AETHLON MEDICAL INC - Quarter Report: 2020 December (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 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)

9635 GRANITE RIDGE DRIVE, SUITE 100, SAN DIEGO, CA 92123

(Address of principal executive offices, including Zip Code)

(858) 459-7800

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ 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   ☒ 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.

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of February 4, 2021, the registrant had outstanding 12,123,524 shares of common stock, $0.001 par value.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes.

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Month Periods Ended December 31, 2020 and 2019

(Unaudited)

See accompanying notes.

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended December 31, 2020 and 2019

(Unaudited)

Continued on following page

See accompanying notes.

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended December 31, 2020 and 2019

(Unaudited)

See accompanying notes.

AETHLON MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2020

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

ORGANIZATION

Aethlon Medical, Inc. and its subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”), is a medical technology company focused on developing products to diagnose and treat life and organ threatening diseases. The Aethlon Hemopurifier®, or Hemopurifier, is a clinical-stage immunotherapeutic device designed to combat cancer and life-threatening viral infections. In cancer, the Hemopurifier is designed to deplete the presence of circulating tumor-derived exosomes that promote immune suppression, seed the spread of metastasis and inhibit the benefit of leading cancer therapies. The U.S. Food and Drug Administration, or FDA, has designated the Hemopurifier as a “Breakthrough Device” for two independent indications:

We believe the Hemopurifier can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote the growth and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients with advanced and metastatic cancers. We are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the impact of the COVID-19 global pandemic on our clinical trials and current timelines.

On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda) (NCT # 04453046).  The primary endpoint for the EFS, which is designed to 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 now open for patient enrollment.

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 human immunodeficiency virus, or HIV, Hepatitis C, and Ebola.

Additionally, in vitro, the Hemopurifier has been demonstrated to capture Zika virus, Lassa virus, MERS-CoV, cytomegalovirus, Epstein-Barr virus, Herpes simplex virus, Chikungunya virus, Dengue virus, West Nile virus, smallpox-related viruses, H1N1 swine flu virus, H5N1 bird flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these studies 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 Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with SARS-CoV-2/COVID-19 in a New Feasibility Study. That study’s plan is to enroll up to 40 subjects at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted to an intensive care unit, or ICU and will have acute lung injury and/or severe or life threatening disease, among other criteria. Endpoints for this study, in addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT # 04595903). The first sites for this trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA now have IRB approval and are preparing to open for patient enrollment. Under Single Patient Emergency Use regulations, the Company has also recently treated a patient with COVID-19 who successfully completed eight daily treatments with the Hemopurifier.

We are also the majority owner of Exosome Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases. Included among ESI’s activities is the advancement of a 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.  

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

Following the approval of a reverse stock split at our 2019 Annual Meeting of Stockholders’ held on October 14, 2019, our Board of Directors approved 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. The accompanying unaudited condensed consolidated financial statements and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on April 1, 2019. All shares and per share amounts have been revised accordingly.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

During the nine months ended December 31, 2020, there were no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 8 of the Securities and Exchange Commission, or SEC Regulation S-X. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended March 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on June 25, 2020. The accompanying unaudited condensed consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the condensed consolidated financial statements as of and for the three and nine months ended December 31, 2020, and the condensed consolidated statement of cash flows for the nine months ended December 31, 2020. Estimates were made relating to useful lives of fixed assets, impairment of assets, share-based compensation expense and accruals for clinical trial and research and development expenses. Actual results could differ materially from those estimates. The accompanying condensed consolidated balance sheet at March 31, 2020 has been derived from the audited consolidated balance sheet at March 31, 2020, contained in the above referenced 10-K. The results of operations for the three and nine months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

Reclassifications

Certain prior year balances within the unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

Restricted Cash

To comply with the terms of our new laboratory and office lease (see Note 13), we caused our bank to issue a standby letter of credit, or the L/C, in the amount of $46,726 in favor of the landlord. The L/C is in lieu of a security deposit. In order to support the L/C, we agreed to have our bank withdraw $46,726 from our operating accounts and to place that amount in a restricted certificate of deposit. We have classified that amount as restricted cash, a long-term asset, on our balance sheet.

LIQUIDITY AND GOING CONCERN

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

2. LOSS PER COMMON SHARE

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional dilutive common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded, as their effect would be antidilutive.

As of December 31, 2020, and 2019, an aggregate of 2,626,485 and 3,779,301 potential common shares, respectively, consisting of shares underlying outstanding stock options, warrants and unvested restricted stock units, were excluded, as their inclusion would be antidilutive.

3. RESEARCH AND DEVELOPMENT EXPENSES

Our research and development costs are expensed as incurred. We incurred research and development expenses during the three and nine month periods ended December 31, 2020 and 2019, which are included in various operating expense line items in the accompanying condensed consolidated statements of operations. Our research and development expenses in those periods were as follows:

4. Recent Accounting Pronouncements

We do not expect the adoption of any recent accounting pronouncement to have a material impact on our financial statements.

5. CONVERTIBLE NOTES PAYABLE, NET

In July 2019, all of our previously outstanding convertible notes, in the aggregate amount of $992,591, were paid in full.

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

During the nine months ended December 31, 2019, prior to paying off the notes, we reduced the conversion price on the 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.

6. EQUITY TRANSACTIONS IN THE NINE MONTHS ENDED DECEMBER 31, 2020

Common Stock Sales Agreement with H.C. Wainwright & Co., LLC

On June 28, 2016, we entered into a Common Stock Sales Agreement, or the Agreement, with H.C. Wainwright & Co., LLC, or 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 provided for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000.

On March 30, 2020, we executed Amendment No. 2 to the 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 provided Wainwright with customary indemnification rights under the Agreement, and Wainwright is entitled to a commission at a fixed rate equal to three percent of the gross proceeds per share sold. In addition, we agreed to pay certain expenses incurred by Wainwright in connection with the 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 of 1933, as amended, or 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 three months ended June 30, 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, through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.

Restricted Stock Unit Grants

In 2012, as amended through July 16, 2020, our Board of Directors established the Non-Employee Directors Compensation Program, to provide for cash and equity compensation for persons serving as non-employee directors of the Company. Under this program, each new director receives either stock options or a grant of restricted stock units, or RSUs, as well as an annual grant of RSUs at the beginning of each fiscal year. The RSUs are subject to vesting and represent the right to be issued on a future date shares of our common stock upon vesting.

On April 3, 2020, pursuant to the terms of the Company’s Non-Employee Directors Compensation Program, the Compensation Committee of the Board of Directors granted RSUs to each non-employee director of the Company. The Non-Employee Directors Compensation Program provided for a grant of RSUs with a grant date fair value of $35,000, priced at the average of the closing prices for the five trading days ending on the date of grant, which was $1.41 per share, so that the total number of RSUs to be granted to each non-employee director for fiscal year 2020 would be 24,822 shares of our common stock.  On April 3, 2020, each eligible director was granted an RSU for 23,893 shares under the Company’s 2010 Stock Plan, or the 2010 Plan, as the number of shares that remained available for grant under the 2010 Plan was not sufficient for each director’s full RSU grant. The Compensation Committee also granted to each eligible director a contingent grant under our 2020 Equity Incentive Plan, or the 2020 Plan, for the remaining portion of the annual RSU grants, or 929 RSU’s to each eligible director, contingent upon stockholder approval of the 2020 Plan at the Company’s 2020 Annual Meeting of Stockholders, or the Annual Meeting. These grants are subject to vesting as follows: 50% of the RSUs subject to the grants will vest on December 31, 2020 and 50% of the RSUs will vest on March 31, 2021, subject in each case to the continuous service of each director, through such vesting dates, as well as approval of the 2020 Plan by the stockholders at the Annual Meeting, which was obtained at the Annual Meeting.

In June 2020, 29,866 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 11,947 of the vested RSUs being cancelled in exchange for $24,251 in aggregate cash proceeds to those independent directors.

In September 2020, 29,866 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 11,947 of the vested RSUs being cancelled in exchange for $16,128 in aggregate cash proceeds to those independent directors.

Also in September 2020, our stockholders approved the 2020 Plan at the Annual Meeting, at which point the grants of 929 RSUs to each of our eligible independent directors for a total of 4,645 RSUs were considered effective and no longer contingent as of that date (See Note 9).

In December 2020, 32,189 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 12,876 of the vested RSUs being cancelled in exchange for $31,802 in aggregate cash proceeds to those independent directors.

RSUs outstanding that have vested as of, and are expected to vest subsequent to, December 31, 2020 are as follows:

7. RELATED PARTY TRANSACTIONS

During the three months ended December 31, 2020, we accrued unpaid fees of $69,292 owed to our non-employee directors as of December 31, 2020.

As a result of entering into a Separation Agreement on October 30, 2020 with our former Chief Executive Officer, or CEO, Timothy Rodell, M.D., or the Separation Agreement, we paid out accrued vacation of $20,260 to Dr. Rodell in the three months ended December 2020 (see Note 8 and Note 13). That accrued vacation was previously recorded in the due to related parties account.

Amounts due to related parties were comprised of the following items:

8. OTHER CURRENT LIABILITIES

Other current liabilities were comprised of the following items:

9. STOCK COMPENSATION

The following tables summarize share-based compensation expenses relating to RSUs and stock options and the effect on basic and diluted loss per common share during the three and nine month periods ended December 31, 2020 and 2019:

All of the stock-based compensation expense recorded during the nine months ended December 31, 2020 and 2019, which totaled $629,207 and $755,648, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the nine months ended December 31, 2020 and 2019 represented an impact on basic and diluted loss per common share of $(0.06) and $(0.41), respectively.

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the nine months ended December 31, 2020 was insignificant.

Stock Option Activity and Approval of 2020 Plan

From February 2020 through May 2020, our compensation committee granted options to purchase 521,476 shares of our common stock that were contingent upon stockholder approval of the 2020 Plan. Upon approval of the 2020 Plan at the Annual Meeting, these option grants were considered effective and no longer contingent as of that date.

The 2020 Plan approved by our stockholders at the Annual Meeting, authorizes up to 1,842,556 shares for issuance pursuant to stock option grants, RSUs or other forms of stock-based compensation. No future grants will be made under the 2010 Plan.

We issued an option to purchase shares 239,122 shares of our common stock pursuant to the 2020 Plan to our Chief Executive Officer during the three months ended December 31, 2020, in connection with the appointment of Dr. Fisher as our Chief Executive Officer, effective as of October 30, 2020.

In connection with the Separation Agreement and pursuant to Dr. Rodell’s employment agreement with the Company, the vesting was accelerated on 50% of outstanding and unvested options to purchase shares of our common stock held by Dr. Rodell as of the Separation Date of October 30, 2020, such that the accelerated stock options were fully vested and exercisable as of the Separation Date.

In December 2020, Dr. Rodell elected to net exercise a portion of his stock options. As a result, we issued Dr. Rodell an aggregate of 15,896 shares of our common stock and we paid the estimated withholding taxes of $34,209 related to the net exercise.

Options outstanding that were vested as of December 31, 2020 and options that are expected to vest subsequent to December 31, 2020 are as follows:

A summary of stock option activity during the nine months ended December 31, 2020 is presented below:

On December 31, 2020, our outstanding stock options had no intrinsic value since the closing price on that date of $2.47 per share was below the weighted average exercise price of our outstanding stock options.

At December 31, 2020, there was approximately $2,240,000 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 1.48 years.

10. WARRANTS

During the nine months ended December 31, 2020 and 2019, we did not issue any warrants.

A summary of warrant activity during the nine months ended December 31, 2020 is presented below:

11. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION

We have recognized revenue under the following two contracts/grants with the National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, over the past two years:

Phase 2 Melanoma Cancer Contract

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

The work to be performed pursuant to this Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation that ran from September 2017 through June 2018, 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 period ended December 31, 2020, we completed all of the milestones relevant to that time period. As a result, we recorded $436,427 of government contract revenue on the Phase 2 Melanoma Cancer Contract in the nine months ended December 31, 2020.   Of the total revenue recognized during the current period relating to this grant, a total of $117,849 was invoiced to the NCI during the three months ended December 31, 2020 and we recorded $318,578 which had previously been recognized as deferred revenue.

Breast Cancer Grant

In the nine months ended December 31, 2020, we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation,” or the Breast Cancer Grant.

This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month extension on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors to work with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital. As of December 31, 2020, we have received all of the funds allocated to the Breast Cancer Grant.

During the nine months ended December 31, 2020, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant, as we achieved two of the three milestones related to the Breast Cancer Grant. We concluded in our final report to the SBIR that our pre-clinical results demonstrated that our work under the grant provided support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients. That amount previously was recorded as deferred revenue.

As of December 31, 2020, we received all of the funds allocated to the Breast Cancer Grant and have submitted the final reports applicable to this grant.

Subaward with University of Pittsburgh

In addition, we are completing the logistical elements of documentation and billing the University of Pittsburgh in connection with a cost reimbursable subaward arrangement under an NIH project entitled “Depleting Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the award is $256,750. We have not recorded any revenues as of December 31, 2020 related to the subaward. We anticipate billing and recognizing revenue under this subaward in future periods.

12. 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.

The following tables set forth certain information regarding our segments:

13. COMMITMENTS AND CONTINGENCIES

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations and Commitments” as contained in our Annual Report on Form 10-K for the year ended March 31, 2020, filed by us with the SEC on June 25, 2020.

On October 30, 2020, we entered into a Separation Agreement with Timothy Rodell, M.D., our former Chief Executive Officer, or the Separation Agreement. Under this agreement, we agreed to pay Dr. Rodell a total of $444,729 and to cover his medical insurance costs over a twelve-month period that began on November 1, 2020, all in accordance with the terms of his employment agreement with the Company. We also paid Dr. Rodell accrued vacation in the amount of $20,260 in November 2020.

The total expense accrued at December 31, 2020 relating to the Separation Agreement, was $400,578 (see Note 7 and Note 8).

On October 30, 2020, we entered into an Executive Employment Agreement, or Agreement, with Charles J. Fisher Jr., M.D. The Agreement provides Dr. Fisher with (i) an initial annualized base salary of $430,000 per year; (ii) eligibility for a discretionary annual cash bonus, (iii) eligibility for a one-time cash bonus and additional equity grant upon attaining a specified performance goal, (iv) eligibility to participate in and receive additional stock options 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 Dr. Fisher’s employment is terminated by the Company for any reason other than Cause (as defined in the Agreement) or if it is terminated by Dr. Fisher for Good Reason (as defined in the 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 current rental rate under the lease extension is $8,265 per month.

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 $6,148 per month on a one-year lease that originally was to expire on November 30, 2020. In December 2020, we entered into a short-term lease extension running from December 1, 2020 through the completion date of our construction of our planned new laboratory space which is adjacent to our current laboratory.

Rent expense, which is included in general and administrative expenses, approximated $50,000 and $44,000 for the three month periods ended December 31, 2020 and 2019, respectively. For the nine month periods ended December 31, 2020 and 2019, rent expense approximated $144,000 and $130,000, respectively.

Future minimum lease payments under the Granite Ridge Lease as of December 31, 2020, are as follows:

During the fiscal year ended March 31, 2020, we adopted ASU Topic 842 on April 1, 2019 utilizing the alternative transition method allowed for under this guidance. As a result, we recorded lease liabilities and right-of-use lease assets of $228,694 on our balance sheet as of April 1, 2019. The lease liabilities represent the present value of the remaining lease payments of our corporate headquarters lease, discounted using our 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. We also elected the short-term lease recognition exemption for its laboratory lease. For the laboratory lease that qualified as short-term, we did not recognize right-of-use assets or lease liabilities at adoption.

In December 2020, we entered into an agreement to lease approximately 2,823 square feet of office space and 1,807 square feet of laboratory space. The agreement carries a term of 63 months and we will commence paying rent when we take occupancy of those spaces, which is expected to occur in the second quarter of 2021. Upon taking occupancy of the space, we will record lease liabilities and right-of-use lease assets related to this agreement on our balance sheet. We estimate that the present value of the contractual payments under the lease agreement to be approximately $806,000.

In addition, the new lease agreement required us to post a standby letter of credit in favor of the landlord in the amount of $46,726 in lieu of a security deposit. We arranged for our bank to issue the standby letter of credit in the three months ended December 31, 2020 and transferred a like amount to a restricted certificate of deposit which secured the bank’s risk in issuing that letter of credit. We have classified that restricted certificate of deposit on our balance sheet as restricted cash .

LEGAL MATTERS

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.

14. SUBSEQUENT EVENTS

Management has evaluated events subsequent to December 31, 2020 through the date that the accompanying condensed consolidated financial statements were filed with the SEC for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

In January 2021, we hired two senior executives, Guy Cipriani as Senior Vice President, Chief Business Officer, and Steven LaRosa, M.D., as Chief Medical Officer and entered into employment agreements with each executive. Mr. Cipriani will oversee business development and partnerships, while also contributing to fundraising and corporate development. Mr. Cipriani’s initial annual base salary is $340,000 and Mr. Cipriani also is eligible for a discretionary annual cash bonus.  Mr. Cipriani also is eligible for reimbursement of relocation expenses in the aggregate amount of up to $75,000.  Dr. LaRosa will be responsible for the clinical development of Aethlon's Hemopurifier®, including leading clinical operations and regulatory strategy. In addition to a one-time signing bonus of $100,000, subject to repayment if Dr. LaRosa leaves Aethlon prior to two years with the Company, Dr. LaRosa’s initial annual base salary is $400,000. Dr. LaRosa also is eligible for a discretionary annual cash bonus and relocation expense reimbursement of up to $50,000.  Upon commencement of employment each of Mr. Cipriani and Dr. LaRosa was granted an option to purchase 120,883 shares of the Company’s Common Stock, with an exercise price equal to the fair market value on the date of grant, subject to a four-year vesting schedule and other terms and conditions of the Company’s 2020 Equity Incentive Plan.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.

FORWARD LOOKING STATEMENTS

All statements, other than statements of historical fact, included in this Form 10-Q are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements contained in this Form 10-Q. Potential risks and uncertainties include, without limitation, completion of our capital-raising activities, our ability to maintain our Nasdaq listing, U.S. Food and Drug Administration, approval of our products, other regulations, patent protection of our proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of our filings with the Securities and Exchange Commission, or the Commission. The forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected in such forward-looking statements.

Overview

We are a medical technology company focused on developing products to diagnose and treat life and organ threatening diseases. The Aethlon Hemopurifier®, or Hemopurifier, is a clinical-stage immunotherapeutic device designed to combat cancer and life-threatening viral infections. In cancer, the Hemopurifier is designed to deplete the presence of circulating tumor-derived exosomes that promote immune suppression, seed the spread of metastasis and inhibit the benefit of leading cancer therapies. The U.S. Food and Drug Administration, or FDA, has designated the Hemopurifier as a “Breakthrough Device” for two independent indications:

We believe the Hemopurifier can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote the growth and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients with advanced and metastatic cancers. We are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the impact of the global COVID-19 pandemic on our clinical trials and current timelines.

On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda) (NCT # 04453046). The primary endpoint for the EFS, which is designed to 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 now open for patient enrollment.

We also believe the Hemopurifier can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals infected with human immunodeficiency virus, or HIV, Hepatitis-C, and Ebola.

Additionally, in-vitro, the Hemopurifier has been demonstrated to capture Zika virus, Lassa virus, MERS-CoV, cytomegalovirus, Epstein-Barr virus, Herpes simplex virus, Chikungunya virus, Dengue virus, West Nile virus, smallpox-related viruses, H1N1 swine flu virus, H5N1 bird flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validations were conducted in collaboration with leading government or non-government research institutes.

On June 17, 2020, the FDA approved a supplement to 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 (NCT # 04595903). The first sites for this trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA now have IRB approval and are preparing to open for patient enrollment. Under Single Patient Emergency Use regulations, the Company has also recently treated a patient with COVID-19, who successfully completed eight daily treatments with the Hemopurifier.

We are also the majority owner of Exosome Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases. Included among ESI’s activities is the advancement of a 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 global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets.

We are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health and safety of our employees while continuing our operations, including clinical trials. Given the level of uncertainty regarding the duration and impact of the COVID-19 pandemic on capital markets and the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting COVID-19 pandemic on our future access to capital. Further, while we have not experienced significant disruptions to our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or preclinical research to date, we are unable to assess the potential impact this pandemic could have on our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or preclinical research in the future.

As we continue to actively advance our clinical trials, we remain in close contact with our clinical sites and are assessing the impact of COVID-19 on our trials, expected timelines and costs on an ongoing basis. We will assess any potential delays in our ability to timely ship clinical trial materials, including internationally, due to transportation interruptions. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition, if any.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act, and must file reports, proxy statements and other information with the Commission. The Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123. Our phone number at that address is (858) 459-7800. Our website is http://www.aethlonmedical.com.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2019

Government Contract Revenues

We recorded $624,871 in government contract revenue in the three months ended December 31, 2020. This revenue resulted from work performed under our government contracts with NIH as follows:

We have recognized revenue under the following two contracts/grants with the National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, over the past two years:

Phase 2 Melanoma Cancer Contract

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

The work to be performed pursuant to this Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation that ran from September 2017 through June 2018, 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 period ended December 31, 2020, we completed all of the milestones relevant to that time period. As a result, we recorded $436,427 of government contract revenue on the Phase 2 Melanoma Cancer Contract in the three months ended December 31, 2020.   Of the total revenue recognized during the current period relating to this grant, a total of $117,849 was invoiced to the NCI during the three months ended December 31, 2020 and we recorded $318,578 which had previously been recognized as deferred revenue.

Breast Cancer Grant

In the three months ended December 31, 2020, we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation,” or the Breast Cancer Grant.

This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve-month extension on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors to work with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital. As of December 31, 2020, we have received all of the funds allocated to the Breast Cancer Grant.

During the three months ended December 31, 2020, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant as we achieved two of the three milestones related to the Breast Cancer Grant and concluded in our final report that our work under the grant provided nonclinical support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients. That amount previously was recorded as deferred revenue.

Subaward with University of Pittsburgh

In addition, we are completing the logistical elements of documentation and billing the University of Pittsburgh in connection with a cost reimbursable subaward arrangement under an NIH project entitled “Depleting Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the award is $256,750. We have not recorded any revenues as of December 31, 2020 related to the subaward. We anticipate billing and recognizing revenue under this subaward in future periods.

Operating Expenses

Consolidated operating expenses for the three months ended December 31, 2020 were $3,068,459, compared to $1,289,864 for the three months ended December 31, 2019. This increase of $1,778,595, or 137.9%, in the 2020 period was due to increases in payroll and related expenses of $1,117,229, in general and administrative expenses of $646,320, and in professional fees of $15,046.

The $1,117,229 increase in payroll and related expenses was due to the combination of an $841,847 increase in our cash-based compensation expense and a $275,382 increase in stock-based compensation expense. The largest factor in the cash-based compensation increase was a result of recording an aggregate of $593,272 related to severance costs associated with the Separation Agreement. Additional factors were a $125,000 increase in year-end bonus payments, increased headcount and salary increases.

The $646,320 increase in general and administrative expenses was primarily due to a $360,703 increase in our clinical trial expenses, a $132,542 increase in subcontractor expenses associated with our government contracts and grants, a $130,019 increase in lab supplies, in connection with our ongoing effort to continue to build an inventory of Hemopurifiers for our clinical trials, and to a $39,667 increase in our insurance expenses.

The $15,046 increase in our professional fees was primarily due to a $28,421 increase in contract labor, predominantly research scientists hired on a consulting basis, and a $23,151 increase in our legal fees, which were partially offset by a $35,189 decrease in our accounting fees.

Other Income (Expense)

We had $802 of other expense during the three months ended December 31, 2020. In the three months ended December 31, 2019, other expense consisted of interest expense and a gain on share for warrant exchanges.

The following table breaks out the various components of our other expense for both periods:

Gain on Share for Warrant Exchanges

There was no warrant exchange activity during the three months ended December 31, 2020. During the three months ended December 31, 2019, we agreed with two accredited investors to issue 2,914 shares of our common stock to these investors in exchange for the cancellation of outstanding warrants then held by the investors to purchase 29,141 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 $55,593 on those exchanges based on the changes in fair value between the instruments exchanged.

Interest Expense

We had $802 in interest expense in the three months ended December 31, 2020. Interest expense was $126 for the three months ended December 31, 2019. The various components of our interest expense are shown in the following table:

Net Loss

As a result of the changes in revenues and expenses noted above, our net loss increased to approximately $2,447,000 in the three month period ended December 31, 2020, from approximately $821,000 in the three month period ended December 31, 2019.

Basic and diluted loss attributable to common stockholders were ($0.20) for the three month period ended December 31, 2020, compared to ($0.28) for the three month period ended December 31, 2019.

NINE MONTHS ENDED DECEMBER 31, 2020 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2019

Government Contract Revenues

We recorded $624,871 in government contract revenue in the nine months ended December 31, 2020. This revenue resulted from work performed under our government contracts with NIH as follows:

We have recognized revenue under the following two contracts/grants with the National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, over the past two years:

Phase 2 Melanoma Cancer Contract

On September 12, 2019, the NCI awarded to us an SBIR Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes for Diagnostics and Treatment Monitoring”, or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019 through September 15, 2021. The work to be performed pursuant to this Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation that ran from September 2017 through June 2018, 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 period ended December 31, 2020, we completed all of the milestones relevant to that time period. As a result, we recorded $436,427 of government contract revenue on the Phase 2 Melanoma Cancer Contract in the nine months ended December 31, 2020.   Of the total revenue recognized during the current period relating to this grant, a total of $117,849 was invoiced to the NCI during the three months ended December 31, 2020 and we recorded $318,578 which had previously been recognized as deferred revenue.

Breast Cancer Grant

In the nine months ended December 31, 2020, we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation,” or the Breast Cancer Grant.

This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month extension on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors to work with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital. As of December 31, 2020, we have received all of the funds allocated to the Breast Cancer Grant.

During the nine months ended December 31, 2020, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant as we achieved two of the three milestones related to the Breast Cancer Grant and concluded in our final report that our work under the grant provided nonclinical support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients. That amount previously was recorded as deferred revenue.

Subaward with University of Pittsburgh

In addition, we are completing the logistical elements of documentation and billing the University of Pittsburgh in connection with a cost reimbursable subaward arrangement under an NIH project entitled “Depleting Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the award is $256,750. We have not recorded any revenues as of December 31, 2020 related to the subaward. We anticipate billing and recognizing revenue under this subaward in future periods.

Operating Expenses

Consolidated operating expenses for the nine months ended December 31, 2020 were $6,250,266, compared to $4,588,255 for the nine months ended December 31, 2019. This increase of $1,662,011, or 36.2%, in the 2020 period was due to increases in payroll and related expenses of $910,863 and in general and administrative expenses of $885,337, which were partially offset by a decrease in professional fees of $134,189.

The $910,863 increase in payroll and related expenses in the nine months ended December 31, 2020 was due to a $934,726 increase in our cash-based compensation expense, which was partially offset by a $23,865 reduction in stock-based compensation expense. The largest factor in the cash-based compensation increase was a result of recording an aggregate of $593,272 related to severance costs associated with the Separation Agreement. Additional factors were a $125,000 increase in year-end bonus payments and our headcount and salary increases.

The $885,337 increase in general and administrative expenses in the nine months ended December 31, 2020 was primarily due to a $441,246 increase in our clinical trial expenses, a $67,542 increase in subcontractor expenses associated with our government contracts and grants, a $318,100 increase in lab supplies, in connection with our ongoing effort to continue to build an inventory of Hemopurifiers for our clinical trials, and to a $60,958 increase in our insurance expenses.

The $134,189 decrease in our professional fees was due to a $116,432 decrease in our accounting fees, a $92,820 decrease in our legal fees, and a $23,610 decrease in other consulting fees, which were partially offset by a $102,243 increase in contact labor, predominantly research scientists hired on a consulting basis.

Other Expense

Other expense during the nine months ended December 31, 2020 consisted of interest expense and during the nine months ended December 31, 2019, consisted of interest expense, a gain on share for warrant exchanges and a loss on debt extinguishment. Other expense for the nine months ended December 31, 2020 was $1,530, compared to other expense of $450,053 for the nine months ended December 31, 2019.

The following table breaks out the various components of our other expense for both periods:

Loss on Debt Extinguishment

There were no losses on debt extinguishment during the nine months ended December 31, 2020. During the nine months ended December 31, 2019, we reduced the conversion price on our then 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 Share for Warrant Exchanges

There was no warrant exchange activity during the nine months ended December 31, 2020. During the nine months ended December 31, 2019, we agreed with seven accredited investors to issue 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 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 Expense

Total interest expense was $1,530 for the nine months ended December 31, 2020, and $54,232 for the nine months ended December 31, 2019, a decrease of $52,702. The various components of our interest expense are shown in the following table:

The $52,702 decrease in our total interest expense in the nine months ended December 2020 was due to the payment in full of our convertible notes in July 2019.

Net Loss

As a result of the changes in revenues and expenses noted above, our net loss increased to approximately $5,630,000 in the nine month period ended December 31, 2020, from approximately $4,595,000 in the nine month period ended December 31, 2019.

Basic and diluted loss attributable to common stockholders were ($0.50) for the nine month period ended December 31, 2020, compared to ($2.52) for the nine month period ended December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2020, we had a cash balance of $12,131,593 and current working capital of $11,086,708. This compares to a cash balance of $9,604,780 and working capital of $8,973,393 at March 31, 2020. We expect our existing cash as of December 31, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these financial statements.

The primary source of our increase in cash during the nine months ended December 31, 2020 resulted from our Common Stock Sales Agreement with H.C. Wainwright & Co., LLC, or Wainwright. The cash raised from that activity is described below:

Common Stock Sales Agreement with Wainwright

On June 28, 2016, we entered into a Common Stock Sales Agreement, or the 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 provided for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000.

On March 30, 2020, we executed Amendment No. 2 to the 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 provided Wainwright with customary indemnification rights under the Agreement, and Wainwright is entitled to a commission at a fixed rate equal to three percent of the gross proceeds per share sold. In addition, we agreed to pay certain expenses incurred by Wainwright in connection with the 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 nine months ended December 31, 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 through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.

Future capital requirements will depend upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative cash flows and net losses for the foreseeable future.

Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the accompanying Condensed Consolidated Statements of Cash Flows, are summarized as follows:

NET CASH USED IN OPERATING ACTIVITIES. We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately $4,526,000 in the nine month period ended December 31, 2020, compared to approximately $3,577,000 in the nine month period ended December 31, 2019.

NET CASH USED IN INVESTING ACTIVITIES. We used approximately $55,000 of cash to purchase laboratory and office equipment in the nine months ended December 31, 2020, compared to approximately $148,000 in the nine month period ended December 31, 2019.

NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES. During the nine months ended December 31, 2020, we raised approximately $7,261,000 from the issuance of common stock. That source of cash from our financing activities was partially offset by the use of approximately $106,000 to pay for the tax withholding on restricted stock units and on a net stock option exercise by our former Chief Executive Officer, for an aggregate increase of cash provided by financing activities of approximately $7,154,000. During the nine months ended December 31, 2019, we raised approximately $4,987,000 from the issuance of common stock, which was offset by the use of approximately $993,000 to pay off our then outstanding convertible notes and approximately $39,000 to pay for the tax withholding on restricted stock units.

As of the date of this filing, we plan to invest significantly into purchases of our raw materials and in our contract manufacturing arrangement, subject to successfully raising additional capital.

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. These 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.

There have been no changes to our critical accounting policies as disclosed in our Form 10-K for the year ended March 31, 2020.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2020, we did not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

ITEM 4. CONTROLS AND PROCEDURES.

DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report.

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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.

ITEM 1A. RISK FACTORS.

RISK FACTOR SUMMARY

Below is a summary of the principal factors that make an investment in our securities speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q and our other filings with the SEC before making investment decisions regarding our securities.

RISK FACTORS

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. For a discussion of our potential risks and uncertainties, please see the information listed in the item captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

*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 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:

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.

*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). 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.

*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. The United States Supreme Court is currently reviewing this case, but it is unclear when a decision will be made. 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, and other COVID-19 relief legislation have, among other things, temporarily suspended the two percent Medicare sequester from May 1, 2020 through March 31,2021. 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. It is also possible that additional health reform measures will be implemented as a result of the new Presidential administration. 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We did not issue or sell any unregistered securities during the three months ended December 31, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

We have no disclosure applicable to this item.

ITEM 4. MINE SAFETY DISCLOSURES.

We have no disclosure applicable to this item.

ITEM 5. OTHER INFORMATION.

We have no disclosure applicable to this item.

ITEM 6. EXHIBITS.

(a) Exhibits. The following documents are filed as part of this report:

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SIGNATURES

Pursuant to the requirements 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.