Aethlon Medical, Inc. (AEMD) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to the Aethlon Medical’s Third Quarter Fiscal 2019 Earnings and Corporate Update Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Jim Frakes, Chief Financial Officer. Sir, please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Aethlon Medical's third quarter fiscal year 2019 conference call. My name is Jim Frakes, and I am Aethlon's Chief Financial Officer. At 4:15 p.m. Eastern time today, Aethlon Medical released financial results for its third quarter ended December 31, 2018. If you have not seen or received Aethlon Medical's earnings release, please visit the Investors page at www.aethlonmedical.com. Following this introduction and the reading of our forward-looking statements, Aethlon's Chairman, Dr. Charles Fisher; and our CEO, Dr. Tim Rodell, will provide an overview of Aethlon's strategy and recent developments. I will then make some brief remarks on Aethlon's financials. We will then open up the call for the Q&A session. Before I hand the call over to Dr. Fisher, please note that the news release today and this call contain forward-looking statements within the meaning of the Federal Securities Act of 1933 and the Securities Exchange Act of 1934. The Company cautions you that any statement that is not a statement of historical facts 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 fiscal year ended March 31, 2018 and in the Company's other filings with the Securities and Exchange Commission. Except as may be required by law, the Company does not intend, nor does it undertake any duty to update this information to reflect future events or circumstances. With that, I will now turn the call over to Dr. Charles Fisher, Aethlon Medical's Chairman.

Good afternoon, everyone. It's my pleasure to join this call today as the Chairman of Aethlon Medical, Inc. and introduce my colleague, Tim Rodell. In the past year, as Chairman, since I was elected such, we have done some revisions to our Board to help strengthen it in different positions, and we're very pleased with where we are. And most recently, we're very pleased that we have been able to attract Dr. Timothy Rodell to be the interim CEO here at Aethlon Medical. I've had the pleasure and privilege of knowing and working with Tim over the past 30 years. He's been CEO of both public and private companies. He has been a thought leader in a number of scientific areas and he's a very well rounded person that helped Aethlon move forward this point. So, now, let me introduce you to our CEO, Timothy Rodell.

Thank you, Chuck. Good afternoon, everybody, and thank you for taking time to call in for the update. I'd like to make a few general remarks and then I'll get to a few specifics. But before I do that, I'd like to say first of all that I'm delighted to be here. It is an exciting place to be, and I'm excited about both the technology and the opportunity that this technology, particularly the Hemopurifier device presents. And I wouldn't be here if I weren't excited about those two things. I'm also thrilled to be working with this team. It's a great pleasure to have an opportunity to work closely with Chuck, with Jim Frakes, and with what I believe to be a really solid Board of Directors that can bring a great deal to the table. And I look forward to working closely with all of them. I'd also like to thank Jim Joyce for all of his contributions to Aethlon, for building the Company to where it is today. And I'd also like to thank him, particularly for his help and support during the transition. And finally, in my list of thanks, I'd like to thank all of you and the other investors who aren’t on the call for your patients with my -- the time it's taking me to begin, and I stress begin, to get my arms around the Company and the technology. And I'll look forward to interacting with all of you in the future. With that, let me make a few comments about communication style and set some expectations, which may be a bit of a shift from what the Company has done, and every CEO has their own philosophy about communications. But, I'd like to share a few of mine with you. The first one is that we intend to announce and discuss material accomplishments that the Company is making, as they are delivered. But, we don't intend to make predictions about things that we don't control. And that's for a very simple reason and that is if we don't control the contingencies, then we're setting ourselves up for potential disappointments down the road, and we don't want to do that. So, we intend to essentially under promise and over deliver. We're not going to make predictions about regulatory decisions, we're not going to make decisions -- make predictions about grants that have not yet been funded, those types of things. So, we may be a little more spare in terms of what we put out in communications. But, our intent is to set the stage, so that when we say something, you'll know that it's happening or that it's already happened. Along those lines, we also intend to try to be fairly careful that we discuss on these calls what's in the release. And I was -- actually had that deepen into me very early in my career that what we're going to talk about should be in the release. And the reason for that is really very simple. If we go too far beyond what's in the release, we really run a risk of selective disclosure, which is both unfair and illegal. So, we will try and use releases to kind of frame things. Now, the conclusion you could come from that -- you could draw from that is well, why should we have a call if you've already set it all on the release? And what I would say there is that that doesn't mean that we can't expand on things, it doesn't mean that we can't answer questions and clarify, and it also doesn't mean that we can't talk in general terms about the environment we operate in, the regulatory environment, the development environment and how those processes work. So, we intend to be as communicative as we possibly can, but we also intend for everyone to get the same information at the same time. So, let me turn to what is in the release. And we've limited it to things that that are essentially ongoing. We're not going to talk about a number of things that are simply in process. But, we said we're continuing the development of the Hemopurifier that has received a breakthrough designation, received, I guess, early last year a breakthrough designation for viral disease, and in December, received a second breakthrough designation, which I think is pretty unusual, if not unique for a second indication, which is a clearance of exosomes associated with advanced and metastatic cancer. And those are important assets for the Company, but I want to come back in a minute and talk about what those actually mean, because I think that there may be some misconceptions in terms of what a breakthrough designation means and doesn't mean, but I'll come back to that in a minute. I've also -- we've also said that we're going to continue to pursue development in the arena of life-threatening viruses, particularly the so-called hemorrhagic fever class of viruses, which includes Ebola, Marburg, and a number of other ones. But, we're also using -- essentially building on the breakthrough device designation, we're going to -- we're very aggressively in the area of cancer. And as I think it’s been discussed in these calls in the past, developing a product for a viral infection like Ebola is challenging, simply because it's very difficult to do a controlled clinical trial in an area where the prevalence or the incidence of the disease is spotty, happens in epidemics in tightly restricted areas. So, there are challenges there. That does not mean that we don't intend to continue to investigate the activity of the Hemopurifier in viral infections and be prepared to provide the Hemopurifier in settings where it may have clinical utility. But, the truth is that the development pathways in oncology are much more predictable, easy to understand. And as such, may provide us with the most rapid path to -- through development to regulatory submissions and ultimately to the market. We do have a number of things ongoing in the area of oncology. The one ongoing study that is financed by government grant right now has been discussed before, and this was the breast cancer grant that was awarded to us under a small business innovative research, under the small business, innovative research grant program. Research is ongoing under that grant with our collaborators. And we intend to continue to pursue that. As you know and has been discussed, we completed a previous study that was funded under a contract, looking at malignant melanoma and we intend to continue to look to these types of opportunities as non-dilutive funding to move the programs forward. Let me finish my remarks by talking just briefly about the development process. Drug development and device development and incidentally my career up until this point has been predominantly in the area of the development of drugs and biologics, as well as some diagnostics. But, my expectation was and I found it to be true is that development with some exceptions is development, whether you're developing a device, a drug or a diagnostic. Obviously manufacturing things are different, the regulatory pathways can be different, but the main principles remain the same. And those involve putting together a development plan, which starts with the product, the device in this case, and ends with an approval, a regulatory approval and ultimately commercialization, and putting together, a very clear staged plan that gets you from the beginning of that process to the end of that process. What comes after that is sharing that process with the appropriate regulatory agencies. But, that is the correct order. A development plan comes first, the discussion with the regulatory agencies comes after that, and the process proceeds through a fairly stereotypic process. Early exposure in this case of humans to the device in question, moving to studies in a specific target patient population that are intended to show not only safety, which is the primary target in early studies, but then efficacy of the target population, and ultimately reproducibility of those results in a way that is supportive of regulatory approval and commercialization. Now, we have a breakthrough therapy designation for both viral disease and for oncology. But, I think it's important to understand what the breakthrough designation does. What it does not do is change that process that I've just talked about. It is intended to accelerate that process to the extent possible, it is intended to make communication between the FDA in this case and the company as seamless and as quick as possible, but it doesn't change the requirement for us to present a cogent development plan and move through it. I was actually involved in the writing of the legislation, the 21st Century Cures Act when I was on the Board of Directors of Bio -- the Biotechnology Industry Organization. And so I'm very familiar with how this came about because we were involved essentially in designing the breakthrough designation. But, I think it's important to understand that what the breakthrough designation really gives you, is a commitment on the part of the FDA. The term they use is all hands on deck. It's a commitment from the FDA essentially to answer the phone quickly and to be available to the company to help guide it in the process of running the development plan. But, the development plan is designed and owned by the company. So, I think I'll stop there and turn it back to Jim Frakes. And then, Chuck and Jim and I will be happy to answer any questions that we can to the best of our ability. Jim?

Thanks, Tim. Good afternoon again everyone. Our net loss was approximately $2 million or $0.11 per share for the three months ended December 31, 2018 compared to a net loss of approximately $1.2 million or $0.08 per share for the three months ended December 31, 2017. At December 31, 2018, we had a cash balance of approximately $4.8 million. Our consolidated operating expenses for the three months ended December 31, 2018 were approximately $1.96 million in comparison with $1.24 million for the comparable period a year ago. This increase of approximately $720,000 was primarily due to an accrual approximately $517,000 to cover separation payments to be paid over calendar 2019 to our former CEO and to our former President. We recorded approximately $473,000 of that accrual as payroll and related expenses, and the remaining $44,000 into the general and administrative expense area. Net of that $517,000 accrual, our operating expenses increased by approximately $203,000. The primary driver in that $203,000 increase was a net increase in our professional fees of approximately $148,000, largely due to increased scientific consulting fees related to ongoing studies. We had other expense of approximately $55,000 in the three months ended December 31, 2018 compared to other expense of approximately $56,000 in the nine months ended December 31, 2017. While we do not record any revenue in the December 2018 quarter, we anticipate recognizing revenue under our NCI award in the March 2019 quarter. We received our first funding under that award which was for $50,000, in January 2019. In terms of the cash used in our operating activities, we used approximately $2,896,000 or $322,000 per month in the nine months ended December 31, 2018, compared to approximately $2,893,000 or $321,000 per month in the nine months ended December 31, 2017, in other words, quite comparable. We put out those earnings and related commentary in a press release earlier this afternoon. That release included the balance sheet for December 31, 2018, and the statements of operations for the three and nine-month periods ended December 31, 2018 and ‘17. We will file our Form 10-Q quarterly report following this call. Since we are on the March 31 fiscal year, our next earnings call coincides with the filing of our Annual Report on Form 10-K in late May or in early June. And now, Charles, Tim and I would be happy to take any questions that you might have. Operator, please open the call for questions.

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brian Marckx from Zacks Investment Group. Please go ahead with your question.

Hi, guys, and congrats on the cancer breakthrough designation. Tim, I wonder if you can just kind of layout for us what the near-term priorities are that you see under that program?

Well, thank you, Brian, and thanks for dialing in. In keeping with what I said philosophically about what the -- about making predictions about what's going to happen, I'm not going to say exactly what we're going to be doing when. But, let me answer in more general terms. Obviously, the critical pieces of getting a drug or device to market are the clinical pieces. And, there are a lot of moving parts leading up to that the people tend not to pay attention to, having to do with manufacturing and quality strategy, and all of those kinds of things. But, what is incumbent upon us to do is to get experience in the target population that generically now is cancer, which obviously is a very broad area, but to begin to get safety data and exposure data, if you will, in the target population as quickly as possible. And then, what comes after that, essentially is identification of a specific target population, in this case, cancer, but almost always in cancer, you're talking about specific stages of disease, specific patient characteristics. But, those are the trials that one would ultimately expect to either lead to pivotal trials or in the case of extremely high need area, sometimes earlier applications for approval. So, I think, what we're going to be doing is working as fast as we can to move through that process, begin to get patient experience in cancer patients and move as quickly as possible to meaningful willpower efficacy studies.

Tim, have you or can you say if you've had an initial dialogue with FDA regarding a cancer program? And if so, can you talk about anything that was involved in the discussions?

Well, there has obviously been substantial dialogue with FDA around the breakthrough designation. And the next step after that is essentially the discussion of the development program and initiating that program. I'm not going to comment on exactly where we are in that process other than to say we're moving, as I said earlier, as quickly as we can.

Okay. And then, in terms of -- so, you have the two breakthrough designations. Are you prioritizing one or the other? It sounds like from the earnings release I get that cancer may be the priority. Is that how we should think about it?

Well, I think it's been discussed before what the challenges are in developing again and developing a drug for things like Ebola and Marburg and those types of things. And some of those challenges in our situation may not be well understood. There's the challenge of doing a controlled trial, as you know there are controlled trials ongoing now with both therapeutic antibodies and vaccines in Ebola in Africa. However, those -- and that's not the kind of development program that we can do for a number of reasons, the simplest one being that our cartridge is essentially hooked up to a dialysis machine, and there are no dialysis centers in the jungles in the Congo and in the other areas where Ebola is there. So, our interaction with those types of indications has to be a little bit more reactional, a little bit more sort of responding to opportunities and that as you know, we did treat one patient in Germany a couple of years back who had Ebola and we -- our job with respect to that is to remain available and poised to supply Hemopurifier cartridges should patients end up essentially, in this case back in the United States and needing treatment. That's not really a development program, that's essentially expanded access. For us to do development in viral disease, we would have to be -- we would have to identify on the target population which we could do a control trial. And again, this is one of the things that I think people may not realize is that the breakthrough designation does not change the FDA’s requirement that we present as they would say, substantial evidence of safety and efficacy in the target population. So, anecdotal use of the device under expanded access conditions would not get us there. So, in that setting, and I've been working, as you know, in the area of oncology, even though I'm not an oncologist, for about 15 years now. And there are very well-established pathways for identifying target patient populations and for identifying what the appropriate endpoints are for both early approval, for accelerated approval, as well as for full approval. So, it is an area where the development pathway is much clearer, the endpoints are clearer and more established. And so, for that reason, I think we'll have to be a little bit opportunistic on the viral side and can control the process more on the oncology side. So, I think, the answer to your question is, we still view both of them as being major priorities, but we think of the path forward as clear in oncology at the moment than it is in viral disease. And with limited resources, we obviously have to take that into account.

Yes. Thanks, I appreciate the answer. There was an Ebola Scare, it was a week or so ago at the University of Pennsylvania Hospital. The initial reports were that they thought it might be Ebola. I think it turned out that it was not. But, if it had been Ebola, is that something that you think that would kind of fit within what your game plan is on the viral side?

I think, the easiest response I can make to that is that's the kind of situation that we have to be prepared to address, whenever it comes. Yes.

And in terms of the ESI side of the business, is there anything that you can talk about in terms of updates with the ongoing CTE TauSome study?

I specifically didn't mention that because it's an ongoing trial. Philosophically, I'm not a big believer in incrementally updating on enrollment rates. We do continue on to pursue that with the group in Arizona and with our collaborators. And as we actually have something to say about that, we certainly will. But, it is ongoing, we continue to enroll patients and collect samples.

Our next question comes from me Yi Chen from H.C. Wainwright. Please go ahead with your question.

My first question is, is the Company waiting for the results from the collaborator studying removal of breast cancer exosomes to make any further move, advancement in the cancer space? That's the first question. And second question is, given the difference between a breakthrough device and breakthrough therapy, your view, what are the likely endpoints that the FDA will require for Hemopurifier to deliver in clinical trial scenario?

Let me take those -- thank you, Yi. And it's good to hear from you. Thanks for dialing in. Let me take those in reverse order. In terms of the endpoints that we would expect the agency to require, if you look at what the breakthrough device -- and I actually quoted the language from the approval of the -- for the breakthrough device designation. So, the answer to that is implicit in the question or it's implicit in that language. And that is that for the device or for a drug in that -- for that matter to be approved, it has to be shown to be a substantial or meaningful advance over available standard-of-care. So, I think you can sort of see a clinical trial in that in that language. You can't ethically do a clinical trial in which you withhold approved standard-of-care from a patient. And we're talking about treating patient populations that are high-need population. So, I think the endpoint in general terms is that we will have to show that add on to standard-of-care this device presents or offers a meaningful advantage with an appropriate safety profile. And that's the way these studies are generally done in oncology and other diseases. As you take a patient population that has approved therapy, but that therapy is not everything you would want it to be. And you see if adding your therapy on to that improves outcome without prohibitive increases in toxicity or safety signals. In addition, the additional piece here is that the language in the approval says that these are diseases in which exosomes have been demonstrated to participate in the development of the severity of the disease. That I think I would characterize as a bit of [technical difficulty] based on what we've talked about which is that it's clearing exosomes -- if clearing exosomes and patients with a specific cancer results in a meaningful improvement, then, I think you can say that the mechanism is there. In terms of first question about -- and I'll paraphrase, and tell me if I'm misstating it is, do we need to wait, are we waiting for the data from the non-clinical breast cancer studies that we’re doing before we move forward with clinical development? The answer to that is no. And it's not for a very specific reason. And that is ordinarily in drug or device development, you proceed through a sequence where you get non-clinical data, generally animal data, or in vitro data, and then you move on, once you've established everything that you've been established in that context, predominantly safety to clinical data. We're in a different position here, simply because we have a benefit of over 150 patients clinical experience, not with cancer, but with hepatitis C. So, we already have an established safety profile in humans. So, I would say that clinical development and the types of studies that we're doing in the breast cancer grant, can proceed in parallel rather than sequentially.

Thank you. My final question is, the fiscal third quarter’s operating expense seems to be higher than the fiscal second quarter. So, going forward, do you think the operating expenses will be marginally lower than the reported fiscal third quarter or it should stay relatively stable compared to third quarter?

Hi, Ye. It’s Jim Frakes. Well, we had a very large accrual, as I mentioned, in the third quarter for the separation agreements for our former CEO and former President. So, $517,000 of that increase was a bit of an anomaly. So, I don't think we should expect ongoing expenses at that level. However, as clinical trials and other positive events unfold, hopefully, that would translate into higher expenses. But, I think in terms of daily operations, the second quarter's levels are probably a better baseline than the third quarter levels.

Got it. Thank you. One additional question. Tim, do you think it's reasonable for us to assume that during the first half of this year we should be able to see the clinical trial design of the Hemopurifier to be used in cancer setting?

I'm not going to make predictions about exact timing because it's dependent on a lot of things, some of which in fact, as I said at the beginning, I don't control. What I can say is that we are going to be proceeding on the clinical front as quickly as we possibly can. But, I'm not going to announce a clinical development plan. We will essentially talk about initiation of clinical trials as they happen, but we're going to move as quickly as we possibly can.

Okay, got it. Thank you.

Thank you.

And ladies and gentlemen, we have reached the end of today's allotted time for the question-and-answer session. We will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.