Aethlon Medical, Inc. (AEMD) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the Aethlon Medical Incorporated Fourth Quarter Earnings Conference Call. 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 conference is being recorded. I would now like to turn the conference over to Brad Edwards. Mr. Edwards, please go ahead.

Thank you, operator and good afternoon everyone and welcome to Aethlon Medical's fiscal 2016 fourth quarter and full year conference call. Hosting the call today are Aethlon’s Chairman and CEO, Jim Joyce, as well as the Company’s CFO, Jim Frakes. Mr. Joyce will provide an overview of Aethlon’s strategy, clinical testing status and recent developments. Mr. Frakes 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 Mr. Joyce, 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. Forward-looking statements involve risk and uncertainties that can cause actual results to differ materially from those anticipated or suggested by such forward-looking statements. Statements containing words such as may, believe, anticipate, expect, intend, plan, project, estimate, or similar expressions constitute forward-looking statements. Factors that may contribute to such differences include without limitation risk related to the Company's ability to develop and commercialize its products, the ability to fund and complete clinical testing of the Company's products, the Company's ability to raise working capital if and when needed, the Company's ability to protect its intellectual property, the impact of changing government regulations on biomedical devices, the ability of the Company to meet the milestones contemplated in its contract with DARPA and other risk factors. The foregoing list of risk and uncertainties is illustrative, but is not exhaustive. Additional risk factors can be found under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year ended March 31, 2015 and in the Company's other filings with the Securities and Exchange Commission. For a more detailed discussion of the risk and uncertainties that could cause actual results to differ materially from any forward-looking statements, please see the Company’s public filings which are all available on Aethlon’s Web site. Now, with that, I will now turn the call over to Mr. Joyce.

Thank you, Brad and good afternoon everyone. A little less than a year ago, when public market stature was elevated when our securities began trading over the NASDAQ Stock Exchange, as of Monday, our shares also became included as part of the Russell Microcap Index. This event should further elevate our stature amongst institutional investors and index funds who had asked to benchmark against the U.S. Russell Indexes. We also announced yesterday that we entered into a $12.5 million after market financing and to enhance our balance sheet office going forward. The all new offering being conducted at prevailing market prices, there are no warrants being issued and the investment banking commission is limited to 3% of proceeds. While these are certainly positive market trends, I feel greater emphasis should be placed on the emerging evidence that has been validating novel scientific discoveries that believe should we establish years ago. As an example, in June of plus 2004, the industry to develop treatment countermeasure against bio-terror and pathogen threats was launched in the passage of project bio-shield. Our belief at the time that we highlighted in my own congressional testimony is that it was not possible to align a drug or vaccine with each and every pathogen threat and that in the case with bio-terror threats, it was a futile proposition for expected drug and vaccine countermeasures to be developed against unknown pathogens, to provide some added perspective our government spent $80 billion alone on bio-defense efforts since the year 2001. Regardless, the passage of time and the limited advancement of drug and vaccine countermeasures have validated our original position. Today, the United States Department of Health & Human Services has expanded of our government’s focus towards broad spectrum countermeasures that can cost the boundaries of different pathogen threats. Based on clinical and preclinical study outcomes, we believe our Hemopurifier is the leading and perhaps only true broad spectrum countermeasure being advanced in FDA approved studies today. Today, we’re almost half way through the completion of a 10-patient feasibility study that serves as our clinical safety challenge for Zika virus, Dengue, SARS, MERS, Ebola, Chikungunya, pandemic influenza and other acute viral pathogens that are not addressed with proven antiviral drugs. Upon successful completion, which we are targeting for year-end, we will have an opportunity to file a pivotal IDE submission with the FDA related to a chronic viral pathogen such as HIV or Hepatitis C where it is feasible to conduct controlled human efficacy studies. The completion of the study will also set the stage for us to submit an IDE to treat cancer. As it relates to cancer, we made a scientific bet in 2006 with cancerous tumors release particles known as Exosomes that we believe to play a significant role in cancer progression. We also began to demonstrate that our Hemopurifier had captured these particles based on our observation of Exosome were cloaking themselves with a surface structure that was the basis of our Hemopurifier’s ability to capture viruses. They accurately assess that viruses in Exosomes was deploying this structure as a means to abate surveillance in the immune system. Unfortunately, the consensus of the medical community at the time was that Exosomes were nothing more than cellular degree and had no biological function. Fast-forward 10 years and researches from around the globe now recognize that tumor derived Exosomes play a multitude of deleterious roles in cancer progression, including the promotion of metastasis, which is attributed to 90% of cancer deaths. We believe our Hemopurifier can reduce the presence of circulating Exosomes and synergistically combine with cancer treatment regimen there is a means to optimize patient benefit without adding additional drug toxicity. It seems the medical community is beginning to appreciate this strategy as our 2012 publication entitled Exosome removal of the therapeutic adjuvant in cancer has now been citing in 54 different scientific publications. Beyond cancer Exosomes that were once considered to be studied as a breed have also been identified to contribute to bacterial and viral pathogenesis, the progression of Alzheimer’s, ALS and Parkinson’s diseases, the spread of prion proteins, as well as numerous inflammatory conditions. In addition the patents already issued or pending, we disclosed on June 14th, that our pioneering research in the field of exosome biology is rewarded with the issuance of the U.S. patent that is not limited to anyone disease conditions, yet adds broad therapeutic and diagnostic implications. We believe this patent will be the impetus for new products as well as potential collaborations and partnerships. In regard to diagnostics the genesis of our efforts were driven by the simple reality that a functional assay to isolate exosomes is in exist to allow our research team to validate exosome capture in our original Hemopurifier studies. So out of need, our team created ELLSA, which is an assay that leverages the infinity capture mechanism within our Hemopurifier as the basis for a diagnostic platform to isolate exosomes from a wide range of bodily fluid and disease conditions. To advance that ELLSA in our other diagnostic related endeavors we established Exosome Sciences which operates today at the majority owned assets of Aethlon Medical. To demonstrate the clinical potential of ELLSA, we disclosed on May 4th, the results of a preliminary investigational study that indicates the ability to diagnose HIV infection through the identification of an exosomal biomarker in the urine. In the study, researchers at The Morehouse School of Medicine utilized our proprietary ELLSA platform to isolate exosomes from the urine followed by an antibody step to detect HIV-specific exosomes. As a result, the Morehouse collaborators reported that this protocol was able to identify HIV-specific exosomes in 111 HIV-infected individuals, but not in the urine of 35 HIV negative control subjects. Beyond being a simple non-invasive strategy to diagnose HIV infection, we believe our ELLSA platform technology could be deployed across a broad-spectrum of viral pathogens and potentially other disease conditions. Our Exosome Sciences subsidiary also discovered what is believed to be the first candidate biomarker to diagnose the neurodegenerative disease, Chronic Traumatic Encephalopathy or CTE in living individuals. We trademarked this exosomal biomarker under the name TauSome. If you're not familiar with CTE, it is a disease condition associated with repetitive head trauma and at present can only be diagnosed through post-mortem autopsy. In a study of 78 former NFL players and 16 former non-contact sport control athletes, TauSome levels were observed to be approximately 9 times higher in the NFL group as compared to the control subjects. Additionally, TauSome levels in the NFL group also significantly correlated with cognitive decline based on memory and psychomotor tests. We are now preparing to initiate follow-on TauSome testing as part of a $16 million grant program that was awarded by the NIH through collaborators at the Boston University CTE Center as a means to support the advancement of tests that could diagnose CTE in living individuals. Now before I hand the mic off to our CFO, Jim Frakes, I want to point out that unlike most clinical stage organizations, our value proposition has never been relied on a clinical advancement of a product that targets the mechanism underlying a single disease indication, instead we established a cohesive pattern and evidence-based foundation that allows for the possibility of industry success across a multitude of disease boundaries, a foundation that provides us with multiple short-term goals to resolve unmet clinical needs in cancer, infectious disease and neurological disorders. With that said, I would like to introduce Jim Frakes.

Thanks, Jim. Given our strategy and the stage of our development as a U.S. clinical progression story, we are not focused on the generation of revenues at this time. However with that said, in the fiscal year ended March 31, 2016, we generated revenue of approximately $887,000 which was related to work performed under our government contracts with DARPA. This compares to approximately $762,000 in government contract revenue in the prior fiscal year. We have worked with DARPA since September 2011 and our agreement runs through September 2016. Now that DARPA has exercised its option to extend the contract through the final year. We are working with DARPA to find other agencies that can continue the development work in the dialysis like therapeutics projects, but there can be insurance that other agency will continue that project. At March 31, 2016, we had a cash balance of approximately $2.1 million. Our cash position will continue to be used to fund our FDA-approved feasibility study in the U.S. and our operations. And as Jim Joyce noted earlier, we recently entered into an agreement for a $12.5 million after-market financing arrangement. This arrangement will allow us to raise capital at our discretion at prevailing market prices without the need to issue warrants or to issue shares at a discount to market prices. And given our current cash burn rate of approximately $1.1 million per quarter, the combination of the $12.5 million after-market financing arrangement and our existing cash allows considerable profitability for the Company. Our consolidating and operating expenses were $5.3 million in fiscal 2016 compared to $4.8 million in fiscal 2015, an increase of approximately $500,000. This increase was due to increases in professional fees of $687,000, in general and administrative expense of $22,000, which were partially offset by $193,000 decrease in payroll and related expenses. A $687,000 increase in our professional fees is due to a combination of factors including the increases in our U.S. clinical trial expenses, our scientific consulting expenses, our business development expenses and increases in our legal fees which is largely related to work on financings and related registration saving filings. A $22,000 increase in general and administrative expenses primarily arose from a combination of $100,000 in NASDAQ listing fees and an increase of $70,000 in conference related expenses, which were largely offset by decreases in G&A expenses at Exosome Sciences and in our DARPA related G&A expenses. The $193,000 decrease in payroll and related expenses was principally driven by the $258,000 decrease in the payroll and related expenses of ESI due to headcount reductions and $214,000 of production in our stock-based compensation expense. Which were partially offset by a $279,000 increase in payroll and related expenses of Aethlon Medical. We had other expense of $574,000 in fiscal 2016 compared to $2.6 million in fiscal 2015, a decrease of $2.026 million. That decrease was largely due to a $2.8 million charge for a loss on debt conversion in fiscal 2015 with no comparable expense in fiscal 2016. So overall the net loss for fiscal 2016 was $4.9 million or $0.66 per share compared to a net loss of $6.8 million or $1.22 per share in fiscal 2015. For a more detailed review of the movements in our operating expenses and in our balance sheet, I would like to refer you to the earnings release that we put out after the close today, or to our Form 10-K which we will file later on today. And now Jim Joyce and I are happy to take any questions that you may have.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Marckx with Zacks Investment Research. Please go ahead.

In terms of the U.S. feasibility study, which is in -- have played a [CD]. Can you talk about sort of the transition I guess from that feasibility study to an IDE approved study? And then in terms of the IDE approved study, you mentioned Hepatitis C and HIV. Are those two potential indications, indications that you would see as an eventual indication that you would seek for U.S. FDA approval?

Hi Brian this is Jim Joyce. I appreciate your question. First off I want to clarify that in this feasibility study the FDA asked us to enrol health compromised dialysis patients infected with a viral pathogen of which the most prevalent viral pathogen in that patient population is Hepatitis C. It is not necessarily the first thing in advancing a Hepatitis C therapy, it is -- the study serves as a model to advance the Hemopurifier as a countermeasure against a wide range of viral threats including some of the bio-terror and pandemic threats that I mentioned. Unfortunately, for many of those threats it's not feasible to conduct controlled human efficacy studies. So, moving forward to larger market chronic disease conditions, we have an opportunity once we complete the study if successful to make a decision as to what pivotal study as a CDRH Class III medical device, what pivotal studies we might want to pursue. It could be within HIV, it could be within Hepatitis C, but we’re not really forced to make that decision today and I don’t think at this point in time based on emerging new therapies in Hepatitis C and observations of opportunities and other potential opportunities in other chronic viral pathogens, I don’t think we want to force ourselves to make that decision today. But we have two pathways upon completion, one is through pathway in such as Humanitarian Use Device, pathways for indications that affect fewer than 4,000 people each year in the U.S. and that would be based on safety, the demonstration of capture of virus through a [B2S] studies of which it demonstrated capture of a very wide range of these viral pathogens, and these are pathogens where there is no follow-on efficacy studies from a obvious humanitarian standpoint. And then pivotal studies directed towards the chronic viral pathogen. And as mentioned, we would also expect to initiate our first IDE submission upon conclusion related to a cancer indication and that would be a safety study not an efficacy study.

How big do you envision the cancer safety study?

We boys have envisioned it at -- again I cannot predict responses from FDA but our intent is to file an IDE that would look very similar to the infectious disease protocol that’s already been approved for us by FDA. So we would hope that it would be a small study, it would be an indication that we will see something at the very hard to treat disease condition, but has a biomarker that we might be able to look at during the safety study to assess potential benefit or observation of potential benefit. So there is a number of different options in that regard.

Jim in terms of Zika obviously it's a headline grabber today, is there any work that you can do towards Zika prior to the U.S. feasibility study completing I guess in terms of sort of proof of concept or feasibility that the Hemopurifier could be efficacious in Zika?

Sure, so I guess the best example I can use to the reference to your question is the example of the work that we did, preclinical work in Ebola where we worked with researchers at CTC in New SandRidge to validate the capture of multiple strains of Ebola and those validations became very important in combination with our previous human studies overseas that demonstrates safety and efficacy observations in HIV and Hepatitis C. That became very important when the opportunity surfaced to treat a patient at Frankfurt University Hospital in Germany of which we treated a comatose Ebola infected physician with multiple organ failure and had a remarkable response through a Hemopurifier therapy. It was that in-vitro data that we believed really provided us a pathway to treat the patient. So in the case of Zika, the history of safety studies, overseas efficacy observations being in clinical stage company under the banner of an FDA approved study in the United States. We believe in combination where pre-clinical data that demonstrates and validates our cartridge capture Zika virus potentially would give us a pathway to treat Zika on an emergency use basis here in this country. We also recognized that based on our studies we are not just limited to being a potential therapeutic countermeasure. The work that we've done in exosome biology puts us in a position if you reflect back on what I was pointing out related to our HIV study where we were able to isolate an exosomal biomarker underlying HIV in urine. We believe that's a possibility for a wide range of viral pathogens and could be a broad spectrum platform much like our Hemopurifier is from a therapeutic standpoint. So, we're also interested in expanding our diagnostic opportunities to may be looking at exosomal biomarker in Zika virus as well.

Is there enough I guess known about the Zika virus to -- that suggests that eliminating the virus after somebody's already been infected will eliminate or at least reduce I guess the effects of the virus such as a woman bearing a child with a small head?

In regards to microcephaly, I don't think there is enough really known about the virus. We're continually monitoring new publications about the virus, many of -- historically the information about the virus was driven by overstrains that were studied in the virus and this is a briefly mutated strain. So, it's important for researchers to have access to the active stream that's in circulation, but in terms of understanding viral pathogenesis when there is high levels of -- where you need the help time the best way to be treat, I don't think the information is really that well defined other than to be assumptive that virus is going to be in the circulatory system that's the pathway for viral replication to spread the virus throughout the body and spread it to other organs, so that's the area where you would always like to intercede. There is some very interesting research being conducted, a group out of Pittsburgh in terms of trying to understand how microcephaly occurs. A group at Pittsburgh recently published a paper that indicated a potential exosomal component and we know that exosomes which -- this wasn't known even two years ago, we know in a variety of other viral pathogens that exosomes transfer micro RNA and RNA which is the machinery required for viral replication we know that exosomes transport immunosuppressive cargo in viral pathogens and the publications that the Pittsburgh team indicated a release of exosomes were transporting viral infection across the placenta to infect the fetus and that perhaps that is the transmission pathway from the mother to the fetus that's causing microcephaly. But again, people are still working to validate that component of infection. So, in reality outside of the microcephaly issue and some other secondary conditions, the Zika virus doesn't seem to be extremely virulent like Ebola virus. However, for pregnant mothers this is a very significant issue. It appears most recent publication this past week, it appears that in most people the virus resolves itself in five to six days, but apparently in infected women it can last for 70 to 85 days. And so it could be this infection goes pass and back and forth across the placenta through exosomes between the mother and the fetus.

The next question comes from Yi Chen with H.C. Wainwright. Please go ahead.

My first question is regarding the feasibility study. What is the definition of being successful here, so if we’re looking at the viral load reduction at what level can we consider this feasibility study, a successful study?

Hi Yi thanks for your question. As a feasibility study, the primary endpoint is to demonstrate safety that the technology was well tolerated. It’s actually a protocol that is extremely similar to the first protocol we ever ran in humans overseas. In terms of secondary endpoints, we have the ability to look at viral load reduction, but we’re also -- we think the more accurate secondary endpoint is the protocol that we established basis of request of FDA and that is what is called an allusion protocol. Where we can actually quantify viruses captured in the cartridge by eluding the biological fluid out of the cartridge after treatment quantifying what was captured in the cartridge is no longer circulating in the patients. And we think that endpoint is really, even though this is a feasibility safety study, there is a bridge to pivotal studies. We believe that endpoint very much lines up with the endpoint that we’re pursuing as a label indication and that is for the single use removal of viral pathogen from blood.

Okay. Considering, there is no specific virus designation in this feasibility study for the future IDE, will the IDE cover arrange viruses and will only cover in specific virus. What’s the FDA perspective of that?

Yes. The next step moving the IDE to a pivotal study, we will need to define what’s viral indication we might want to pursue for commercialization on a large-scale basis, but the original premise of the establishment of this study in our discussions and negotiations with FDA was to establish the safety step to advance our technology it’s a broad spectrum countermeasure against viral pathogens especially those that are considered bio-terror and pandemic threats. And I think most people don’t recognize there is well over 300 different viruses that are known to be infectious to man and obviously these don’t includes viral pathogen that can be genetically modified to be agents of bio-terror, but the reality is, there is only -- I think as latest count nine of those pathogens that address with anti-viral drug agent. So we believe our device in acute viral pathogens that can emerge naturally through mother-nature or be released as agents of bio-terrorism. We believe our countermeasure is unique in the leading broad spectrum countermeasure and a primary aspect of this study is to advancement in that regard and with great hope at some point in time in the future that the product might be in the strategic stockpile to treat people that could be effective for these threats in the future.

So you are suggesting that eventually when the product is approved, the label can actually cover, a wide range of our viruses not just a specific virus?

That is correct.

Okay. A follow-on question, so do these patients in the trial also receive other anti-viral therapies in addition to the dialysis as Hemopurifier?

No, they are not. And in fact if you look at the inclusion and exclusion criteria as part of the inclusion criteria patients can’t be on anti-viral drug agents.

Okay. Do you plan to release any sort of interim data or you will wait until the full data set for the 10 patients are available?

I mean first off we had a good fortune having what, I think would be considered by most of you a pretty small study in terms of a total patient population of 10 patients. We don’t, at this point in time, we don’t intend to release interim data just based on the data is not being statistically significant based on its overall patient population. But we do hope we get the study wrapped up towards year-end.

Okay. Final question, just to clarify the ELLSA platform is different from the Hemopurifier platform, right?

It is and it was really driven by the need of our research team to be able to isolate and quantify the presence of exosomes in our original Hemopurifier studies to validate that the Hemopurifier could capture these particles. And at that time there really was not a functional assay or isolation techniques that seem to be effective in isolating these particles and because of that early work that's why we've been able to get the patent that we disclosed this month, as well as other patents issues that we think provide us a very and a new position in the exosome biology field which as many are watching unfold very rapidly into an industry, but that original research the assay, the ELLSA assay are researches -- that is the [affinity left in that side] inside of our Hemopurifier we call it -- it's called galanthus nivalis agglutinin we call it GNA and they embedded it on a 90 day trial plate with the goal to be able to isolate exosome populations out of bodily fluids and then -- if we want to get really specific to a target we can then overlay an antibody specific to the disease targeted if that antibody is able to identify a surface marker on the exosome.

So on the ELLSA platform the CTE is the primary indication and that program is supported by the grant the 16 million grant right?

On the ELLSA platform, I would share that the most -- the best demonstration would be of its capability has been the identification of the exosomal biomarkers in HIV patients in urine. The research related to the discovery of an exosomal biomarker TauSome and the CTE or high risk CTE individuals then in a self study that was not -- that has not yet been conducted on our ELLSA platform. We used other techniques to be able to identify and quantify, the objective long-term is to breakdown the techniques down to a very simplistic approach like our ELLSA platform and was actually also files patents in advance related to taking it down to simplistic levels as simple as a lateral flow assay which could be the basis of a telemetric strip test.

Yes.

So that really simplifies that where individuals that actually have the potential to test themselves for the presence of these participles at certain levels.

So what are the next steps that we can expect for the ELLSA platform, what's going to happen next?

Yes. The ELLSA platform I think we're going to want to see that we can replicate these results in another viral pathogen. We're also looking very closely given the benefit of so many researchers now working in the exosome field there is multitude of new publications hitting every week. And we're really looking for discoveries related to exosomes that are disease-specific that carry a specific market on their surface, where we can replicate the ELLSA stats like we did in HIV to be able to identify exosome specific to other diseases and that is unique pathway compared to a lot of the exosome research that's going on when we have not as much specificity towards capturing exosomes with a disease specific surface marker as there is capturing exosomes and exploring the content that has the potential for liquid biopsy an effort area where our IPs is beneficial as well. But for right we like in terms of our own internal work and advancements, we really like the simplistic of being able to isolate the simplistic strategy of isolating an exosome that is carrying a disease specific marker on its surface as a simple test.

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

Thank you. Again, as I referenced, we worked very hard this past year to elevate our market stature. We are very appreciative to our long-term shareholders who stood by our side during many year from the returning of the over the counter market, but again is a good year we now have listed in the NASDAQ, our shares have already been now included in the Russell Exchange. We provided ourselves access to capital resources on terms that our at-market without warrants and this is going to be a very effective means to fund our endeavors going forward. And I think as you've probably heard, we've made some best as years past that probably is anything towards skeptical of, but we persevered we never wavered from our belief and now we believe the coming full circle is becoming the basis of a new industry. So I appreciate everybody's time today and we look forward to catching up on our next quarterly call. Thank you.

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