Aethlon Medical, Inc. (AEMD) Q3 2020 Earnings Report, Transcript and Summary

Good day. And welcome to the Aethlon Medical Third Quarter Fiscal 2020 Earnings and Corporate Update. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Frakes, Chief Financial Officer. Please go ahead.

Thank you, operator and good afternoon, everyone. Welcome to Aethlon Medical’s third quarter 2020 earnings 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, 2019. 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 CEO, Dr. Tim Rodell, and our Chairman, Dr. Chuck Fisher, 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. Rodell, 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, 2019 and in the Company's other filings with the Securities and Exchange Commission. Except as may be required 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. Tim Rodell, Aethlon Medical's CEO.

Thank you, Jim. And thank you all for dialing into our earnings call. I'd like to first to briefly address the suspension trading the company shares by the Securities and Exchange Commission on Friday. We will then update on the progress of our programs in oncology and we’ll then discuss our view of the evolving corona virus outbreak and the potential relevance of the Hemopurifier in this, in the future viral epidemics. As you know, on February 7, 2020, the Securities and Exchange Commission issued an order of suspension of trading, temporarily spending trading in Aethlon Medical Incorporated’s stock for a period of 10 days. The SEC order stated that the suspension was due to concerns regarding the accuracy and adequacy of information in the marketplace that appeared to be disseminated by third-party promoters and recent and unusual market activity since at least January 22, 2020. Aethlon is aware that certain third-party promoters may have made claims about the potential accuracy of its products with respect to the corona virus. The company neither solicited an advanced knowledge of, nor played any role in the preparation of such reports. Now I wanted to get that out of the way first, so that we can concentrate on what we and our shareholders really care about, which is a discussion of our R&D programs. So let we move to that. We are continuing the advancement of the Hemopurifier for advanced cancers under our recently approved IEE and breakthrough designation. As we previously disclosed, the initial clinical trial in cancer, known as an early feasibility study which is the device equivalent of a Phase 1 trial, will be a small single center, open label trial in 10 to 12 patients with advanced and/or metastatic squamous cell carcinoma of the head and neck or head and neck cancer, who are receiving pembrolizumab, which is Merck’s drug also known as Keytruda in the front line setting and for which it received FDA approval last year. The protocol for this trial is undergoing IRB and related reviews at the trial site, and we expect the trial to open for enrollment in the near future. We will be in a position to discuss additional details regarding the trial at that time. To our subsidiary Exosome Sciences, we're also continuing our collaboration with the Hoag Hospital group in Newport Beach, California to characterize diagnostic and prognostic exosome markers in patients with in a high risk for solid tumors. Additionally, we're also continuing our work under the recently awarded approximately $1.8 million National Cancer Institute contract, to develop our benchtop version of the Hemopurifier for the isolation and characterization of exosomes. These are our major activities in the oncology space. We continue to work on other potential applications in ways that we can investigate the Hemopurifier. And now I'd like to move on to discuss our work in the development of Hemopurifiers for viral infections, which is an area that remains a major focus of the company, and has received a great deal of attention in the context of the current corona virus outbreak. As you know, in addition to the oncology breakthrough designation, the company has also received a breakthrough designation for the Hemopurifier for the treatment of life threatening viruses that are not addressed with approved therapies, an designation that would generically appear fit the current corona virus outbreak, which is now designated as 2019-NCOV, that's a working name for this particular corona virus and we'll probably have a different name at some point in the near future. However, in order for the Hemopurifier to be evaluated and deployed in this situation, a number of conditions would have to be met as I will discuss in a minute. And this is the reason we have publicly commented before this morning. There is not adequate information out there yet for us to be able to say one way or another, whether the Hemopurifier is potentially a candidate for the treatment of this disease. But before I go into that, let me step back and provide a quick overview of the status of the current outbreak, because a number of the characteristics of this virus that we understand now have a direct impact on the potential for the Hemopurifier to intervene in this disease. Based on data from the World Health Organization from yesterday morning, there have been a total of 37,558 confirmed infections with this particular strain of the corona virus. Because as you will see, the majority of these cases are mild disease and the majority of them in fact are in China where healthcare resources are very strained at this point, many cases are not yet reported. Many patients who are probably infected can't even get into see healthcare practitioner. So the overall figure is probably substantially higher than reported confirmed number of cases. As I said, the majority of these cases are in China. So out of the 37,558 confirmed cases globally, 37,251 of those cases are in China. Of those 6,000 are defined as severe, which means 17% rate of severity and the case fatality rate is 2%. Now given that the total number of cases is probably higher than what’s reported, this case fatality rate may actually be lower than that more on the order of 1%. Now as of yesterday, the World Health Organization had reported 812 deaths in China and one death outside of China. But based on data that are now becoming available today, the mortality rate is probably now closer to a thousand. Of note as reported yesterday, even with this low case fatality rate, that is the percentage of patients who are infected, who die, the total number of deaths in this outbreak has now surpassed the SARS outbreak. So the SARS outbreak affected a smaller number of patients with a higher fatality rate, but because of the greater number of patients who are infected with this current corona virus, the mortality rate, even though on a percentage basis is lower, has now surpassed the SARS epidemic. Now for perspective, I have to say that both of these outbreaks, the SARS outbreak and the current corona virus outbreak pale in significance next to influenza, which is a much larger problem that people tend to ignore for which the CDC, the Centers for Disease Control, estimate that so far this season in the United States alone, there have been 22 million cases, 210,000 hospitalizations and 12,000 deaths. This is sort of disease for which there are already effective vaccines and approved drugs. Now to return to the corona virus, the current corona virus infection, the cause of the virus has been identified, it's been sequenced and as I mentioned, has been designated 2019-NCOV, it's a member of one of the four corona virus families so-called beta family that also includes a SARS virus and Middle Eastern Respiratory Syndrome or MERS virus viruses, which are also in the corona virus family. But as you can see from the above figures, this virus appears to be much more widespread than those outbreaks but substantially less dangerous in terms of mortality. Now as you may know, both Chuck and I have many years of experience in the area of viral disease and viral product development in a number of different academic and commercial settings, and I'm going to ask Chuck to comment briefly in a minute, but before I do let me say that we've been basically tuned into the since the very early days. We've been closely monitoring the situation. We've been speaking with our colleagues who may be involved in the care of these patients ultimately, and we've been evaluating whether the Hemopurifier can offer any benefit to severely affected patients. Fortunately, as noted above, the majority of patients today have not had severe disease. In fact, the corona virus is closely related to viruses that cause diseases that are generally referred to as the common cold. So the majority of patients are not severely infected, or not severely affected. And those with mild disease would never be candidates for treatment with the Hemopurifier, because it is an extracorporeal device that involves taking the blood out of the patient, filtering it through the Hemopurifier and then returning it to the patient, which obviously is an invasive treatment that would only be appropriate for use in life threatening situations. Moreover, it ultimately could be used in any outbreaks such as the current one, who would almost certainly not be an additional frontline treatment. In addition, beyond appropriate severity of disease, two additional considerations would have to be satisfied for the Hemopurifier to be considered for evaluation and deployment here. First, while the company has previously evaluated the ability of benchtop versions of Hemopurifier to bind multiple viruses, including one other member of the corona virus family I mentioned previously, the MERS virus, the currently circulating 2019 and corona virus is not yet widely available for evaluation and therefore, the company does not have data showing whether the Hemopurifier could clear it. It seems likely that it could based on the data that we currently have but unless we have direct data showing that the Hemopurifier could bind it, that would be a necessary although not sufficient precedent for us to deploy it. Second and potentially at least as important, it's unclear at this time whether a virus primarily affects the upper respiratory tract, generating pneumonia, such as this one would in fact be ameliorated by clearance in the circulating blood as the Hemopurifier is designed to do. Remember the Hemopurifier is not directed at the lungs, it’s directed at the bloodstream. And while this virus almost certainly circulates, it's totally unclear whether clearing it from the circulation would have an impact on the pneumonia that ultimately disables and potentially kills patients. Finally, as noted above, this outbreak is still largely in China and I think is likely to remain there, and virtually all of the mortality is in China. So any use of the Hemopurifier, inappropriate patients would based on what we know today, would be focused in China and would additionally require the support of the Chinese regulatory authorities not the FDA. With all these considerations in mind, we tend to monitor the current situation and also the inevitable future outbreaks to come. I think we all understand now that this type of virus is not going to be an isolated case. We've already seen two other deadly corona viruses, the SARS corona virus and the MERS corona virus, we're likely to see additional outbreaks of other corona viruses and many other viruses as time passes, and we're going to deal with these in the same way. We will monitor them. We will look for opportunities to identify situations whether Hemopurifier could be beneficial and intervene as appropriate. So let me stop there and ask Chuck Fisher, our Chairman and a close colleague of mine, to add any comments he may have before we go on to the next part of the call. Chuck?

Thank you, Jim and thanks, everybody for joining the call today. I think Tim did a nice job of summarizing the key events. The issue for us to deploy Hemopurifier at this point would be demonstrated with buying the 2019 in COV version of the virus, the ones in China and is spreading throughout the world. And two, based on what we're seeing, the intensity and severity of that is quite much larger in China than it is anywhere else. And as Tim pointed out, we would then need to work through the Chinese regulatory authorities should we have the data to present to them. And that's I think the key element here. We've been on top of this since day one. But what we really need to do is get to a point where we have the data that would support making a submission for some form of emergency use in China should they be open to granting that capability. So I think that's a key point on the corona virus on the larger issues of what the company is doing. We're tracking very well and I'm very pleased with the overall performance of the team and of all of our programs. Now, back to you, Tim.

Thank you, Chuck. So we'll take questions at the end. But what I'd like to do now is turn the call back over to Jim Frakes, our Chief Financial Officer, to report on the financial part of the quarter. Jim?

Thanks, Tim and good afternoon again, everyone. Our net loss was approximately $820,000 or $0.28 per share for the third quarter ended December 31, 2019 compared to a net loss of approximately $2 million or $1.67 per share for the quarter ended December 31, 2018. We recorded government contract revenue of approximately $413,000 in the three months ended December 31, 2019. This revenue resulted from work performed under our Phase 2 melanoma cancer contract with the NCI. We do not record any government contract revenue in the three months into December 31, 2018. Our consolidated operating expenses for the three months ended December 31, 2019 were approximately $1.29 million in comparison with $1.96 million for the three months ended December 31, 2018. This was a decrease of approximately $670,000 or 34% in 2019, and the decrease was due to a decrease in payroll and related expenses of approximately $755,000, which was partially offset by increases in professional fees of approximately $23,000 and in general and administrative expenses of approximately $58,000. The $755,000 decrease in payroll and related expenses was due to the combination of $513,000 reduction in our cash based compensation expense and $242,000 decrease in stock-based compensation. The reduction in cash based compensation expense was due to recording a $506,000 accrual in the December 2018 period related to contractually agreed severance payments or former CEO and former presidents with no comparable expense into December 2019 period. The $23,000 increase in our professional fees in 2019 was primarily due to $101,000 increase in our legal fees and $27,000 increase in our accounting fees, which were partially offset by $104,000 decrease in scientific consultant expenses. The increase in legal and accounting fees related to increased activity in our registration statement filings and in intellectual property actions among other matters. The $58,000 increased in general and administrative expense in 2019 was primarily due to the combination of $29,000 increase in our clinical trial expenses and an $18,000 increase in licenses and permitting costs. Other income or expense during the three months ended December 31, 2019 consisted of interest expense and a gain on share for foreign exchanges and during the three months ended December 31, 2018 consisted of interest expense only. Other income for the three months ended December 31, 2019 was approximately $55,000 in comparison with other expense of approximately $55,000 for the three months ended December 31, 2018. Now at December 31, 2019, we had a cash balance of approximately $4.1 million. Subsequent to December 31, 2019, we conducted a registered direct offering of approximately 1.9 million shares of common stock at a purchase price of $2 per share for aggregate gross proceeds of approximately $3.77 million before deducting fees payable to the investment bank and other estimated operating expenses payable by us. In a concurrent private placement, we also entered into a securities purchase agreement with certain institutional investors, pursuant to which we agreed to sell and issue to the purchasers warrants to purchase up to an aggregate of 943,000 shares of our common stock at an exercise price of $2.75 per share, and those warrants carry a term of 5.5 years. Also subsequent to December 31, 2019, investors that participated in our December 2019 public offering exercised outstanding warrants to purchase an aggregate of approximately 2.6 million shares of our common stock for aggregate cash proceeds to us of approximately $3.89 million before expenses. The combination of the gross proceeds from the registered direct offering and from the warrant exercises amounted to approximately $7.66 million in gross proceeds to the company subsequent to December 31, 2019. We included these earnings and related commentary in a press release earlier this afternoon. That release included the balance sheet for December 31, 2019 and the statements of operations for the three and nine month periods ended December 31, 2019 and 2018. And we will file our quarterly report on Form 10-Q following this call. Our next earnings call will coincide with the filing of our annual report on Form 10-K in June. And now Chuck, Tim and I, would be happy to take any questions that you may have. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Brian Marckx with Zacks Investment Research.

If we could just start with the cancer feasibility study program. Is there anything else that you can talk about relative to where you are or what you need, I guess before you can go ahead to the next steps, which I guess is to start the study? So any other details that you can -- can you give us. And anything in terms of when you think that the timeline might be for starting that study?

Thanks, Brian, this is Tim Rodell and thanks for the question. As you know in any clinical trial, you need approval once the FDA has authorized the trial you need approval from at least one local review group, which is an institution review board. But in major academic cancer centers, there frequently is a multi step review process. We are in that process. Fortunately, I've seen actually some major academic centers where you have to go through sequential committee authorizations for up to five or six committees and that's not the case here. I can't give you an exact time frame. But we are hoping that will be open, we will have full approval of the appropriate groups including the IRB and be ready to start the trial. I would say shortly I think sometime around the end of the first quarter, maybe a reasonable prediction, but that could change.

And is it fair to assume that if you can start on the timeline that you just mentioned, that you believe it would be finished by the end of the current calendar year, so by the end of 2020?

Well, I would love to give you a firm answer to that. But as you know, that would probably be pretty dangerous for me to do. Until we actually open the trial and start to see the enrollment rates, it's very hard to predict exactly how fast they're going to go. This is a small trial 10 to 12 patients so we don't need that many. And this is a very busy center that we're going to be working and with a very large head and neck patient population. So I'm hopeful that the timeframe you talk about is realistic, but I'm really not going to be in a position to say anything much more than that until we see. Even if you already know exactly what the number of patients that are being taken care of in the center is, you still don't know what percentage of those patients are going to get consented for a trial like this. So I'm hopeful but that's a reasonable estimate. But that will be more comfortable giving you something a little bit more precise once we get open and see a couple months at the moment.

Relative to the corona virus, I know it's early. Nobody has a whole lot of answers. So I certainly don't expect that you guys will have any details either. But if you can just talk about what your thoughts are or what you've seen relative to what's known about it today. If there's anything that gives you concern that the Hemopurifier may not be able to clear the corona virus?

Well, it's really basically the issues that the Chuck and I talked about. I think that given the data that we have with a lot of other viruses, including as I said, one additional corona virus, the MWRS virus, it appears that the Hemopurifier has very broad activity against all glycosylated viruses that affect humans. But it would be unethical for us to enter into any kind of treatment without knowing specifically that this virus is bound to the Hemopurifier. So that's a data point that we need. I think the bigger question is our experience in treating viruses and we, as you know, we do have extremely expensive human clinical experience is with viruses were the primary mode of pathology, if you will, involves circulation. Hepatitis C virus circulates and if you decrease the amount of circulating Hepatitis C, patients do better we know that. We're not in the business of treating Hepatitis C anymore, simply because it's a drug -- it's a disease that can be treated with drugs now, rather than an invasive treatment like the Hemopurifier. But probably a much more relevant example is a single patient we treated with Ebola. And we do know, with Ebola virus and probably with all of the other hemorrhagic fever viruses, like barber agent like hantavirus here in the United States, these viruses circulate in very, very high titers. And the amount of circulating virus appears to be directly related to the outcome of the disease, how the patients do. So in a situation like the Ebola patient that we treated, we were able to see that we cleared huge quantities of the virus captured them in the Hemopurifier and the patient did better. The situation here is a bit different from that and I'm not saying that to predict what the outcome would be one way or another. But the coronavirus we know is transmitted through the ones that is, it's inhaled or it's picked up from mucous membranes. So it doesn't enter through the bloodstream and its primary target is the lung, patients get pneumonia and ultimately they're presumably dying of respiratory failure. Now some of those patients are probably in shock as well, we just don't have enough data on the fatal cases at this point to be able to say. So it's not a slam dunk that clearing circulating virus would have an impact on what's really hurting these patients, which is the damage in their lungs. So that's similar to basically what I've already said. We don't know enough yet at this point. If the answer to both of those questions is yes, we could bind the virus and patients have a lot of circulating virus that may have an impact on the outcome of their lung disease that I would say it could potentially have a role there.

Tim, just for a little clarity on kind of where you are in terms of sort of the next steps I guess. Is it to talk the Chinese authorities, maybe you've already done that, I don't know? But do you have sort of a specific game plan, sequential steps that you need to go through that you think will answer the questions that you have relative to whether Hemopurifier have applicability against corona virus?

I think two things that we would need as I said, the two things we need to know are can we bind it and that's an experiment that we're not in a position to do now but we're going to keep our eyes open for when we could do that. As you know, this is a dangerous virus and has to be evaluated in high level bio-security facilities, the kind of facilities that are used to handle all life threatening viruses, so we would need to identify, we will need to identify a place where that can happen and we will need access to the virus. Beyond that, I think that we're going to need to understand more about what levels the virus circulates at and begin to put together a story that we could take to the Chinese regulatory authorities and say that we actually think that this could work here. So it's a bit of a sequential story. I can't give you an exact timeframe for how that could happen, but that's the process. What I will say is that the dissemination of information about this virus, about this outbreak, is stunningly current. The New England Journal opened up essentially an ongoing edition where they're turning around publications, case reports and case series, literally on a daily basis. All of the other major medical journals are publishing very quickly. So we are learning a lot about how these patients get infected, how the virus is transmitted and ultimately how the patients who do succumb die. So you know, I think we're going to have a much better idea of what the actual course of the disease is over the course of the next few weeks. The other thing we're going to have an idea is what the course is likely to be for this particular outbreak. That is, is it slowly becoming contained, the rate at which it is expanding outside China is encouragingly slow and limited at this point, but whether China has peaked or not, I don't think we know. We'll understand that better over the course of the next few weeks. Chuck, do you want to add anything to that?

I think you captured the key points. The issues is to recognize rebind what circulating. And if you into from this from other diseases, whether it's Ebola or Marburg, or the flu, of ‘19, ‘18, et cetera, many of them had a respiratory component, but they keep in each one of them, they had a high levels of circulating titers, as Tim just mentioned. We're able to demonstrate that we in fact bind the virus, which is not an unreasonable assumption since we have bound other corona viruses, it's possible. And two, if there's an association between circulating viral titers in the blood with the severity of the pulmonary disease, then I think that's the case that makes it more attractive to present to the regulatory authorities as we believe there's a real hypothesis where we can really make a difference, that we're way shorter that right now, as Tim mention, because we need access to specimens and we need transparency on embellishment of the titers. And to put a point to that, I think we all have to recognize how challenging this is to the Chinese medical care system and particularly their physicians and nurses that are managing these patients. They’re in essentially a 24x7 365 program now and we're seeing some of their physicians and the health care providers die. That tells me that in a concentrated environment, if the various much worse, if we capture people and get them isolated perhaps they're able to clear, we don't know if this something in that juxtaposition that raises the mortality in that setting. Those are all questions I think all of us who study these kind of fields are very much looking at. And whether you look at the WHO or any of the surveillance or organizations, they're all same, fundamentally the same thing.

Just one last one relative to the Chinese and getting access to the virus. Have you -- do you have a communication with the Chinese directly? And the other part of that is do you have a kind of a game plan or some sort of insight into when or if you'd be able to get access, samples, access to samples?

First of all, the viruses, once they're identified tend to become available to researchers reasonably quickly and we were actually able to evaluate the MERS virus fairly early in that epidemic. So I would say we would expect that it will become available to researchers in the reasonably near future. I don’t want to say in terms of days or weeks. I won't comment on any contact with Chinese regulatory authorities, I don't think that would be appropriate. What I would say is that it is our understanding that the Chinese are doing the same thing that all regulators are doing, which is making sure that potentially helpful things can get deployed and introduced as quickly as possible. But I'm not going to comment on any contact we may or may not have had with the Chinese regulators. What I will say is that for us to have a meaningful conversation with any regulatory authority would require a certain understanding of the two major issues that we've been talking about.

This will conclude our question-and-answer session. I would like to turn the conference back over to Dr. Rodell for any closing remarks.

I just again like to thank everybody for calling in and for your continuing interest. We intend to be as forthcoming as we possibly can with respect to all of the issues that we've discussed. So when we have something meaningful and material to say, we plan to get it out as quickly as possible. Thanks again and have a good afternoon.

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