreement unless terminated earlier by either party as permitted under the Agreement.
Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act,
including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with Wainwright. We have no
obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.
In the fiscal year ended March 31, 2019, we raised aggregate net proceeds of $1,048,371 (net of $32,471 in commissions to Wainwright and $5,447 in other offering expenses)
under the Agreement through the sale of 51,548 shares at an average price of $20.34 per share of net proceeds.
Warrant Exercises
In the fiscal year ended March 31, 2019, investors that participated in our October 2017 public offering exercised 18,887 warrants for aggregate cash proceeds to us of
$292,932.
Restricted Shares Issued for Services
During the fiscal year ended March 31, 2019, we issued 1,000 shares of restricted common stock at a price of $19.35 per share, the market price at time of issuance, in payment
for investor relations consulting services. The aggregate value of this share issuance was $19,350.
Stock Option Issuances
During the fiscal year ended March 31, 2019, we issued an option to our new CEO under the Company’s 2010 Stock Incentive Plan to purchase 36,842 shares of our common
stock at an exercise price of $18.75 per share, the closing price on the date of the option grant.
Restricted Stock Unit Grants to Non-Employee Directors
During the fiscal year ended March 31, 2019, 13,831 vested RSUs held by our executives were exchanged into the same number of shares of our common stock. As our
executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 7,484 of the RSUs were
cancelled and we issued a net 6,347 shares to our executives.
During the fiscal year ended March 31, 2019, 9,699 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As four of our
five independent directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 3,165 of the RSUs were
cancelled and we paid $54,278 in cash to those independent directors.
WARRANTS:
During the fiscal year ended March 31, 2020, we issued 4,432,585 warrants in association with our December 2019 Public Offering and our January 2020 Registered Direct
Financing and associated private placement (see Note 6). All of those warrants had a five year term and had exercise prices as follows:
Financing
December 2019 Public Offering – Investors’ Warrants
December 2019 Public Offering – Placement Agents’ Warrants
January 2020 Registered Direct – Investors’ Warrants
January 2020 Registered Direct – Placement Agents’ Warrants
Warrants Issued
Exercise Price
3,333,334
100,000
942,689
56,562
$1.50
$1.875
$2.75
$2.50
F-18
Based on the above assumptions, we valued the warrants issued during the fiscal year ended March 31, 2020 as follows:
·
·
The 999,251 warrants issued in our January 2020 Registered Direct Financing were valued at $2,388,776 and we classified that fair value as equity.
The 3,433,334 warrants issued in our December 2019 public offering were valued at $3,021,334 and we classified that fair value as equity.
We did not issue any warrants in the fiscal year ended March 31, 2019.
A summary of the aggregate warrant activity for the years ended March 31, 2020 and 2019 is presented below:
Outstanding, beginning of year
Granted
Adjustment for reverse split
Exercised
Cancelled/Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average estimated fair value of warrants granted
Fiscal Year Ended March 31,
2020
2019
Warrants
342,992 $
4,432,585
73
(2,700,000) $
(54,282) $
2,021,368 $
2,021,368 $
$
Weighted
Average
Exercise Price
Warrants
Weighted
Average
Exercise Price
27.00
1.79
N/A
1.50
91.23
5.21
5.21
1.22
394,839 $
– $
--
(18,887) $
(32,960) $
342,992 $
342,992 $
27.00
N/A
N/A
16.50
42.60
27.00
27.00
N/A
The following outlines the significant weighted average assumptions used to estimate the fair value of warrants granted in the fiscal year ended March 31, 2020 utilizing the
Binomial Lattice option pricing model:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Fiscal Year Ended
March 31, 2020
1.57% - 1.71%
5 years
148.6% - 233.0%
None
The expected volatility was based on the historic volatility. The expected life of options granted was based on the “simplified method” as described in the SEC’s guidance due to
changes in the vesting terms and contractual life of current option grants compared to our historical grants.
The detail of the warrants outstanding and exercisable as of March 31, 2020 is as follows:
Warrants Outstanding
Warrants Exercisable
Range of
Exercise Prices
$2.75 or Below
$16.50 - $59.25
$64.50 - $135.00
Number
Outstanding
1,732,585
249,985
38,798
2,021,368
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise Price
4.80
2.07
0.58
$
$
$
2.23
23.24
92.48
Number
Outstanding
1,732,585 $
249,985 $
38,798 $
2,021,368
Weighted
Average
Exercise Price
4.80
2.07
0.58
F-19
STOCK-BASED COMPENSATION:
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan, to provide incentives to attract, retain and motivate employees, directors and consultants, whose present and
potential contributions are important to our success, by offering them an opportunity to participate in our future performance through awards of options, the right to purchase
common stock, stock bonuses and stock appreciation rights and other awards. We initially authorized a total of 4,667 common shares for issuance under the 2010 Stock
Incentive Plan.
On January 26, 2016, our Board of Directors approved an amendment to the 2010 Stock Incentive Plan to increase the total number of shares of common stock authorized for
issuance under the plan to 211,333 shares, subject to amendment of our Articles of Incorporation to increase our authorized common stock. On March 29, 2016, at which our
stockholders approved the Amended 2010 Stock Incentive Plan and an amendment of our Articles of Incorporation to increase our authorized common stock to 30,000,000
shares. On March 31, 2016, we filed a Certificate of Amendment to our Articles of Incorporation to effect the increase in our authorized common stock. As a result of such
amendment, the Amended 2010 Stock Incentive Plan became effective on March 31, 2016.
Effective October 14, 2019, we completed a 1-for-15 reverse stock split. Accordingly, 15 shares of outstanding common stock then held by stockholders were combined into
one share of common stock. Any fractional shares resulting from the reverse split were rounded up to the next whole share. Authorized common stock remained at 30,000,000
shares.
At March 31, 2020, we had 119,343 shares available for issuance under this plan See Note 11 to cross reference April 2020 RSU issuance to independent directors.
2012 NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a board compensation program that modified and superseded the Company’s 2005 Directors Compensation Program, or the Non-
Employee Director Plan, which was previously in effect for our non-employee Directors. Under the Non-Employee Director Plan, an eligible director will receive initial and
annual equity grants and cash compensation.
In June 2014 and August 2016, our Board of Directors approved further amendments to the Non-Employee Director Plan. Under this modified program, a new eligible director
will receive an initial grant of $50,000 worth of RSUs or, at the discretion of our Board of Directors, options to acquire shares of common stock. RSUs granted under this
provision will be valued based on the average of the closing prices of the common stock for the five trading days preceding and including the date of grant and will vest at a rate
determined by our Board of Directors in its discretion, typically over one year, partially on the date of grant and in equal quarterly installments thereafter. Options granted under
this plan will have an exercise price equal to the fair market value on the date of grant. Such options will have a term of ten years and will vest at a rate determined by our Board
of Directors in its discretion.
In addition, under the Non-Employee Director Plan, at the beginning of each fiscal year, each existing director eligible to participate will receive a grant of $35,000 worth of
RSUs or, at the discretion of our Board of Directors, options to acquire shares of common stock. RSUs granted under this provision will be valued based on the average of the
closing prices of the common stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of grant, if such grant is
not made on the first day of the fiscal year) and will vest at a rate determined by our Board of Directors in its discretion, typically in equal quarterly installments over one year.
Options granted under this plan will have an exercise price equal to the Fair Market value on the date of grant. Such options will have a term of ten years and will vest at a rate
determined by our Board of Directors in its discretion.
In lieu of per meeting fees, eligible directors receive an annual board retainer fee of $30,000. The Non-Employee Director Plan also provides for the following annual retainer
fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Nominating Committee chair - $5,000, Audit Committee member - $4,000, Compensation
Committee member - $4,000, Nominating Committee member - $4,000 and lead independent director - $15,000.
F-20
The RSU grants and the changes to the Non-Employee Director Plan were approved and recommended by our Compensation Committee prior to approval by our Board of
Directors.
Dr. Fisher additionally is compensated $90,000 per year for his services as Chairman of our Board, which our Board of Directors considers to be fees payable as a member of
our Board of Directors or a Committee of our Board for purposes of Section 10A-3 of the rules promulgated under the Securities Exchange Act of 1934, as amended. To the
extent payment of such fees are construed to not be fees payable as a member of our Board of Directors or a Committee of our Board, then our Board of Directors considers
that Dr. Fisher may act as a member of its Audit Committee under Nasdaq Rule 5605(c)(2)(B) as our Board of Directors has determined that it is in the best interests of our
Company and its stockholders for Dr. Fisher to continue to serve on its Audit Committee. The Board has awarded compensation to non-employee directors in the past outside of
the Non-Employee Director Plan.
In April 2019, pursuant to the Non-Employee Directors Compensation Program, we issued RSUs with a value of $35,000, in accordance with the terms of the plan, to each of
our non-employee directors, as the stock-based compensation element of their overall directors’ compensation, for the fiscal year ending March 31, 2020. Those grants were
based on the closing price of our common stock on the grant date, or $14.25 per share, resulting in 2,456 RSUs being issued to each of our five non-employee directors, for a
total of 12,280 RSUs. All of the RSUs were subject to vesting in equal quarterly installments on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020.
During the fiscal year ended March 31, 2020, 12,280 vested RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As four
of our five independent directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 3,926 of the RSUs
were cancelled and we paid $11,230 in cash to those independent directors.
In addition, during the fiscal year ended March 31, 2020, 8,793 vested RSUs then held by our executive officers were exchanged into the same number of shares of our
common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 4,657
of the RSUs were cancelled and we issued a net 4,136 shares to our executives.
There were no vested RSUs outstanding as of March 31, 2020.
STAND-ALONE GRANTS
From time to time our Board of Directors grants common stock or options to purchase common stock or warrants exercisable to common stock to selected directors, officers,
employees and consultants as equity compensation to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually
negotiated.
STOCK OPTION ACTIVITY
During the fiscal year ended March 31, 2019, we issued an option to our new CEO to purchase 36,842 shares of common stock at a price of $18.75 per share, the closing price
on the date of the option grant.
The following is a summary of the stock options outstanding at March 31, 2020 and 2019 and the changes during the years then ended:
Outstanding, beginning of year
Granted
Exercised
Cancelled/Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average estimated fair value of options granted
Fiscal Year Ended March 31,
2020
2019
Options
Weighted
Average
Exercise Price
Options
Weighted
Average
Exercise Price
$
$
59,111
--
–
(7,987) $
$
51,124
$
25,197
$
56.85
N/A
N/A
138.75
44.12
70.08
N/A
27,670 $
36,842 $
–
(5,400) $
59,111 $
21,070 $
$
145.05
18.75
N/A
248.25
56.85
125.40
16.50
F-21
The detail of the options outstanding and exercisable as of March 31, 2020 is as follows:
Exercise Prices
$18.75 - $25.20
$57.00 - $75.00
$142.50 - $187.50
Options Outstanding
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
7.89 years $
3.17 years $
1.38 years $
19.05
64.28
176.90
Options Exercisable
Number
Outstanding
12,715 $
6,113 $
6,369 $
25,197
Weighted
Average
Exercise
Price
19.36
64.28
176.90
Number
Outstanding
38,642
6,113
6,369
51,124
We recorded stock-based compensation expense related to restricted stock unit issuances and to options granted totaling $843,998 and $1,319,001 for the fiscal years ended
March 31, 2020 and 2019, respectively. These expenses were recorded as stock compensation included in payroll and related expenses in the accompanying consolidated
statement of operations for the years ended March 31, 2019 and 2018.
Our total stock-based compensation for fiscal years ended March 31, 2020 and 2019 included the following:
Vesting of restricted stock units
Vesting of stock options
Total Stock-Based Compensation
Fiscal Year Ended
March 31, 2020
March 31, 2019
$
$
678,028
165,970
843,998
$
$
1,262,794
56,207
1,319,001
We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect
of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year
ended March 31, 2020 was insignificant.
As of March 31, 2020, we had $1,528,684 of remaining unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average
remaining vesting period of 4.33 years.
On March 31, 2020, our stock options had a negative intrinsic value since the closing price on that date of $1.52 per share was below the weighted average exercise price of our
stock options.
6. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Historically, certain of our officers and other related parties have advanced us funds, agreed to defer compensation and/or paid expenses on our behalf to cover working capital
deficiencies. There were no such related party transactions during the fiscal year ended March 31, 2020, except that we had accrued unpaid Board fees of $69,750 owed to our
outside directors as of March 31, 2020.
F-22
Due to related parties were comprised of the following items:
Accrued board fees
Accrued vacation
Total due to related parties
7. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
Accrued interest
Accrued separation expenses for former executives (see Note 6 and Note 12)
Accrued professional fees
Total other current liabilities
8. INCOME TAXES
March 31, 2020
March 31, 2019
69,750
41,957
111,707
March 31, 2020
–
–
472,420
472,420
$
$
$
$
69,750
13,904
83,654
March 31, 2019
59,573
355,189
231,238
646,000
$
$
$
$
For the years ended March 31, 2020 and 2019, we had no income tax expense due to our net operating losses and 100% deferred tax asset valuation allowance.
At March 31, 2020 and 2019, we had net deferred tax assets as detailed below. These deferred tax assets are primarily composed of capitalized research and development costs
and tax net operating loss carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a 100% valuation has been
established to offset the net deferred tax assets.
Significant components of our net deferred tax assets at March 31, 2020 and 2019 are shown below:
Deferred tax assets:
Capitalized research and development
Net operating loss carryforwards
Stock compensation
Total deferred tax assets
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
YEAR ENDED MARCH 31,
2020
2019
$
3,442,000
18,384,000
1,181,000
23,007,000
–
23,007,000
(23,007,000)
3,442,000
17,221,000
944,000
21,607,000
–
21,607,000
(21,607,000)
–
$
–
$
$
At March 31, 2020, we had tax net operating loss carryforwards for federal and state purposes approximating $71 million and $53 million, which begin to expire in the year
2021.
F-23
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate for the years ended March 31, 2020 and 2019 due to the following:
Income taxes (benefit) at federal statutory rate of 21.00%
State income tax, net of federal benefit
Tax effect on non-deductible expenses and credits
True up items
Expiration of net operating loss carryforwards
Change in valuation allowance1
2020
2019
$
$
(1,340,000)
(446,000)
122,000
42,000
222,000
1,400,000
–
$
$
(1,306,000)
(434,000)
41,000
(41,000)
407,000
1,333,000
–
______________
(1) Pursuant to Internal Revenue Code Sections 382, use of our tax net operating loss carryforwards may be limited.
ASC 740, “Income Taxes”, clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements, and prescribes recognition thresholds and
measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest and/or penalties related to income tax matters in income tax
expense. During the years ended March 31, 2020 and 2019, we did not recognize any interest or penalties relating to tax matters.
At and for the years ended March 31, 2020 and 2019, management does not believe the Company has any uncertain tax positions. Accordingly, there are no unrecognized tax
benefits at March 31, 2020 or March 31, 2019.
Our tax returns remain open for examination by the applicable authorities, generally 3 years for federal and 4 years for state. We are currently not under examination by any
taxing authorities.
9. SEGMENTS
We operate our businesses principally through two reportable segments: Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic
business activities. Our reportable segments have been determined based on the nature of the potential products being developed. We record discrete financial information for
ESI and our chief operating decision maker reviews ESI’s operating results in order to make decisions about resources to be allocated to the ESI segment and to assess its
performance.
Aethlon’s revenue is generated primarily from government contracts to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead
to the ESI segment.
F-24
The following tables set forth certain information regarding our segments:
Revenues:
Aethlon
ESI
Total Revenues
Operating Losses:
Aethlon
ESI
Total Operating Loss
Net Losses:
Aethlon
ESI
Net Loss Before Non-Controlling Interests
Cash:
Aethlon
ESI
Total Cash
Total Assets:
Aethlon
ESI
Total Assets
Capital Expenditures:
Aethlon
ESI
Capital Expenditures
Depreciation and Amortization:
Aethlon
ESI
Total Depreciation and Amortization
Interest Expense:
Aethlon
ESI
Total Interest Expense
F-25
Fiscal Years Ended March 31,
2020
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
650,187
–
650,187
(5,899,523)
(30,465)
(5,929,988)
(6,349,576)
(30,465)
(6,380,041)
9,604,583
197
9,604,780
10,387,489
197
10,387,686
151,665
–
–
26,366
–
26,366
54,232
–
54,232
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
229,625
–
229,625
(5,875,094)
(123,923)
(5,999,017)
(6,095,581)
(123,923)
(6,219,504)
3,827,555
519
3,828,074
4,122,445
519
4,122,964
–
–
–
30,695
–
30,695
220,487
–
220,487
10. SUBSEQUENT EVENTS
Management has evaluated events subsequent to March 31, 2020 through the date that the accompanying consolidated financial statements were filed with the Securities and
Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
Management Update
In June 2020, Thomas L. Taccini joined our management team as Vice President, Manufacturing and Product Development. Mr. Taccini has over 35 years of experience in
leading teams in engineering, product development, project management, quality systems and regulatory affairs for multiple different classes of medical devices.
IDE Supplement
On June 17, 2020, the FDA approved a supplement to the Company’s open IDE for the Company’s Hemopurifier in viral disease to allow for the testing of the Hemopurifier 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.
Sales Under ATM Facility
In June 2020, 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 Agreement
described above through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.
COVID-19 Update
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global
supply chains and created significant volatility and disruption of financial markets.
We are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health and safety of our employees while
continuing our operations, including clinical trials. Given the level of uncertainty regarding the duration and impact of the COVID-19 pandemic on capital markets and the U.S.
economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting COVID-19 pandemic on our future access to capital. Further, while we
have not experienced significant disruptions to our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or preclinical research to date,
we are unable to assess the potential impact this pandemic could have on our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or
preclinical research in the future.
As we continue to actively advance our clinical trials, we remain in close contact with our clinical sites and are assessing the impact of COVID-19 on our trials, expected
timelines and costs on an ongoing basis. We will assess any potential delays in our ability to timely ship clinical trial materials, including internationally, due to transportation
interruptions. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of
the outbreak, impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate
the related impact to our business, operating results and financial condition, if any.
RSU Grants
On April 3, 2020, pursuant to the terms of the Company’s 2012 Non-Employee Directors Compensation Program, as modified on August 9, 2016, or the Directors Plan, the
Compensation Committee of the Board granted RSUs under the Company’s 2010 Stock Incentive Plan, or the 2010 Plan, to each non-employee director of the Company. The
Director’s Plan provides for a grant of $35,000 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 $1.41 per share as of April 3, 2020. Each eligible director was granted an RSU in the amount of 23,893 shares under the 2010 Plan, as the number
of available shares under the 2010 Plan was not sufficient for each director’s full grant. The RSU’s are subject to vesting in four equal quarterly installments on June 30,
September 30, December 31, 2020, and March 31, 2021, subject to the recipient's continued service with the Company on each such vesting date. Each eligible director will
receive the remaining portion of the annual RSU grants, or 929 RSU’s, contingent upon stockholder approval at the 2020 annual meeting of the Company’s stockholders, of a
new 2020 Equity Incentive Plan.
F-26
11. COMMITMENTS AND CONTINGENCIES
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We have had the following material changes to our contractual obligations and commitments outside the ordinary course of business during the fiscal year ended March 31,
2020:
On March 17, 2020, we entered into an Amended and Restated Executive Employment Agreement, or the Amended Agreement, for Timothy C. Rodell, M.D., FCCP, or
Executive, dated March 17, 2020, by and between the Company and Executive. This Amended Agreement supersedes and replaces Executive’s current Executive Employment
Agreement with the Company, dated December 10, 2018, or Prior Agreement.
The Amended Agreement updated the Prior Agreement to set forth (i) Executive’s base salary for calendar year 2020, previously approved by the Company, of $430,000 per
year; (ii) Executive’s title of Chief Executive Officer; (iii) Executive’s eligibility to participate in and receive additional stock option or equity award grants under the
Company’s equity incentive plans from time to time, in the discretion of the Board or the Compensation Committee, and in accordance with the terms and conditions of such
plans; and (iv) severance payments in the event that Executive’s employment is terminated by the Company for any reason other than Cause (as defined in the Amended
Agreement) or if it is terminated by Executive for Good Reason (as defined in the Amended Agreement).
LEASE COMMITMENTS
We currently lease approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123 under a 39-month gross plus
utilities lease that commenced on December 1, 2014 and expires on August 31, 2021 the “Granite Ridge Lease.” The current rental rate under the lease extension is $8,265 per
month. We believe this leased facility will be satisfactory for our office needs over the term of the lease.
We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $4,700 per month on a
one-year lease that originally was to expire on November 30, 2019. In October 2019, we entered into a lease extension for an additional twelve months running from December
1, 2019 through November 30, 2020, at the rate of $5,961 per month.
Rent expense, which is included in general and administrative expenses, approximated $178,000 and $169,000 for the fiscal years ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, our commitments under the lease agreements are as follows:
9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 office lease
11585 Sorrento Valley Road, Suite 109, San Diego, CA 92121 office lease
Total Lease Commitments
LEGAL MATTERS
2021
2022
Totals
$
$
102,074
47,684
149,758
$
$
43,670
$
–
43,670
$
145,744
47,684
193,428
From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent
uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in
other activities.
The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that period or future periods. We are not
presently a party to any pending or threatened legal proceedings.
F-27
Exhibit 4.16
DESCRIPTION OF COMMON STOCK
The following description summarizes the most important terms of our common stock. Because it is only a summary, it does not contain all the information that may be
important to you. For a complete description of the matters set forth in this “Description of Common Stock,” you should refer to our articles of incorporation, as amended, or
the articles of incorporation, and amended and restated bylaws, or the bylaws, which are included as exhibits to our Annual Report on Form 10-K, and to the applicable
provisions of Nevada law. Our authorized capital consists of 30,000,000 shares of common stock, par value $0.001 per share. Our board of directors is authorized, without
stockholder approval, except as required by the listing standards of The Nasdaq Stock Market LLC, to issue additional shares of our capital stock.
Voting Rights. Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors.
Our stockholders do not have cumulative voting rights in the election of directors. An election of directors by our stockholders shall be determined by a plurality of votes cast by
the stockholders entitled to vote on the election.
Dividends. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive dividends, if any, as may
be declared from time to time by the board of directors out of legally available funds.
Liquidation. In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for
distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then
outstanding shares of preferred stock.
Rights and Preferences. Holders of common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to
the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of
any series of preferred stock that we may designate in the future.
Anti-Takeover Effects of Certain Provisions of Nevada Law and Our Articles of Incorporation and Bylaws
Nevada’s “combinations with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified types of business “combinations” between certain
Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person first becomes an “interested stockholder” unless the
corporation’s board of directors approves the combination (or the transaction by which such person becomes an “interested stockholder”) in advance, or unless the combination
is approved by the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder, its affiliates and associates.
Further, in the absence of prior approval certain restrictions may apply even after such two-year period. However, these statutes do not apply to any combination of a
corporation and an interested stockholder after the expiration of four years after the person first became an interested stockholder. For purposes of these statutes, an “interested
stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation,
or (2) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the
voting power of the then outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most significant transactions between a
corporation and an “interested stockholder.” These statutes generally apply to Nevada corporations with 200 or more stockholders of record. However, a Nevada corporation
may elect in its articles of incorporation not to be governed by these particular laws, but if such election is not made in the corporation’s original articles of incorporation, the
amendment (1) must be approved by the affirmative vote of the holders of stock representing a majority of the outstanding voting power of the corporation not beneficially
owned by interested stockholders or their affiliates and associates, and (2) is not effective until 18 months after the vote approving the amendment and does not apply to any
combination with a person who first became an interested stockholder on or before the effective date of the amendment. We did not make such an election in our original
articles of incorporation and have not amended our articles of incorporation to so elect.
Nevada’s “acquisition of controlling interest” statutes (NRS 78.378 through 78.3793, inclusive) contain provisions governing the acquisition of a controlling interest in certain
Nevada corporations. These “control share” laws provide generally that any person that acquires a “controlling interest” in certain Nevada corporations may be denied voting
rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. Our bylaws provide that these statutes do not apply to us or any
acquisition of our common stock. Absent such provision in our bylaws, these laws would apply to us as of a particular date if we were to have 200 or more stockholders of
record (at least 100 of whom have addresses in Nevada appearing on our stock ledger at all times during the 90 days immediately preceding that date) and do business in the
State of Nevada directly or through an affiliated corporation, unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling interest
provide otherwise. These laws provide that a person acquires a “controlling interest” whenever a person acquires shares of a subject corporation that, but for the application of
these provisions of the NRS, would enable that person to exercise (1) one fifth or more, but less than one third, (2) one third or more, but less than a majority or (3) a majority or
more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction
taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest become
“control shares” to which the voting restrictions described above apply.
1
NRS 78.139 also provides that directors may resist a change or potential change in control of the corporation if the board of directors determines that the change or potential
change is opposed to or not in the best interest of the corporation upon consideration of any relevant facts, circumstances, contingencies or constituencies pursuant to NRS
78.138(4).
In addition, our authorized but unissued shares of common stock are available for our board of directors to issue without stockholder approval. We may use these additional
shares for a variety of corporate purposes, including future public or private offerings to raise additional capital, corporate acquisitions and employee benefit plans. The
existence of our authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of our company by means of a proxy
contest, tender offer, merger or other transaction. Our authorized but unissued shares may be used to delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. The board of directors is
also authorized to adopt, amend or repeal our Bylaws, which could delay, defer or prevent a change in control.
Articles of Incorporation and Bylaws
Certain provisions from our articles of incorporation and bylaws, which are summarized below, could have the effect of discouraging others from attempting hostile takeovers
and, as a consequence, they might also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover
attempts. These provisions might also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish
transactions that stockholders might otherwise deem to be in their best interests.
Removal of Directors. Directors may be removed with or without cause by the holders of not less than two-thirds (2/3) of the voting power of all of our then-outstanding stock
entitled to vote generally in the election of directors (voting as a single class), excluding stock entitled to vote only upon the happening of a fact or event unless such fact or
event shall have occurred.
Resolutions to Change Authorized Number of Directors. The authorized number of directors may be changed only by resolution of our board of directors.
Vacancies may be Filled by Directors. All vacancies, including newly created directorships, may, except as otherwise required by law, be filled by a majority vote of the
directors then in office or by a sole remaining director, in either case though less than a quorum, and the director(s) so chosen shall hold office for a term expiring at the next
annual meeting of stockholders and when their successors are elected or appointed, at which the term of the class to which he or she has been elected expires, or until his or her
earlier resignation or removal.
Advance Notice Procedures. Stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of
stockholders must provide advance and timely notice in writing, and also specify requirements as to the form and content of a stockholder’s notice.
No Cumulative Voting Rights. Our articles of incorporation and bylaws do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of
common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose).
Action by Written Consent; Special Meetings of Stockholders. Stockholder action can only be taken at an annual or special meeting of stockholders called and noticed in the
manner required by the bylaws. The stockholders may not in any circumstance take action by written consent.
Authorized but Unissued Shares. Our authorized but unissued shares of common stock will be available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by
means of a proxy contest, tender offer, merger or otherwise.
2
Exclusive Forum. To the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial District Court
of Clark County, Nevada, will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the following:
·
·
·
·
any derivative action or proceeding brought in the name or right of the Company or on its behalf,
any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s
stockholders,
any action arising or asserting a claim arising pursuant to any provision of NRS Chapters 78 or 92A or any provision of our articles of incorporation or bylaws, or
any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of our
articles of incorporation or bylaws.
However, our bylaws provide that the exclusive forum provisions do not apply to suits brought to enforce any liability or duty created by the Securities Exchange Act of 1934,
as amended, or any other claim for which the federal courts have exclusive jurisdiction. We note that there is uncertainty as to whether a court would enforce the provision and
that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing
increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our
directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
Listing
Our common stock is listed on The Nasdaq Capital Market under the symbol “AEMD”.
3
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-230445, 333-182902, 333-168483, 333-168481, 333-164939, 333-
160532, 333-145290, 333-127911, 333-114017 and 333-49896), Form S-1 (File Nos. 333-234712, 333-201334, 333- 219589 and 333-205832), and Form S-3 (File Nos. 333-
237269, and 333-231397) of Aethlon Medical, Inc. of our report dated June 25, 2020 relating to the consolidated financial statements of Aethlon Medical, Inc. and subsidiary
appearing in the Annual Report on Form 10-K of Aethlon Medical, Inc. and subsidiary for the year ended March 31, 2020.
/s/ Squar Milner LLP
San Diego, California
June 25, 2020
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy C. Rodell, certify that:
1. I have reviewed this Annual Report on Form 10-K of Aethlon Medical, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: June 25, 2020
/s/ TIMOTHY C. RODELL
TIMOTHY C. RODELL, M.D.
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
EXHIBIT 31.2
I, James Frakes, certify that:
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1. I have reviewed this Annual Report on Form 10-K of Aethlon Medical, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: June 25, 2020
/s/ JAMES B. FRAKES
JAMES B. FRAKES
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aethlon Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March 31, 2020 as filed with the Securities
and Exchange Commission on the date hereof, I, Timothy C. Rodell, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Aethlon
Medical, Inc.
Dated: June 25, 2020
/s/ TIMOTHY C. RODELL, M.D.
Timothy C. Rodell, M.D.
Chief Executive Officer
Aethlon Medical, Inc.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to Aethlon Medical, Inc. and will be retained by Aethlon Medical, Inc.
and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference
into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the
Form 10-K), irrespective of any general incorporation language contained in such filing.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aethlon Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March 31, 2020 as filed with the Securities
and Exchange Commission on the date hereof, I, James B. Frakes, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Aethlon
Medical, Inc.
Dated: June 25, 2020
/s/ JAMES B. FRAKES
James B. Frakes
Chief Financial Officer
Aethlon Medical, Inc.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed
form within the electronic version of this written statement required by Section 906, has been provided to Aethlon Medical, Inc. and will be retained by Aethlon Medical, Inc.
and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference
into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the
Form 10-K), irrespective of any general incorporation language contained in such filing.