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 (the
"Securities Act"), and Section 21E of the Exchange Act. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties and other
factors which may cause the actual results, performance, or achievements of
Aethlon Medical, Inc. ("we" or "us") 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. Such potential risks and
uncertainties include, without limitation, completion of our capital-raising
activities, U.S. Food and Drug Administration (FDA), 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 (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
Aethlon Medical, Inc. and its subsidiary (collectively, "Aethlon", the
"Company", "we" or "us") is a medical technology company focused on addressing
unmet needs in global health and biodefense. The Aethlon Hemopurifier is a
clinical-stage immunotherapeutic device designed to combat cancer and
life-threatening viral infections. In cancer, the Hemopurifier depletes the
presence of circulating tumor-derived exosomes that promote immune suppression,
seed the spread of metastasis and inhibit the benefit of leading cancer
therapies. The FDA has designated the Hemopurifier as a "Breakthrough Device"
related to the following two indications:
to the treatment of life-threatening viruses that are not addressed with
approved therapies, and
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.
We believe the Hemopurifier can be a part of the broad-spectrum treatment of
life-threatening highly glycosylated viruses that are not addressed with an
already approved treatment countermeasure objective set forth by the U.S.
Government to protect citizens from bioterror and pandemic threats. In
small-scale or early feasibility human studies, the Hemopurifier has been
administered to individuals infected with HIV, hepatitis-C, and Ebola.
Additionally, the Hemopurifier has been validated 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. Domestically, we are
focused on the clinical advancement of the Hemopurifier through investigational
device exemptions (IDEs) approved by the FDA. We recently concluded a
feasibility study to demonstrate the safety of our device in health-compromised
individuals infected with a viral pathogen.
We are also the majority owner of Exosome Sciences, Inc. (ESI), a company
focused on the discovery of exosomal biomarkers to diagnose and monitor
life-threatening diseases. Included among ESI's endeavors is the advancement of
a TauSomeTM biomarker candidate to diagnose Chronic Traumatic Encephalopathy
(CTE) in the living. ESI previously documented that TauSome levels in former NFL
players to be nine times higher than same age-group control subjects. We
consolidate Exosome'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 intend to sell this device. 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.
Our common stock is listed on the Nasdaq Capital Market under the symbol "AEMD."
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended, 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 Web site is http://www.aethlonmedical.com.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2018 COMPARED TO THE THREE MONTHS ENDED DECEMBER
Government Contract Revenues
We did not record any government contract revenue in the three month period
ended December 31, 2018 and we recorded $74,813 of government contract revenue
in the three month period ended December 31, 2017.
Consolidated operating expenses for the three months ended December 31, 2018
were $1,963,873 in comparison with $1,238,440 for the comparable period a year
ago. This increase of $725,433, or 58.6%, was due to increases in payroll and
related expenses of $498,286, in professional fees of $148,075 and in general
and administrative expenses of $79,072.
The $498,286 increase in payroll and related expenses was primarily due to the
combination of a $472,639 accrual for the separation payments over calendar 2019
for our former CEO and President and a $21,692 increase in stock-based
The $148,075 increase in our professional fees was due to a $34,900 increase in
our Board fees due to the recent expansion of our Board, a $7,273 increase in
ESI's professional fees and a $197,426 increase in scientific consulting fees.
Those increases were partially offset by a $71,749 decrease in our legal fees, a
$9,890 decrease in our marketing costs and a $9,885 decrease in our accounting
The $79,072 increase in general and administrative expenses was primarily due to
the combination of a $44,592 accrual for the health insurance payments over
calendar 2019 for our former CEO and President, a $26,086 increase in our
insurance costs and an $18,791 increase in rent expense under our renewed
Other expense during the three months ended December 31, 2018 and 2017 consisted
of interest expense.
Interest expense was $55,107 for the three months ended December 31, 2018 and
was $55,912 for the three months ended December 31, 2017, a decrease of $805.
The various components of our interest expense are shown in the following table:
Three Months Three Months
12/31/18 12/31/17 Change
Interest Expense $ 24,820 $ 25,625 $ (805 )
Amortization of Note Discounts 30,287 30,287 -
Total Interest Expense $ 55,107 $ 55,912 $ (805 )
As noted in the above table, since the amortization of note discounts was the
same in both periods, the $805 decrease in our interest expense was due to a
reduction in our contractual interest expense.
As a result of the changes in revenues and expenses noted above, our net loss
increased from approximately $1,215,000 in the three month period ended December
31, 2017 to $2,013,000 in the three month period ended December 31, 2018.
Basic and diluted loss attributable to common stockholders were ($0.11) for the
three month period ended December 31, 2018 compared to ($0.08) for the period
ended December 31, 2017.
NINE MONTHS ENDED DECEMBER 31, 2018 COMPARED TO THE NINE MONTHS ENDED DECEMBER
Government Contract Revenues
We recorded $149,625 in government contract revenue in the nine months ended
December 31, 2018 and we recorded $74,813 in government contract revenue in the
nine months ended December 31, 2017. This revenue arose from work performed
under our government contract with National Cancer Institute, part of the
National Institutes of Health ("NIH") as follows:
Nine Months Nine Months Change in
Ended 12/31/18 Ended 12/31/17 Dollars
NIH Contract $ 149,625 $ 74,813 $ 74,812
Total Government Contract Revenue $ 149,625 $ 74,813 $ 74,812
We have entered into the following two contracts/grants with the National Cancer
Institute (NCI), part of the National Institutes of Health (NIH) over the past
Breast Cancer Grant
In September 2018, the NCI awarded us a government grant (number
1R43CA232977-01). The title of this Small Business Innovation Research (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 runs from September 14, 2018 through August 31,
2019. 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.
As of December 31, 2018, we have not recognized any revenue under this grant.
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 is "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 towards the achievement of specific milestones against which we will
invoice the government for fixed payment amounts.
In the nine months ended December 31, 2018, 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 nine months ended December 31, 2018.
All of the revenue noted above related to the Melanoma Cancer Contract, which is
Consolidated operating expenses for the nine months ended December 31, 2018 were
$4,557,724 in comparison with $3,634,862 for the comparable period a year ago.
This increase of $922,862, or 25.4%, was due to increases in in payroll and
related expenses of $515,275, professional fees of $283,900 and in general and
administrative expenses of $123,687.
The $515,275 increase in payroll and related expenses was primarily due to the
combination of a $472,639 accrual for the separation payments over calendar 2019
for our former CEO and President and a $56,905 increase in stock-based
The $283,900 increase in our professional fees was due to a $126,400 increase in
our Board fees due to the recent expansion of our Board, a $253,262 increase in
scientific consulting fees, a $53,494 increase in our marketing and investor
relations fees and a $40,290 increase in ESI's professional fees. Those
increases were partially offset by a $149,235 decrease in our legal fees, a
$29,529 decrease in our accounting fees and a $10,782 decrease in website
The $123,687 increase in general and administrative expenses was primarily due
to the combination of a $44,592 accrual for the health insurance payments over
calendar 2019 for our former CEO and President and $79,484 of clinical trial
expenses associated with the exosome trial at University of California Irvine,
which was partially offset by reductions in a number of additional expenses.
Other expense during the nine months ended December 31, 2018 consisted of
interest expense and during the nine months ended December 31, 2017 consisted of
losses on debt extinguishment, losses on share for warrant exchanges and
interest expense. Other expense for the nine months ended December 31, 2018 was
$165,317 in comparison with other expense of $813,618 for the nine months ended
December 31, 2017.
The following table breaks out the various components of our other expense for
Nine Months Nine Months
12/31/18 12/30/17 Change
Loss on Debt Extinguishment $ - $ 376,909 $ (376,909 )
Loss on Share for Warrant Exchanges - 130,214 (130,214 )
Interest Expense 165,317 306,495 (141,178 )
Total Other Expense $ 165,317 $ 813,618 $ (648,301 )
Loss on Debt Extinguishment
Our loss on debt extinguishment for the nine months ended December 31, 2017
resulted from a $376,909 loss associated with the June 2017 amendments to our
convertible notes. There was no loss on debt extinguishment for the nine months
ended December 31, 2018 - see below for additional information.
June 2017 Amendments - The $376,909 loss on debt extinguishment in the nine
months ended December 31, 2017 resulted from an Exchange Agreement with two
institutional investors under which we issued 57,844 restricted shares of common
stock in exchange for the cancellation of 77,125 warrants held by those
investors (see Loss on Share for Warrant Exchanges below). Additionally, the
investors agreed to extend the expiration dates of the convertible notes held by
them from July 1, 2018 to July 1, 2019 in exchange for the reduction of the
conversion price of those notes from $4.00 per share to $3.00 per share. The
modification of the notes was evaluated under FASB Accounting Standards
Codification ("ASC") Topic No. 470-50-40, "Debt Modification and
Extinguishments". Therefore, according to the guidance, the instruments were
determined to be substantially different, and the transaction qualified for
This modification of the notes was also evaluated under ASC Topic No. 470-50-40,
"Debt Modification and Extinguishments". Therefore, according to the guidance,
the instruments were determined to be substantially different, and the
transaction qualified for extinguishment accounting.
Loss on Share for Warrant Exchanges
During the nine months ended December 31, 2017, we agreed with two individual
investors to exchange 11,497 restricted shares for the cancellation of 22,993
warrants. Additionally, during the period, we entered into an Exchange Agreement
with two institutional investors under which we issued 57,844 restricted shares
of common stock in exchange for the cancellation of 77,125 warrants held by
those investors. We measured the fair value of the shares issued and the fair
value of the warrants exchanged for those shares and recorded losses for each of
those exchanges based on the changes in fair value between the instruments
exchanged. There was no loss on share for warrant exchanges for the nine months
ended December 31, 2018.
Interest expense was $165,317 for the nine months ended December 31, 2018 and
was $306,495 for the nine months ended December 31, 2017, a decrease of
$141,178. The various components of our interest expense are shown in the
Nine Months Nine Months
12/31/18 12/31/17 Change
Interest Expense $ 74,456 $ 91,119 $ (16,663 )
Amortization of Note Discounts 90,861 215,376 (124,515 )
Total Interest Expense $ 165,317 $ 306,495 $ (141,178 )
As noted in the above table, the most significant factor in the $141,178
decrease in our interest expense was the $124,515 decrease in the amortization
of note discounts, which related to the amortization against the discount on our
convertible notes. An additional factor in the change in our total interest was
a $16,663 decrease in our contractual interest expense.
As a result of the changes in revenues and expenses noted above, our net loss
increased from approximately $4,361,000 in the nine month period ended December
31, 2017 to $4,553,000 in the nine month period ended December 31, 2018.
Basic and diluted loss attributable to common stockholders were ($0.25) for the
nine month period ended December 31, 2018 compared to ($0.40) for the nine month
period ended December 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had a cash balance of $4,824,901 and working capital of
$3,079,243. This compares to a cash balance of $6,974,070 and working capital of
$6,752,293 at March 31, 2018. While we expect our current cash levels to support
our operations for at least twelve months from the issuance date of these
interim financial statements, beyond that timeframe, significant additional
financing must be obtained in order to provide a sufficient source of operating
capital and to allow us to continue to operate as a going concern. In addition,
we will need to raise capital to complete anticipated future human clinical
trials in the U.S. We anticipate the primary sources of this additional
financing will be from proceeds of our at-the-market offering program, debt
financing and other forms of equity placements. If we are unable to raise
sufficient capital through the above noted sources of financing, we may elect to
reduce our expenditures in order preserve cash. Those expenditure reductions may
include stopping or slowing any clinical trials and/or reducing our headcount.
Our primary sources of capital during the nine months ended December 31, 2018
were our Common Stock Sales Agreement with H.C. Wainwright & Co., LLC ("H.C.
Wainwright") and exercises of certain of the warrants from our October 2017
Public Offering for cash. The cash raised from those activities is noted below:
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement (the
"Agreement") with 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 of our common stock having an aggregate offering price of up to
$12,500,000 (the "Shares").
Subject to the terms and conditions set forth in the Agreement, H.C. 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 H.C. Wainwright with customary indemnification
rights, and H.C. 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 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
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 of 1933, as amended, 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 nine months ended December 31, 2018, we raised aggregate net proceeds of
$749,804 (net of $23,289 in commissions to H.C. Wainwright and $2,395 in other
offering expenses) under the Agreement through the sale of 555,000 shares at an
average price of $1.35 per share of net proceeds. As of the date of the filing
of this Form 10-Q, we had approximately $8.3 million available under the
In the nine months ended December 31, 2018, investors that participated in the
October 2017 public offering exercised 129,300 warrants for aggregate cash
proceeds to us of $142,230 before expenses.
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 from operating, investing and financing activities, as reflected in
the accompanying Condensed Consolidated Statements of Cash Flows, are summarized
For the nine months ended
December 31, December 31,
Cash provided by (used in):
Operating activities $ (2,896 ) $ (2,893 )
Investing activities - (24 )
Financing activities 747 6,968
Net (decrease) increase in cash $ (2,149 ) $ 4,051
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 $2,896,000 in both of the nine month periods ended December 31,
2018 and 2017.
NET CASH USED IN INVESTING ACTIVITIES. We used approximately $24,000 of cash to
purchase laboratory and office equipment in the nine months ended December 31,
2017. We had no investing activities in the nine months ended December 31, 2018.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. In the nine months ended
December 31, 2018 we raised approximately $884,000 from the sale of common
stock, which was partially offset by the payment of approximately $137,000 for
tax withholding on vested rights while in the nine months ended December 31,
2017 we raised approximately $7,166,000 from the sale of common stock, which was
partially offset by the payment of approximately $199,000 for tax withholding on
As of the date of this filing, we plan to invest significantly into purchases of
our raw materials and into our contract manufacturing arrangement subject to
successfully raising additional capital.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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 policies relate to revenue recognition, measurement of stock purchase
warrants issued with notes payable, beneficial conversion feature of convertible
notes payable, impairment of intangible assets and long lived assets, stock
compensation, and the classification of warrant obligations, and evaluation of
contingencies. We believe estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should
future events or occurrences result in unanticipated consequences, there could
be a material impact on our future financial condition or results of operations.
There have been no changes to our critical accounting policies as disclosed in
our Form 10-K for the year ended March 31, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
We have no obligations required to be disclosed herein as off-balance sheet