Aethlon Medical, Inc. (AEMD) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Aethlon Medical Earnings Conference Call for the first quarter fiscal 2018 ended June 30, 2017. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of the call will be available approximately one hour after the end of the call through August 17, 2017. I would now like to turn the conference over to Scott Gordon, President of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Brian. And thank you for joining today's conference call to discuss Aethlon Medical's corporate developments and financial results for the first quarter fiscal 2018 ended June 30, 2017. With us today are Jim Joyce, the company's CEO and Jim Frakes, CFO. At 4:15 PM Eastern time today, Aethlon Medical released financial results for the first quarter fiscal 2018 ended June 30, 2017. If you had not received Aethlon Medical's earnings release, please visit the investor's page at www.aethlonmedical.com. During the course of this conference call, the company will be making forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934 that involve risks and uncertainties. The company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. These statements are based on expectations and assumptions as of the date of this conference call. Such forward-looking statements are subject to significant risks and uncertainties and actual results may differ materially from the results anticipated in the forward-looking statements. Factors that could cause results to differ materially from those anticipated in forward-looking statements can be found under the caption Risk Factors in the company's Annual Report on Form 10-K for the year ended March 31, 2017 and in the company's other filings with the Securities and Exchange Commission. Except as made by required by law, the company does not intend nor does it undertake any duty to update this information to reflect future events or circumstances. I will now turn the call over to Jim Joyce, Aethlon Medical's CEO.

Thank you, Scott, and good afternoon, everyone. Joining me for our first fiscal quarter 2018 call is Jim Frakes, our CFO. Based on our 3/31 fiscal year end this call comes just a little more than a month, since our last earnings call. In our last call, we disclosed plans to pursue with Expedited Access Pathway program submission with the United States Food and Drug Administration. Yesterday, we finalized this submission and have advised our regulatory advisors to formerly submit our application to the FDA. The Expedited Access Pathway program, it's otherwise known as the EAP, was established to support medical devices that have the potential to address unmet medical needs for life-threatening or irreversibly debilitating diseases or conditions. The EAP objective corresponds with our initiative to address unmet medical needs in global health and biodefense. An important criterion for EAP eligibility are medical devices with - are medical devices that represent breakthrough technologies with the potential to address a life-threatening disease condition for which no approved treatment alternatives exist. We designed our Hemopurifier to be a broad-spectrum treatment countermeasure to address life-threatening viruses, for which no antiviral treatment alternative exists. An example of our Hemopurifier in action against a life-threatening virus not addressed with an approved antiviral antiviral agent was our successful treatment of Ebola virus, for which we subsequently received FDA clearance of emergency-use and compassionate-use treatment protocols. Additionally, the FDA approved feasibility study that we recently concluded with design to support the advancement of our Hemopurifier, in treatment of life-threatening viruses that are not addressed with approved antiviral therapies. Our device is also been validated to effectively capture a broad-spectrum of life-threatening viral pathogens, many of which are not addressed with approved therapies. Many of these validations were also done in collaboration with leading government and non-government research institutes. The capture validation of mosquito-borne viruses that are not addressed with an approved antiviral drug agent includes Chikunguya virus, Dengue virus, West Nile virus and Zika virus. Beyond our Ebola treatment experience, the capture validation of bioterror and pandemic threat viruses that are not addressed with an approved antiviral drug includes Lassa virus, MERS-coronavirus and Monkeypox virus, which is a surrogate for human Smallpox infection. Studies of Marburg virus, which is a cousin of Ebola virus, are currently being conducted. In regards to pandemic influenza viruses, we validate the capture of virulent H5N1 Bird-Flu virus, H1N1 Swine Flu virus and the reconstructed Spanish Flu of 1918, which was responsible for 50 million to 100 million deaths over a period of 18 months. We have also validated the capture of latent viral pathogens that contribute to increased mortality rates in immune-compromised individuals that includes late-stage sepsis patients as well as organ transplant recipients. These validations include Cytomegalovirus, Epstein-Barr virus and Herpes-simplex virus-1. And based on our previous human treatment experiences, we believe our Hemopurifier may have utility in addressing drug-resistant viral strains that emerge in HIV and Hepatitis-C infected individuals. According to FDA guidance, feedback to an EAP program application should be anticipated approximately 30 days after submission. Beyond meeting FDA EAP criteria, we also believe that our Hemopurifier fulfils the broad-spectrum treatment objectives of the 2016 Public Health Emergency Medical Countermeasure Enterprise initiative, which defines the strategic plan of the U.S. government to protect citizens against known and unknown bioterror and pandemic threats. Based on preclinical and clinical studies, we believe our device is the most advanced broad-spectrum countermeasure and our long-term goal is the procurement of the Hemopurifier into the Strategic National Stockpile. I should point out that at present, only one of the 13 high-threat Category A viruses that are of greatest concern to the U.S. Government has a treatment countermeasure in the Strategic National Stockpile. Now, beyond finalizing our EAP submission, we also filed S-1 registration statement with the SEC on July 31 to support a $7.5 million financing that will complement our at-the-market financing facility and will help to reduce the balance sheet off-take [ph] risk that overhangs our company. Completion of the offering should also bring us in compliance with NASDAQ shareholders' equity requirement. The offering will be managed by H.C. Wainwright, who is ranked as the number-one placement agent during the first half of 2017 with 42 transactions, with almost a total of $1 billion raised. With that said, I will now turn the call over the Jim Frakes, who will discuss our financial results for the quarter ending June 30.

Thanks, Jim. Our net loss for the June 2017 quarter was approximately $1.8 million or $0.21 per share, compared to a net loss for the June 2016 quarter of approximately $2.1 million, or $0.28 per share. Our consolidated operating expenses were $1.16 million in the June 2017 quarter compared to $1.14 million in the June 2016 quarter that was an increase of approximately $20,000. That increase was primarily due to an increase in payroll and related expenses of approximately $290,000. However, that increase in payroll and related expenses was driven by $230,000 increase in our non-cash stock based compensation due to the vesting of restricted stock units granted during the last fiscal year. Excluding that non-cash expense increase our overall cash operating expenses actually decreased by approximately $210,000 from reductions in our professional fees and general and administrative expenses. Specifically, our professional fees decreased by approximately $225,000 and our general and administrative expenses declined by approximately $37,000. We had other expense of approximately $685,000 in the June 2017 quarter compared to approximately $1 million in the June 2016 quarter that was a decrease of approximately $315,000 in other expense. At June 30, 2017, we had a cash balance of approximately $327,000. We have an active At The Market financing facility to raise additional capital as needed. And as Jim Joyce noted earlier, we have also filed registration statements to rise up to an additional $7.5 million in capital. We put out these information and related commentary in the press release earlier this afternoon. That release included the balance sheet for June 30, 2017, in the statements of operations for the quarters ended June 30, 2017 and 2016. We will file our Form 10-Q quarterly report following this call. And now, Jim Joyce and I will be happy to take any questions that you may have. Brian, please open the call for questions.

At this is time we have allotted a certain amount of time to address questions from participants. [Operator Instructions] First question comes from Brian Marckx with Zacks Investment Research. Please go ahead.

Hi, guys, congrats on the EAP submission. Jim, I apologize, I didn't hear - when the date was that you filed, can you repeat that for me, please?

Yeah, we finalized the submission internally yesterday and then provided it to our regulatory advisors who are now formatting it for formal submission to FDA.

Oh, got you, okay. All right, thanks. I had a little problem with the…

And they have a process to format it so that it aligns with the FDA's electronic submission system.

Oh, got you. So everything is ready to roll, you just have to - it's a kind of just…

What you will see within a day or so of the formal submission will be an 8-K. That I'll let people know when the formal submission, which is not just sent to FDA, but was received by FDA.

Okay, okay, great. And can you give me a quick education on the EAP application? What's - just somewhat of a summary of what's in it. And I guess, specifically, is there - do you have to kind of outline essentially what your game plan is in terms of validation or is it just to petition for EAP based on the parameters of this being a novel device and - but not have to outline, I guess, the - kind of clinical strategy I guess.

Yeah, I think there are multiple factors. But I think the primary factor for the EAP submission is that it benefits both us and our reviewers at FDA. It was suggested to us during a recent FDA meeting that we should investigate the EAP pathway. One of the driving factors are new precedents that we're establishing with our device as it relates highly virulent bioterror and pandemic threats where it's very difficult to run controlled human studies or not possible or feasible to people run controlled human studies. So as a device, we have a different pathway or a different classification with biologics in addressing these high threat pathogens. So it's very - it's beneficial if we can establish and EAP relationship with FDA to review how we move our technology directly into an approved, a potentially market cleared device for a broad spectrum of indications. And we previously as a device component, participated in the predecessor program that established EAP pathway called the innovation program. And this part of the DARPA DLT program and we witnessed firsthand the benefits of having the ability to dialogue with your FDA reviewers as collaborators on a regular basis. So in our case what we would hope is that we're accepted into the EAP program, which brings us into a collaborative relationship with our reviewers at FDA, where we help design not just next steps for how to advance indications where you can't run controlled studies in humans, but also advanced protocol that they are in design for applications where you can run controlled studies in humans.

Okay. That's helpful.

And normally, Brian, I point out for people that are not familiar with the normal regulatory process, this if accepted circumvent the submission of IDEs individually where you can get feedback from FDA for extended periods of time on next steps. So from a long-term perspective, we believe, if our devices are accepted, which we believe it meets the criteria and more; we believe if it's accepted, it will truly benefit the long-term advancement of our technology in the broad-spectrum countermeasure against these life-threatening viruses.

Okay, so the hope is - obviously, the hope is that the EAP designation is approved. And so, if we assume that that happens, it sounds like, potentially there are a few different options on the table through opening up discussions via EAP, that this isn't necessarily human studies and a PMA pathway that this is - potentially there's a lot of different options on the table. Is that the way that I should think about it?

Yeah, there are a lot of different options on the table. But it provides us the pathway for absolute market clearance, for different disease indications; whereas, with the Public Health Emergency Medical Countermeasure Enterprise, which is focused on moving therapeutics into the Strategic National Stockpile, those are not. I think if you researched, you would find that most of the countermeasures in the Strategic National Stockpile have not received FDA approval. So that's a different pathway for commercialization than through the FDA. Hopefully, we can advance into the EAP and towards the strategic national stockpile under the new 2016 initiative. And hopefully some of the agency objectives can correspond with each other. The one thing is that we're happy to see is that is 2016 Public Health Emergency Medical Countermeasure Enterprise initiative is a joint agency partnership with Health & Human Services, FDA and other healthcare agencies. So we're really seeing for the first time and we've been involved in this for a while, the government really setting the focus towards broad-spectrum therapy, this is what we believe we have a leading countermeasure, but they're really seem to be aligning - the different government agencies aligning their interests to truly figure out how to advance countermeasures into the strategic national stockpile. And as I mentioned not many of the threats that are considered Category A threats, specifically, as it relates to infectious viruses or interest with a countermeasure in the strategic national stockpile, just 1 of 13 threats have a countermeasure in the stockpile, and that's related to a vaccine for smallpox, which is the virus that supposedly was eradicated two decades ago.

Jim, is there any precedent or are there any devices that are in the stockpile now that you can kind of use as - use the word proxy is probably not the best word, but sort of a proxy for - kind of determining - not determining, but as an example that that would kind of relates what you're trying to do, where it really hasn't been validated essentially, and these highly deadly viruses, but the government has decided to stockpile.

Yes, Brian, I wish, I could say there a while, I wish there was the precedent ahead of us, where we were comparing ourselves to something that have successfully navigated, but that's not the case. And as you can imagine there is a little bit of discrimination against devices historically, who are attempting to treat viral pathogens and other types of disease conditions that traditionally been addressed with disease specific drugs. But that's something we need to navigate through, you can only imagine if we have the same data, the drug agent what - our company might be perceived in value.

Great. Jim, anything you talk about relative to our ESI and the CTE program. There is certainly been quite a bit of news relative to head trauma in association with CTE recently. And I guess, if there's anything kind of update that you can give us on that that would be great?

Sure. I appreciate the question, because it's not something brought up there in the call. So as I look CTE was certainly in the news. This past week based on our colleagues at Boston University presenting updated autopsy data in former NFL players is indicated CTE with diagnosed 110 of 111 former NFL players, while it's being diagnosed with autopsy, it's still unknown what the driving force of CTE is unknown, and it's driven by concussions is unknown, it's driven sub-concussive blows is unknown. If there's underlying factors such as drug used steroids are up, cardiovascular disease. There's still a lot of research that needs to be done, but we see these numbers get updated every year. And we see lots of media coverage, but very little going on in terms of trying to diagnose the disease in the living at present the only diagnosable with autopsy, and until you can diagnose if there's not an ability to treat the disease condition. So we have very good outcomes in our first study with the Boston University team, where in 78 former NFL players, and 16 control subjects we demonstrated with biomarker, we discovered it's called a TauSome with nine times higher, and NFL subject as compared to controls. And then we also look at this marker, this is sometimes passes by people, but we look at this marker as a potential marker for Tauopathy in general, where there's an abnormal plaquing of tau protein in the brain, which is the hallmark of CTE. But it's also implicated in other diseases, such as Alzheimer. So we did do a study in Alzheimer's patient, when you showed that compared to the same control group Alzheimer's patients were ten times higher in levels as compared to the NFL subjects being nine times higher. So we're now getting ready to kick off our first sight in a new study with Translational Genomics Research Institute and our lab study looked at individual that were aged 40 to 69 years old. And the new study, which is fully enroll will be the largest study of former NFL players. We're going to - we just changed the protocol to expand the age group to include ages 24 and up, which could include current NFL players as well as former NFL players. And we're hoping to get this study kicked off right after in Labor Day.

Great. Thanks, Jim.

Thank you, Brian.

Next question is from Marc Robins with Catalyst Research. Please go ahead.

Hey, thank you. A couple of bookkeeping items, Jim, if you please, first of all, I think I heard a bit kept kind of mumbled or something, but you passed on the file for the new EAP protocol and that's going through your consultants now, and that I hear that there should be some kind of response within 30 days?

Yes, typically the guidance from FDA. FDA should have a response to what are your application has been accepted or not, based on FDA guidance in approximately 30 days after formal submission.

Okay. So it's essentially - this is okay, to precede kind of a thing?

Well, as we've accepted your application in your product will be advanced under the EAP program, which creates a [Multiple Speakers] relationships with you and your [Multiple Speakers].

So it's not a gating item, it's more of a turnstile, so…

Yes, I would say that's an accurate statement. The other thing is important to EAP program, where it seems that FDA is still navigating through this themselves, as it the end of the year with EAP program had a definition expanded into would add a result of the 21st century Cures Act was signed into law, which training a breakthrough device designation that was assigned to the EAP program. And the breakthrough device designation specifically was aligned with devices that can address disease conditions for which there is no treatment alternative. And in that case that's where we feel we have a real strength, because not only are we addressing viral pathogens or broad spectrum of viral pathogens, most of them are not addressed was an approved treatment alternative. So where - there's no assurance will - our EAP application will be accepted. What we do feel, it's a very strong application. And again, we have the opportunity to participate in a precedent our proceeding program on to the innovation pathway or DARPA program, and we certainly really got a good look at how does this pathway can be very beneficial.

Okay. And then ever really kind of fits right into my next question. There is no - there was no real guidelines or roadmap as to how to apply for this EAP standing, correct. I mean, it was kind of you've got to say this, in this, in this, and try to approved that and let's give it a whirl, or was there more direct instructions as to how to approach the whole thing?

Yes. Well, first you can go to the FDA website and search Expedited Access Pathway, and there is guideline on applying to the program. But I do believe that most people that would apply to the EAP program, it would be driven by communication. With FDA reviews that would suggest the amount of time they've spent to put together such a submission might be worthwhile.

Okay, okay. So essentially, what they're trying to do is instead of a rather sterile approach to addressing new drugs or devices, they're trying to be far more collaborative with those designation and approach?

Well, to the extend they can…

…into the extends that they can, yes. Okay.

You had a limited number of reviewers, so it's really advantageous if you can get clear to move forward through this pathway.

And then the follow on, there is another little point of order, it said in your release, I think, I also heard in your statement that you were testing the Hemopurifier with Marburg or against Marburg. I remember is that that have been approved years ago in 2006, 2007 and 2008 by either VATEL or USAMRAA or am I mistaking on that.

No, that was another pathogen, we never have validated the capture of Marburg Virus.

Really, okay. All right. Then I was wrong.

But it's a very high threat virus. That's a cousin of Ebola, have similar mortality rates, whereas Ebola can have mortality rates of up to 90%, Marburg is in the neighborhood of 75% and up. So it's a deadly virus. But I think if you follow the news on emerging viral pathogens today, it's pretty frightening and really the people that leads us the combination of global warming, urban crowding, and proliferation of global travel would impact the cause of new emerging operates and then with the advancement of CRISPR Technology we've already seen. The genetic creation of new viruses, this is a really big area that we know the Trump administration is putting a focus on or at least pointed out that they're putting a focus on, but this is a tremendous void for therapies in this area.

Let's go to the next step, assuming that you get the EAP designation or get used that pathway that kind of I would imagine that would make it a little easier for PHEMCE to consider and possibly include the Hemopurifier in their stockpile, it's kind of like your part of the quick advanced club. This thing has got more - this thing has got far more validation and some of the other things that we could be - some of the drug therapies that we could be looking at it. Is that kind of a right assessment?

I can't answer that question, one way or the other, certainly the advancing through FDA to the extent that we've already advanced that very influential with PHEMCE and agencies that not just looking to procure your technology into the strategic national stockpile. But that also may have potential interest to provide non-dilutive funding to support large scale production - of your countermeasure, which is something that federal government is very focused on, is to reach the ability to get these countermeasures manufactured at large scale. It's not just putting them in stockpile, if that happens, to be able to be scaled. And for many of these disease-specific countermeasures and are in the stockpile there is not - if you think about it from a business standpoint, there's not a lot of interest in a disease specific countermeasure, because you can't quantify what the business model is. So that's the value of broad-spectrum countermeasure. And, Mark, I think if you follow the company long enough to remember, when we were in DC on Capitol Hill testifying before Congress about the need to focus on advancing broad-spectrum countermeasures that such countermeasures would have also a commercial viability, because of their broad-spectrum nature and that it needed to be a consideration for a medical device. And at that time, when we started having those discussion and presentations on Capitol Hill, the focal point was disease specific drugs. The focal point was if your drug countermeasure had a commercial application, it was precluded from consideration, because government didn't want pharmaceutical companies to take advantage of these programs to advance their agents. And at the time, the definition of a countermeasure was solely a dragger [ph] of that team. So we were precluded by definition. Today, non-pharmaceutical countermeasure, such as a medical device is very much part of the new PHEMCE Act, broad-spectrum countermeasures are the focal point where we believe we have a leading counter measure. And if your countermeasure has other commercial applications, which ours certainly does, that advances your cause. So there's been a tremendous change in the legislation environment to support the advancement of countermeasures. And we've seen a change in the laboratory environment, that's been very significant at FDA. And then there's underlying legislation, such as the EAP programs that are also potentially beneficial. So you know we worked hard for a long period of time. Again, as I mentioned, historically there's been some discrimination against devices. But the backdrop for advancing our technology has probably never been better.

Well, I also - that's correct. I do remember that. But I also remember the fact that when Ken Alibek was in front of the Congressional Committee, he also said that Ebola was the perfect disease strain, viral strain, if it had a longer viral life. And in those days, that strain of Ebola had a much shorter life, not the 20 some odd days that it has today. So we are living in a much more dangerous world and nothing has been done in ten years. So let's go on.

Just, Mark, just for those that are on the call that don't know who Ken Alibek was, he deflected from Russia, who is the former head of the Russian bio-weapons program, which is the largest offensive program ever to exist. In a national symposium in D.C., it included military healthcare agencies and U.S. government healthcare agencies. He stood up as the keynote speaker and put up a slide that showed a dialysis machine. And during his keynote speech, pointed out at that time that the only way you could address breadth of pathogens that could emerge naturally through Mother Nature or via genetically engineered by man as agents of bioterror is with our device. Unfortunately, at that time, the legislation was all written against us. But that's changed today.

Yeah, yeah, thank you. Another point I have or a question I have is, let's talk about the EAP process to the best of your knowledge. So you get this distinction, this classification, and does not mean you go to them like you would with another device and say, well, we think our device could be used to remove herpes simplex, cytomegalovirus and Epstein-Barr, and to that point it could be used to help in transplants? Again, I'm using this as an example. Would that kind of allow the FDA committee to say, well, gee, what evidence do you have that it works; well, here's the DARPA material. And then you kind of work back and forth to say, yes, this could be a good outcome and let's go ahead and try it? Or do they kind of say, no, no, no, you're going to try Marburg, let's see if we can work on it? How does this kind of blend forward?

So think about the inability through normal submissions for FDA to provide guidance through your protocol development. They can provide [leading government] [ph] through, and in our case they were an IDE, medical device submission product. They can provide guidance through a pre-IDE meeting. But if you have a real-time collaboration within reviewers, you can help discuss in terms of virulent viruses, where it's not feasible to run controlled human studies, you can discuss how you could formally get an indication for Marburg virus or Ebola virus approved based on human safety studies, viral capture data and perhaps any human data that you might have.

Okay, okay, okay, now I get it. Okay.

In terms of like an application, you said like with organ transplants, whereas these individuals are given immune suppressants and latent viral pathogens often are activated, which can increase mortality rates that increase, rejection of organs. You have the ability through an EAP pathway to sit down with your review team to actually helps design the protocol, where you're getting feedback directly with your review team, which long-term - and it's not - it doesn't just have to be against one protocol which typically happens your traditional pathway. We hope, if our application should be accepted we hope to collaborate with our review team at FDA to establish multiple protocols for different disease conditions.

I got you. I got you. Okay, very good. I'll get back in the queue. Thank you, fellows.

Appreciate your questions, Mark.

We have now reached our allotted time for questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Jim Joyce for closing remarks.

Thank you, Brian. I want to thank everyone again for your time today. We will of course continue to update you on our upcoming developments and our participation in both industry and investor conferences, which will be active in September. Thank you again for your time and you continued support, and look forward your participation in our next call you. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.