Earnings Call Transcript - AEMD Q1 2020

Operator, Operator

Good day and welcome to the Aethlon Medical First Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Jim Frakes, Chief Financial Officer

Thank you, operator, and good afternoon everyone. Welcome to Aethlon Medical's first quarter 2020 earnings conference call. My name is Jim Frakes, and I’m Aethlon's Chief Financial Officer. At 4:15 p.m. Eastern time today, Aethlon Medical released financial results for its fiscal year ended June 30, 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 statement, 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 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 fiscal year ended March 31, 2019 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. Tim Rodell, Aethlon Medical’s CEO.

Tim Rodell, CEO

Thank you, Jim, and thank you everyone for dialing in this afternoon. I’m going to make some brief remarks and updates and I’m going to ask Chuck Fisher, our Chairman to comment and then we’ll be happy to take questions. But as I think everybody on the call knows, Aethlon is a development-stage device company; we are developing our proprietary blood purification cartridge called the Hemopurifier. This is a single-use, first-in-class therapeutic device designed to clear both circulating viruses and small subcellular particles called exosomes that are involved in the development, advancement, and spread of cancer, as well as in a number of other processes. The Hemopurifier has been designated as a breakthrough device for the treatment of glycosylated life-threatening viruses including Ebola and other hemorrhagic fever viruses. In late 2018, it was additionally designated as a second breakthrough device by the FDA for the treatment of cancer, specifically advanced and metastatic cancers that are unresponsive to or intolerant of standard of care therapy. We are advancing development programs in both of those areas. I'm going to talk predominantly today about our programs in cancer. We have discussed previously what the development process is for a new device in the treatment of cancer and what the regulatory components of that are. Over the course of the last quarter, we've made significant progress in advancing our development plan. We have had a number of discussions and communications with the FDA during this quarter and conducted an in-person meeting in Bethesda earlier in the quarter. Following that, we are now in the process of preparing an investigational device exemption application, which is the application to the FDA that will allow us to initiate clinical trials. Those communications with the FDA have been helpful, profitable, collegial and we're looking forward to getting the IDE filed and getting authorization from the FDA to initiate clinical trials. As we've previously disclosed, our initial targets in oncology are in the area of solid tumors, including very difficult to treat tumors such as pancreas cancer, head and neck cancer, ovarian cancer, and other solid tumors. All of these specific indications have been demonstrated, by us, our collaborators, and others, to be driven significantly by circulating exosomes. It is our belief that using the Hemopurifier to clear those tumor-derived exosomes will allow for improved outcomes in patients and specifically improve responses to some of the newer chemotherapeutic and immunotherapeutic agents that are currently approved and under development. As we move forward into the development process, we’ll have more to say specifically about what tumor or tumors we're going to be targeting, what those trials will look like, and more details. But at this point, all of our energies are focused on finishing the process of filing the investigational device exemption application and preparing to move into clinical trials. Now I want to talk about a couple of other areas in a few minutes, but before I do, Chuck Fisher, our Chairman, has been working with me and has been heavily involved in the development of our strategy as well as our communications with the FDA. So Chuck, if you'd like to make any comments about the process as it has proceeded so far, please do, and then I'll come back to talk about a few other things.

Chuck Fisher, Chairman

Thanks Jim. My comments will be brief, but thanks to all of you who joined our call today. We appreciate your ongoing interest. Just a few comments. Basically, I'm very pleased with the quality and the content of both the discussions and meetings with the FDA, particularly given the recent discussions on the breakthrough device designation for the treatment of advanced metastatic cancer associated with exosomes. I want to say that I think the team is doing a great job in that regard; their relationships with the FDA have been very collegial, as Tim outlined, and I think that's a positive area to move forward on. So I'll stop there and maybe comment later. With that, I’ll hand it back to Tim.

Tim Rodell, CEO

Thank you, Chuck, and Chuck will remain on the call, so he'll be available. We’ll both be available for questions at the conclusion of our prepared remarks. The next thing I'd like to turn to is the cross-licensing agreement that we announced on our last quarterly call. We announced that we had entered into a strategic cross-licensing agreement with SeaStar Medical, another device company located here in Southern California that is developing several devices that are very complementary to what we are doing here at Aethlon. We had actually just signed that agreement when we last spoke. So I'd like to talk a little bit about my view of how this is going to proceed and where we are. The Hemopurifier is capable of clearing subcellular particles, including particles called exosomes which are involved in the advancement and spread of cancer as well as a number of other processes. SeaStar is developing cartridges that address potential components of both inflammatory, infectious and oncologic pathways. Collectively, we have a series of devices that address different synergistic components of these complex disease pathways. Our belief is that putting these two sets of technologies together in various ways will allow us to address more diseases, improve activity in those diseases, and learn a great deal about exactly how those diseases work. For example, the upcoming experiments we will be initiating in humans will look at the clearance of exosomes in patients with advanced cancer, giving us an opportunity to understand better what the role of exosomes is in cancer. We've got a lot of literature showing correlative relationships between the presence of exosomes and outcomes in cancer, but nobody has been positioned to clear them and see the impact of that on the disease. Similarly, the story is similar for the SeaStar cartridges. I am very excited about this. There will be a number of steps that we're going to be investigating as we move forward. But the first step is to begin looking at how these cartridges will work together, the parameters affecting their performance, and how they can clear various particles like exosomes and inflammatory mediators. We're initiating these early studies to look at combining the technologies which we will be using in animal studies before eventually advancing to human trials to assess their impact on human disease. We're also focused on our majority-owned subsidiary, Exosome Sciences. One of the things that attracted me to this company was the synergy between the Hemopurifier's therapeutic technology and the potential for diagnostics through our Exosome Sciences division. When I joined, the primary focus of the conversation was the use of these diagnostics in the context of chronic traumatic encephalopathy, a neurodegenerative disease seen in football players who have undergone repeated head trauma. We maintain our research focus there while also pursuing the potential of exosomes in informing disease progression and risk identification in other diseases. This area represents a complementary but substantial additional value, involving the use of exosomes in diagnostics, which we are now beginning to pursue aggressively. I’ll stop there and turn it back over to Jim Frakes, our CFO, to discuss our financials.

Jim Frakes, Chief Financial Officer

Thanks Tim and good afternoon again everyone. Our net loss was approximately $2.1 million or $0.11 per share for the first quarter ended June 30, 2019 compared to a net loss of approximately $1.1 million or $0.06 per share for the quarter ended June 30, 2018. At June 30, 2019, we had a cash balance of approximately $2.5 million. Our consolidated operating expenses for the quarter ended June 30, 2019 were approximately $1.6 million compared to $1.25 million for the quarter ended June 30, 2018. The increase of approximately $350,000 in 2019 was due to increases in general and administrative expenses of approximately $188,000, professional fees of approximately $158,000, and payroll and related expenses of approximately $3,000. The increase in general and administrative expenses was primarily due to a combination of a $120,000 rise in clinical trial expenses largely due to costs associated with the manufacturing of the Hemopurifier for an expected clinical trial in the cancer space, a $39,000 increase in lab supplies related to our breast cancer grant, and a $39,000 increase in travel expense. The increase in professional fees was primarily due to a $153,000 rise in legal fees. Our other expenses during the quarter ended June 30, 2019, consisted of interest expense and non-cash loss on debt extinguishment. Other expenses for the June 2019 quarter were approximately $501,000 compared to an expense of approximately $55,000 for the June 2018 quarter. We recorded government contracting grant revenue in the quarters ended June 30, 2019 and 2018. This revenue originated from work performed under two government contracts with the NIH. In the quarter ended June 30, 2019, we recorded $30,000 in aggregate revenue from our breast cancer grant, while the previous year showed approximately $150,000 in revenue from our melanoma cancer contract with the NIH. After June 30, 2019, we paid off the remaining principal balance and accrued interest on our outstanding convertible promissory notes, totaling approximately $904,000, removing that amount from our balance sheet and capitalization table. We previously paid off $100,000 of the outstanding balance during the quarter ended June 30, 2019. In terms of cash used in our operating activities, we used approximately $1,248,000 or $416,000 per month in the June 2019 quarter compared to approximately $818,000 or $273,000 per month in the June 2018 quarter. The $143,000 increase in our average monthly burn rate in 2019 was due to a combination of contractually agreed severance payments to our former CEO and President, increased professional fees, and increased clinical trial costs. Now let me provide an update on our listing situation with Nasdaq. Currently, we have two issues with the stock exchange. The first issue was meeting Nasdaq's continued listing requirement of maintaining a minimum stockholders' equity of $2.5 million. We fell slightly below that threshold on our March 31, 2019 10-K filed on July 1st and further below with our Form 10-Q filed today. Nasdaq required a plan to regain compliance by August 19, 2019. Recently, Nasdaq provided us a one-week extension, so our response is due by August 26, 2019. We are currently working on our response, which will propose a plan to raise additional capital through sales of our common stock in order to meet the minimum stockholders' equity requirement. If Nasdaq accepts our plan, an extension of 180 calendar days from the July 5, 2019 letter will be granted to evidence compliance. The second issue relates to our share price falling below the minimum continued listing threshold of $1 per share. We have until October 29, 2019, to regain compliance with this requirement by trading at or above $1 per share for 10 consecutive trading days. It is possible we will regain that status as we achieve the milestones noted by Tim, but there is no assurance that will happen. The company is also evaluating alternatives to achieve compliance if the price does not recover organically. We've included these earnings and related commentary in a press release earlier this afternoon. That release included the balance sheet for June 30, 2019, and statements of operations for the quarters ended June 30, 2019 and 2018. Our next earnings call will coincide with the filing of our quarterly report Form 10-Q in early November, 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, Operator

We will now begin the question-and-answer session. The first question comes from Brian Marckx of Zacks Investment Research. Please go ahead.

Brian Marckx, Analyst

Hi guys. Can you hear me okay?

Tim Rodell, CEO

Yes.

Chuck Fisher, Chairman

Hi Brian.

Brian Marckx, Analyst

I was jumping between two different calls, so I apologize if I missed anything that relates directly to my questions. I did hear you mention that you plan to file an IND. Congratulations on that. Just wondering in terms of timelines, do you have any idea of when you think you may have it filed?

Tim Rodell, CEO

Yes, thank you for that question, Brian. Let me just modify that slightly, the application that we will be filing because this is a device is an IDE, an investigational device exemption, but it's the device equivalent of an investigation or new drug application. As you probably know, these documents are extensive, containing massive amounts of preclinical data, manufacturing information, quality information, and clinical trial plans. So they are quite a project. We are very far along in that, and I’m not going to say exactly when we’re going to file, but I will say that it’s fairly imminent. We’re talking about weeks, not months or years.

Brian Marckx, Analyst

Okay, great. Yes, and I apologize, I meant IDE, not IND. Is it your sense that given the safety data that you have, not necessarily although in cancer, but you have a reasonable amount of human data, that it is approved that you can go straight to a larger study than Phase 1. Could you start with Phase 2?

Tim Rodell, CEO

I would say the answer to that is theoretically yes, but I think from a development perspective, it would be inadvisable. The reason I say that is that while as a physician, I've reviewed all of the data from the previous viral studies, it gives me a great deal of confidence about the overall safety of the device. We are moving into a new patient population, into a new clinical setting with different patients and in different hospital-type settings than we've treated in the past, bringing additional complexity to the equation. The second point is that as I mentioned earlier, we are intervening in a process that no one's ever intervened in before, creating safety questions. While we've been removing viruses with the Hemopurifier, it's the same device and we've presumably been removing exosomes from these same patients, we just haven’t been looking at them. So while I don't have particular new safety concerns for these populations, we need to learn a lot from the first few patients. It's vital to understand not only safety but also the percentage of exosomes we can clear, what the important exosomes are, and what the targets should be to ensure therapeutic benefits in larger trials. So, while we could jump to a larger trial, it's prudent to first gain experience with a small number of patients before moving quickly to larger trials.

Brian Marckx, Analyst

Okay, great. That's all I have. Thanks Tim.

Tim Rodell, CEO

Thank you, Brian.

Operator, Operator

The next question comes from Darrell Patrick of S J Wolfe Investments. Please go ahead.

Darrell Patrick, Analyst

Hello. Is the Hemopurifier very similar to what they would use in kidney dialysis?

Tim Rodell, CEO

It’s a good question, Darrell, and thank you for dialing in. It is, if you were to stand in a room and look at the two devices—the Hemodialysis cartridge and the Hemopurifier cartridge—they would look similar. They are large plastic cartridges through which you can filter blood. However, what the Hemopurifier does is categorically different from what a dialysis cartridge does; a dialysis cartridge is capable of removing fluid and toxins in patients who are in renal failure, while the Hemopurifier takes blood and passes it over a matrix with a protein that binds to viruses and exosomes. So, physically they are similar pieces of equipment, but their functionalities are very different.

Darrell Patrick, Analyst

Okay. Then the secret sauce is what's in the capsule as opposed to the capsule itself?

Tim Rodell, CEO

I think that's a fair statement. Yes, the actual piece of plastic we are using is utilized in various applications. So yes, the secret sauce is what we put into that cartridge that allows it to clear out viruses and exosomes.

Darrell Patrick, Analyst

Okay. How long does an individual have to be on that system?

Tim Rodell, CEO

Well, we will learn a lot about that once we start using it in the clinic. But basically, it's on the order of four to six hours.

Darrell Patrick, Analyst

Okay. And then you haven't determined exactly how often they'll have to do it. Is it an everyday thing?

Tim Rodell, CEO

No, it's not an everyday thing. Initially, we’re looking at combining the clearance of exosomes using the Hemopurifier with other drugs that are employed in cancer patients. Essentially, patients go to an outpatient infusion center, are hooked up, and receive their drugs in this setting. We’ll be administering the Hemopurifier prior to the administration of one or more drugs, so it will share a schedule similar to chemotherapy treatment.

Darrell Patrick, Analyst

You mentioned that it could be used in transplant patients?

Tim Rodell, CEO

There are several areas where it could be applied and where exosomes could influence outcomes. One of the areas we are especially interested in is the role of viruses in organ transplants. As you may know, many patients who would otherwise be organ donors might be infected with viruses like Hepatitis C. Until recently, that was a contraindication to transplanting their organs. Now that effective drugs for Hepatitis C exist, these organs are sometimes transplanted, but the costs for these drugs can exceed $100,000. We’re keen to explore using the Hemopurifier to clear Hepatitis C in organ donors and potentially in organ transplant recipients. Another common cause of transplant failure is a virus called Cytomegalovirus or CMV, which we have data indicating can also be cleared by the Hemopurifier. This is another area we’re looking at: can we improve the outcomes of transplanted organs by clearing Hepatitis C from donors or clearing viruses like Cytomegalovirus and potentially others in recipients at the time of transplant.

Darrell Patrick, Analyst

Okay. And on encephalopathy, you mentioned in the reports that many people who suffer from it are former football players who have sustained repeated head impacts, but there are other reasons for encephalopathy. Would the Hemopurifier be equally effective in those situations?

Tim Rodell, CEO

To clarify, our current focus on chronic traumatic encephalopathy is diagnostic, utilizing exosomes as markers. We do not currently explore the therapeutic use of the Hemopurifier in that setting or in other encephalopathies, including diseases like Alzheimer's or Parkinson's. It's possible, but that would be a focus for future research.

Darrell Patrick, Analyst

Okay. Thank you very much.

Tim Rodell, CEO

Thank you.

Operator, Operator

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

Tim Rodell, CEO

Thank you, everyone again for dialing in. We appreciate your continued interest and look forward to keeping you informed as we move our development programs forward. From my perspective, there's a significant amount going on in the company today that I'm very excited about, and I look forward to sharing more details about our progress. So thanks again for participating, and we look forward to continuing the conversation.

Operator, Operator

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