Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and
analysis should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual
Report.
We are a medical therapeutic
company focused on developing products to treat cancer and life-threatening infectious diseases. The Aethlon Hemopurifier is a clinical-stage
immunotherapeutic device designed to combat cancer and life-threatening viral infections. In cancer, the Hemopurifier is designed to deplete
the presence of circulating tumor-derived exosomes that promote immune suppression, seed the spread of metastasis and inhibit the benefit
of leading cancer therapies. The FDA has designated the Hemopurifier as a “Breakthrough Device” for two independent indications:
· the treatment
of individuals with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with
cancer types in which exosomes have been shown to participate in the development or severity of the disease; and
· the treatment
of life-threatening viruses that are not addressed with approved therapies.
We believe the Hemopurifier
can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote
the growth and spread of tumors through multiple mechanisms. We are currently working with our new contract research organization, or
CRO, on preparations to conduct a clinical trial in Australia in patients with solid tumors, including head and neck cancer, gastrointestinal
cancers and other cancers.
On October 4, 2019, the FDA
approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier
in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). The primary endpoint for the EFS,
designed to enroll 10 to 12 subjects at a single center, is safety, with secondary endpoints including measures of exosome clearance and
characterization, as well as response and survival rates. This clinical trial, initially conducted at the UPMC Hillman Cancer Center in
Pittsburgh, PA, or UPMC, treated two patients. Due to lack of further patient enrollment, we and UPMC terminated this trial.
In January 2023, we entered
into an agreement with North American Science Associates, LLC, or NAMSA, a world leading MedTech CRO offering global end-to-end development
services, to oversee our clinical trials investigating the Hemopurifier for oncology indications. Pursuant to the agreement, NAMSA will
manage our clinical trials of the Hemopurifier for patients in the United States and Australia with various types of cancer tumors. We
anticipate that the initial clinical trials will begin in Australia.
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 in the past 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, Monkeypox 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.
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On June 17, 2020, the FDA
approved a supplement to our open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with
SARS-CoV-2/COVID-19, or COVID-19, in a New Feasibility Study. That study was designed to enroll up to 40 subjects at up to 20 centers
in the United States. Subjects had to have an established laboratory diagnosis of COVID-19, be admitted to an intensive care unit, or
ICU, and have acute lung injury and/or severe or life-threatening disease, among other criteria. Endpoints for this study, in addition
to safety, included reduction in circulating virus as well as clinical outcomes (NCT # 04595903). In June 2022, the first patient in this
study was enrolled and completed the Hemopurifier treatment phase of the protocol. Due to lack of COVID-19 patients in the ICUs of our
trial sites, we terminated this study in 2022.
Under Single Patient Emergency
Use regulations, the Company has treated two patients with COVID-19 with the Hemopurifier, in addition to the COVID-19 patient treated
with our Hemopurifier in our COVID-19 clinical trial discussed above.
We currently are experiencing
a disruption in our Hemopurifier supply, as our existing supply of Hemopurifiers expired on September 30, 2022, and as previously disclosed,
we are dependent on FDA approval of qualified suppliers to manufacture our Hemopurifier. Our intended transition to a new supplier for
galanthus nivalis agglutinin, or GNA, a component of our Hemopurifier, is delayed as we work with the FDA for approval of our supplement
to our IDE, which is required to make this manufacturing change.
In October 2022, we launched
a wholly owned subsidiary in Australia, formed to conduct clinical research, seek regulatory approval and commercialize our Hemopurifier
in that country. The subsidiary will initially focus on oncology trials in Australia.
We also obtained ERB approval
and entered into a clinical trial agreement with Medanta Medicity Hospital, a multi-specialty hospital in Delhi NCR, India, for a COVID-19
clinical trial at that location. One patient has completed participation in the Indian COVID-19 study. The relevant authorities in India
have accepted the use of the Hemopurifiers made with the GNA from our new supplier.
In May 2023, we also received
ERB approval from the Maulana Azad Medical College, or MAMC, for a second site for our clinical trial in India to treat severe COVID-19.
MAMC was established in 1958 and is located in New Delhi, India. MMAC is affiliated with the University of Delhi and is operated by the
Delhi government.
We also recently announced
that we also have begun investigating the use of our Hemopurifier in the organ transplant setting. Our objective is to confirm that the
Hemopurifier, in our translational studies, when incorporated into a machine perfusion organ preservation circuit, can remove harmful
viruses and exosomes from harvested organs. We have previously demonstrated the removal of multiple viruses and exosomes from buffer solutions,
in vitro, utilizing a scaled-down version of our Hemopurifier. This process potentially may reduce complications following transplantation
of the harvested organ, which can include viral infection, delayed graft function and rejection. We believe this new approach could be
additive to existing technologies that currently are in place to increase the number of viable organs for transplant.
Previously we were the majority
owner of ESI a company formed to focus on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases, and
thus consolidated ESI in our consolidated financial statements. For more than four years, the primary activities of ESI were limited to
the payment of patent maintenance fees and applications. In September 2022, the Board of Directors of ESI and we, as the majority stockholder
of ESI, approved the dissolution of ESI.
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Successful outcomes of human
trials will also be required by the regulatory agencies of certain foreign countries where we plan to market and 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 inflation, recent bank failures, and the war in Ukraine on our business. Given the level of uncertainty
regarding the duration and impact of these events on capital markets and the U.S. economy, we are unable to assess the impact on our timelines
and future access to capital. The full extent to which inflation, recent bank failures and the war in Ukraine will impact our business,
results of operations, financial condition, clinical trials and preclinical research will depend on future developments, as well as the
economic impact on national and international markets that are highly uncertain.
Our executive offices are
located at 11555 Sorrento Valley Road, Suite 203, San Diego, California 92121. Our telephone number is (619) 941-0360. Our website address
is www.aethlonmedical.com.
Our common stock is listed
on the Nasdaq Capital Market under the symbol “AEMD.”
Fiscal Years Ended March 31, 2023 and 2022
Results of Operations
Government Contract Revenues
We recorded government contract
revenue in the fiscal years ended March 31, 2023 and 2022. This revenue resulted from work performed under our government contracts with
the NIH and our subaward with the University of Pittsburgh as follows:
Fiscal Year
Ended 3/31/23
Fiscal Year
Ended 3/31/22
Change in
Dollars
Phase 2 Melanoma Cancer Contract
$ 574,245
$ 229,698
$ 344,547
Subaward with University of Pittsburgh
–
64,467
(64,467 )
Total Government Contract and Grant Revenue
$ 574,245
$ 294,165
$ 280,080
We have recognized revenue under the following
contracts/grants:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the
NCI awarded to us the Award Contract. The Award Contract amount was $1,860,561 and, as amended, ran for the period from September 16,
2019 through September 15, 2022.
The work performed pursuant
to this Award Contract was focused on melanoma exosomes. This work followed 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 involved the design and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
The Award Contract ended on
September 15, 2022 and we presented the required final report to the NCI. As the NCI completed its close out review of the contract, we
recognized as revenue the $574,245 previously recorded as deferred revenue on our December 31, 2022 balance sheet.
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Subaward with University of Pittsburgh
In December 2020, we entered
into a cost reimbursable subaward arrangement with the University of Pittsburgh in connection with an NIH contract entitled “Depleting
Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the award was $256,750. We did not record revenue related
to this subaward in the fiscal year ended March 31, 2023. We recorded $64,467 of revenue related to this subaward in the fiscal year ended
March 31, 2022.
In October 2022, we agreed
with the University of Pittsburgh to terminate the subaward arrangement, effective as of November 10, 2022, since it related to our clinical
trial in head and neck cancer in which the University of Pittsburgh was unable to recruit patients. There are no provisions in the subaward
arrangement requiring repayment of cash received for work completed through November 10, 2022.
Operating Costs and Expenses
Consolidated operating expenses
were $12,472,883 for the fiscal year ended March 31, 2023, compared to $10,715,050 for the fiscal year ended March 31, 2022, an increase
of $1,757,833. The $1,757,833 increase in the fiscal year ended March 31, 2023 was due to increases in general and administrative expense
of $1,026,081 and professional fees of $914,002, which were partially offset by a decrease in payroll and related expenses of $182,250.
The $1,026,081 increase in
the fiscal year ended March 31, 2023 in our general and administrative expense was due to an increase in manufacturing and research and
development supplies of $411,211 related to the manufacture of the Hemopurifier device and various research and development activities.
Other increases included, $146,962 in subcontract expense related to revenue recognized from contracts and grants with the NIH, $154,608
associated with the close out of the US COVID-19 clinical trial, $103,602 associated with our Australian subsidiary and launch of our
oncology clinical trial in Australia, $117,772 in rent expense related to the addition of the manufacturing suite in fiscal year 2023
and a full year of rent for our office and laboratory space, $117,207 in depreciation and amortization expense associated with leasehold
improvements to our manufacturing space and $93,510 in D&O and medical insurance. We also had an increase in our utility expense of
$31,924, largely as the result of our increased space under lease. These increases were offset by decreases in outside services of $65,377,
laboratory fees of $61,258 and decreases in office supplies and equipment of $32,154.
The $914,002 increase in the
fiscal year ended March 31, 2023 in our professional fees was primarily due to increases of $290,762 in legal expenses, $334,828 in contract
labor associated with product development and scientific analytical services, $176,443 in regulatory consulting, $39,999 in investor relations,
$73,066 in recruiting expense and $16,250 in director fees, which were partially offset by a decrease in accounting fees of $16,601.
As a result of the above factors,
our net loss before noncontrolling interests increased to $12,029,786 for the fiscal year ended March 31, 2023, from $10,420,885 for the
fiscal year ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had
a cash balance of $14,532,943 and working capital of $13,585,477. This compares to a cash balance of $17,072,419 and working capital of
$16,332,958 at March 31, 2022. We expect our existing cash as of March 31, 2023 to be sufficient to fund the Company’s operations
for at least twelve months from the issuance date of this Annual Report.
The primary sources of our
cash from financing activities during the fiscal years ended March 31, 2023 and 2022 were sales of our common stock, as follows:
Financings During the fiscal year ended March
31, 2023:
During the fiscal year ended March 31, 2023, we
raised capital only through our At The Market Offering Agreement, or the 2022 ATM Agreement, with H.C. Wainwright & Co., LLC, or Wainwright.
52
2022 At The Market Offering Agreement with
H.C. Wainwright & Co., LLC
On March 24, 2022, we entered
into the 2022 ATM 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 2022 ATM Agreement.
The offering was registered
under the Securities Act of 1933, as amended, or the Securities Act, pursuant to our shelf registration statement on Form S-3 (Registration
Statement No. 333-259909), as previously filed with the SEC and declared effective on October 21, 2021. We filed a prospectus supplement,
dated March 24, 2022, with the SEC that provides for the sale of shares of our common stock having an aggregate offering price of up to
$15,000,000, or the 2022 ATM Shares.
Under the 2022 ATM Agreement,
Wainwright may sell the 2022 ATM Shares by any method permitted by law and deemed to be an “at the market offering” as defined
in Rule 415 promulgated under the Securities Act, including sales made directly on the Nasdaq Capital Market, or on any other existing
trading market for the 2022 ATM Shares. In addition, under the 2022 ATM Agreement, Wainwright may sell the 2022 ATM Shares in privately
negotiated transactions with our consent and in block transactions. Under certain circumstances, we may instruct Wainwright not to sell
the 2022 ATM Shares if the sales cannot be effected at or above the price designated by us from time to time.
We are not obligated to make
any sales of the 2022 ATM Shares under the 2022 ATM Agreement. The offering of the 2022 ATM Shares pursuant to the 2022 ATM Agreement
will terminate upon the termination of the 2022 ATM Agreement by Wainwright or us, as permitted therein.
The 2022 ATM Agreement contains
customary representations, warranties and agreements by us, and customary indemnification and contribution rights and obligations of the
parties. We agreed to pay Wainwright a placement fee of up to 3.0% of the aggregate gross proceeds from each sale of the 2022 ATM Shares.
We also agreed to reimburse Wainwright for certain specified expenses in connection with entering into the 2022 ATM Agreement.
In the fiscal year ended March
31, 2023, we raised net proceeds of $8,927,211, net of $229,610 in commissions to Wainwright and $27,153 in other offering expense, through
the sale of 7,480,836 shares of our common stock at an average price of $1.19 per share under the 2022 ATM Agreement.
Financings During the fiscal year ended March
31, 2022:
During the fiscal year ended
March 31, 2022, we raised capital through our 2021 ATM Agreement (as defined below) with Wainwright and in a registered direct financing
through Maxim Group LLC.
2021 ATM Agreement
On March 22, 2021, we entered
into an At the Market Offering Agreement, or the 2021 ATM Agreement, with Wainwright, as sales agent, pursuant to which we could offer
and sell shares of our common stock, from time to time as set forth in the 2021 ATM Agreement.
The offering was registered
under the Securities Act pursuant to our shelf registration statement on Form S-3 (Registration Statement No. 333-237269), as previously
filed with the SEC and declared effective on March 30, 2020. We filed a prospectus supplement, dated March 22, 2021, with the SEC in connection
with the offer and sale of the shares of common stock, pursuant to which we could offer and sell shares of common stock having an aggregate
offering price of up to $5,080,000 from time to time.
53
Subject to the terms and conditions
set forth in the 2021 ATM Agreement, Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and
sales practices to sell the shares under the 2021 ATM Agreement from time to time, based upon our instructions. We provided Wainwright
with customary indemnification rights under the 2021 ATM Agreement, and Wainwright was entitled to a commission at a fixed rate equal
to up to three percent of the gross proceeds per share sold. In addition, we agreed to reimburse Wainwright for certain specified expenses
in connection with entering into the 2021 ATM Agreement. The 2021 ATM Agreement provided that it would terminate upon the written termination
by either party as permitted thereunder.
Sales of the shares, under
the 2021 ATM Agreement are made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under
the Securities Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at
market prices or as otherwise agreed with Wainwright. The 2021 ATM Agreement provided that we have no obligation under the 2021 ATM Agreement
to sell any of the shares, and, at any time, we could suspend offers under the 2021 ATM Agreement or terminate the agreement.
In the fiscal year ended March
31, 2022, we raised aggregate net proceeds under the 2021 ATM Agreement described above of $4,947,785, net of $126,922 in commissions
to Wainwright and $2,154 in other offering expense, through the sale of 626,000 shares of our common stock at an average price of $7.90
per share of net proceeds. No further sales may be made under the 2021 ATM Agreement.
Registered Direct Financing
In the fiscal year ended March
31, 2022, we sold an aggregate of 1,380,555 shares of our common stock at a purchase price per share of $9.00, for aggregate net proceeds
to us of $11,659,044, after deducting fees payable to Maxim Group LLC, the placement agent, and other offering expenses. These shares
were sold through a securities purchase agreement with certain institutional investors, The shares were issued pursuant to an effective
shelf registration statement on Form S-3, which was originally filed with the SEC on March 19, 2020, and was declared effective on March
30, 2020 (File No. 333-237269) and a prospectus supplement thereunder.
Material Cash Requirements
As noted above in the results
of operations, our clinical trial expense for the preparation for our planned oncology trial in Australia was $103,602 in the fiscal year
ended March 31, 2023. We expect our clinical trial expenses to continue to increase for the foreseeable future. Those increases in clinical
trial expenses include the cost of manufacturing additional Hemopurifiers for the planned clinical trials.
In addition, we have entered
into leases for our new headquarters, laboratory and manufacturing facilities. As noted above in the results of operations, our rent expense
increased by $117,772 in the fiscal year ended March 31, 2023. We expect our rent expense to continue to increase for the foreseeable
future.
Future capital requirements
will depend upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical
programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary
rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, as well as our
ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect to
continue to incur increasing negative cash flows and net losses for the foreseeable future. We will continue to need to raise additional
capital either through equity and/or debt financing for the foreseeable future.
54
As a result of the COVID-19
pandemic and actions taken to slow its spread, global events, political changes, bank failures, actual or perceived changes in interest
rates and economic inflation, the global credit and financial markets have experienced extreme volatility, including diminished liquidity
and credit availability, declines in consumer confidence, declines in economic growth, increases in inflation and uncertainty about economic
stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions
will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain,
more costly and/or more dilutive. Any of these actions could materially harm our business, results of operations and future prospects.
Our ability to raise additional
funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and
financial markets in the United States, including due to bank failures, actual or perceived changes
in interest rates and economic inflation , and worldwide resulting from macroeconomic factors. Because of the numerous risks and
uncertainties associated with product development, we cannot predict the timing or amount of increased expenses and we may never be profitable
or generate positive cash flow from operating activities.
Cash Flows
Cash flows from operating,
investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows
(in thousands):
For the year ended
March 31,
2023
March 31,
2022
Cash (used in) provided by:
Operating activities
$ (10,505 )
$ (9,767 )
Investing activities
(943 )
(349 )
Financing activities
8,915
17,368
Net (decrease) increase in cash
$ (2,533 )
$ 7,252
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 $10,505,000 in fiscal 2023, compared
to net cash used in operating activities of approximately $9,767,000 in fiscal 2022, an increase of approximately $738,000. The primary
factors in this $738,000 increase in cash used in operations in fiscal 2023 was a $1,613,695 increase in our net loss.
Net Cash Used in Investing Activities
During the fiscal years ended
March 31, 2023 and 2022, we purchased approximately $943,000 and $349,000 of equipment, respectively.
Net Cash from Financing Activities
Net cash generated from financing
activities decreased from approximately $17,368,000 in the fiscal year ended March 31, 2022 to approximately $8,915,000 in the fiscal
year ended March 31, 2023.
In the fiscal year ended March
31, 2023, we raised approximately $8,927,000 from the issuance of common stock, which was partially offset by the use of approximately
$12,000 to pay for the tax withholding on the issuance of restricted stock units, or RSUs. In the fiscal year ended March 31, 2022, we
raised approximately $17,456,000 from the issuance of common stock, which was partially offset by the use of approximately $88,000 to
pay for the tax withholding on the issuance of RSUs.
55
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires us
to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of expenses
during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other
factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ
from these estimates under different future conditions. We believe that the estimates and assumptions that are most important to the portrayal
of our financial condition and results of operations, in that they require the most difficult, subjective or complex judgments, form the
basis for the accounting policies deemed to be most critical to us. These critical accounting estimates relate to revenue recognition,
stock purchase warrants issued with notes payable, beneficial conversion feature of convertible notes payable, impairment of intangible
assets and long lived assets, stock compensation, deferred tax asset valuation allowance, and contingencies.
Revenue Recognition
Our revenues consist entirely
of amounts earned under contracts and grants with the NIH. During the fiscal years ended March 31, 2023 and 2022, we recognized revenues
totaling $574,245 and $294,165, respectively, under such contracts. We have concluded that these agreements are not within the scope of
ASC Topic, 606, Revenue from Contracts with Customers, or Topic 606, as the NIH grants and contracts do not meet the definition of a “customer”
as defined by Topic 606. Prior to the effective date of ASC Topic 606, which for the Company was April 1, 2018, we accounted for our grant/contract
revenues under the Milestone Method as prescribed by the legacy guidance of ASC 605-28, Revenue Recognition – Milestone Method,
or the Milestone Method. In the absence of other applicable guidance under US GAAP, effective April 1, 2018, we elected to continue to
use the Milestone Method by analogy to recognize revenue under these grants/contracts.
Common Stock Warrants
In the past, we have granted
warrants to purchase our common stock in connection with financing transactions. When such warrants are classified as equity, we measure
the relative estimated fair value of such warrants which represents a discount from the face amount of the notes payable. Such discounts
are amortized to interest expense over the term of the notes. We analyze such warrants for classification as either equity or derivative
liabilities and value them based on binomial lattice models.
Share-based Compensation
We account for share-based
compensation awards using the fair-value method and record such expense based on the grant date fair value in the consolidated financial
statements over the requisite service period.
Derivative Instruments
We evaluate free-standing
derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as liabilities in our financial
statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative
instrument is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument
is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may
be reclassified.
Instruments classified as
derivative liabilities are remeasured each reporting period (or upon reclassification) and the change in fair value is recorded on our
consolidated statement of operations in other expense (income). We had no derivative instruments at March 31, 2023 or March 31, 2022.
56
Income Taxes
Deferred tax assets are recognized
for the future tax consequences attributable to the difference between the consolidated financial statements and their respective tax
basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is more likely
than not that some portion of the deferred tax assets may not be realized.
Convertible Notes Payable
There were no convertible
notes outstanding as of March 31, 2023 or 2022.
RSU Grants to Non-Employee Directors
The Company maintains the
Director Compensation Policy which provides for cash and equity compensation for persons serving as non-employee directors of the Company.
Under this policy, each new director receives either stock options or a grant of RSUs upon appointment/election, as well as either an
annual grant of stock options or of RSUs at the beginning of each fiscal year. The (i) stock options are subject to vesting and (ii) RSUs
are subject to vesting and represent the right to be issued on a future date shares of our common stock upon vesting.
The Compensation Committee
of the Board of Directors of the Company, or Compensation Committee, approved, effective as of April 1, 2022, pursuant to the terms of
the Company’s Amended and Restated Non-Employee Director Compensation Policy, or the Director Compensation Policy, the grant of
the annual RSUs to each of the two non-employee directors of the Company then serving on the Board of Directors of the Company, or Board,
and the grant of an RSU for the then newly appointed director. The RSU grants were made subject to stockholder approval of an increase
of 1,800,000 shares of common stock authorized for issuance under the Company’s 2020 Equity Incentive Plan, or the 2020 Plan, at
the Company’s 2022 annual meeting of stockholders. The increase was approved at the Company’s 2022 annual meeting of stockholders
held in September 2022. The Director Compensation Policy provides for a grant of stock options or $50,000 worth of RSUs at the beginning
of each fiscal year for current non-employee directors then serving on the Board and for a grant of stock options or $75,000 worth of
RSUs for a newly elected director, with each RSU priced at the average for the closing prices for the five days preceding and including
the date of grant, or $1.46 per share as of April 1, 2022. The two then-current eligible directors each was granted a contingent RSU in
the amount of 34,247 shares under the 2020 Plan and the then newly appointed director received a contingent RSU grant for 51,370 shares
under the 2020 Plan. The RSUs were subject to vesting in three installments, 50% on September 30, 2022, and 25% on each of December 31,
2022, and March 31, 2023, subject to the recipient's continued service with the Company on each such vesting date.
There were no vested RSUs
outstanding as of March 31, 2023.
57
Recent Events
Sales Under 2022 ATM Agreement
Subsequent to March 31, 2023,
we raised net proceeds of $1,086,119, net of $27,999 in commissions to Wainwright and $5,846 in other offering expense, through the sale
of 1,778,901 shares of our common stock at an average price of $0.61 per share under the 2022 ATM Agreement.
RSU Grants
In April 2023, the Compensation
Committee approved, pursuant to the terms of the Director Compensation Policy, the grant of the annual RSUs under the Director Compensation
Policy to each of the three non-employee directors of the Company then serving on the Board. The Director Compensation Policy provides
for a grant of stock options or $50,000 worth of RSUs at the beginning of each fiscal year for current directors then serving on the Board,
and for a grant of stock options or $75,000 worth of RSUs for a newly elected director, with each RSU priced at the average for the closing
prices for the five days preceding and including the date of grant, or $0.43 per share for the April 2023 RSU grants. As a result, in
April 2023 the three eligible directors each was granted an RSU in the amount of 116,279 shares under the 2020 Plan. The RSUs are subject
to vesting in four equal installments, with 25% of the restricted stock units vesting on each of June 30, 2023, September 30, 2023, December
31, 2023, and March 31, 2024, subject in each case to the director’s Continuous Service (as defined in the 2020 Plan), through such
dates. Vesting will terminate upon the director’s termination of Continuous Service prior to any vesting date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller
reporting company” as defined under Item 10(f)(1) of Regulation S-K of the Securities Act.