Aethlon Medical Inc Q2 FY2020 Earnings Call

Good afternoon and welcome to the Aethlon Medical Second Quarter Fiscal 2020 Earnings and Corporate Update 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 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 second 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 second quarter ended September 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 statements, Aethlon's CEO, 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 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 Tim Rodell, Aethlon Medical's CEO. Tim?

Thank you, Jim, and thank you, everybody, for calling in late on the Friday afternoon. We thought that it would be better to have the call on Friday, rather than on Halloween when some of you with school-aged children would be trick-or-treating. So, we appreciate you taking time to hear this update. At Aethlon, we are continuing to develop our proprietary device, the Hemopurifier, which is the first-in-class therapeutic device designed for the single-use depletion of circulating viruses and cancer-promoting exosomes. The Hemopurifier was previously designated a Breakthrough Device by the FDA for the treatment of glycosylated viruses, including Ebola, other hemorrhagic fever viruses, and virtually all viruses that affect humans. In late 2018, the Hemopurifier received a second breakthrough designation for treating individuals with advanced and metastatic cancer, who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in which exosomes have been shown to participate in the development or severity of the disease. So, we have two separate Breakthrough Device designations granted by different divisions at the FDA, recognizing the potential for the Hemopurifier in treating multiple diseases. We've had a very eventful quarter. We previously announced that we were preparing for the initiation of clinical trials in patients with advanced and metastatic cancer. This work follows several years of experience in viral disease, representing over 400 Hemopurifier treatments in patients with various viral infections, predominantly Hepatitis C, establishing a strong safety database for the Hemopurifier. In June of this year, our team, including myself, Dr. Chuck Fisher, who has joined us this afternoon, and Lisa Boswell, our newly recruited Head of Quality Affairs and Regulatory, met with the FDA in person in Bethesda to discuss our development program for the Hemopurifier in cancer. Following that meeting in September, we filed an Investigational Device Exemption or IDE application with the FDA to initiate clinical trials in cancer. That IDE was approved on October 4th, less than 30 days after filing. We have to submit a final informed consent document to the FDA prior to initiating trials, and that informed consent will be approved by the Institutional Review Board at the medical center where we're going to conduct the trial. Now, I'd like to digress for just a minute and take a couple of minutes to comment on the review process in the context of our Breakthrough Device designation. There has been somewhat of a view out there that the breakthrough designation is something that was generated by the FDA to convince people that they were moving quickly and provide a marketing ploy for companies; our experience underlines that this is anything but the case. In this situation, we filed our IDE in early September, and we received the first feedback from the agency three days later. During the subsequent 25 days, we received six additional rounds of comments and filed seven amendments in that time. The IDE was then approved in less than the 30 days mandated after filing. In my over 30 years of experience in drug and biologics device development, this is absolutely unprecedented. Prior to the breakthrough designation in the legislation that supports it, the standard process would involve filing an IND or an IDE and waiting patiently for 29 days, at which point you would receive a call or email from the FDA saying either you can start your trial or you cannot. This type of interactive back-and-forth collegial communication with the agency is exactly what was intended by the legislation that supports the breakthrough designation. And I can tell you, it works. We are now in the process of starting a clinical trial, which is the earliest trial in the device world, an Early Feasibility Study in patients with advanced and/or metastatic cancer of the head and neck. As you may know, head and neck cancer is a deadly disease, and patients who are not candidates for definitive surgery or radiation have very few options and limited survival. Even patients who do have surgically or radiation amenable disease generally recur quickly or develop second primary cancers. So, this is one of the solid tumors in which we've made the least progress in medicine. Recently, one of the newer immuno-oncology agents, also known as checkpoint inhibitors, called pembrolizumab or Keytruda from Merck was approved for the initial treatment of patients who present with disease that is not amenable to surgery or radiation. Keytruda represents a meaningful advance in the treatment of this disease; however, unfortunately, the majority of patients do not respond to this drug, and those who do respond add only months, unfortunately not years, to their life expectancy. Recent studies from collaborating laboratories and other institutions indicate that a primary mechanism through which tumors are resistant to Keytruda and similar drugs is through the shedding of immunosuppressive exosomes, the exact particles targeted for clearance by the Hemopurifier. With this in mind, our initial trial in head and neck cancer will investigate the combination of Keytruda with a preceding treatment using the Hemopurifier to decrease the number of circulating immunosuppressive exosomes. This trial will be conducted at a major cancer center in the United States, and we will provide more details about the trial when it is launched. I should mention before briefly asking Chuck to comment that we continue to pursue the development of the Hemopurifier for viral infections, particularly life-threatening hemorrhagic fever viruses like Ebola. We will opportunistically treat patients with these diseases and investigate other potential viral targets in the transplant area to improve the intake of translated solid organs. We have not abandoned the viral field; we continue to develop in that area, but we also view cancer as a clearer and more rapid path to potential approval for the Hemopurifier. I'd like to stop for a moment because Chuck Fisher, Dr. Charles Fisher, our Chairman, has been intimately involved with the development program. Chuck recruited me to the Company last December in a management restructuring. We share a common philosophy about drug and device development and about how to run an organization. Our relationship is quite different from the typical relationship between a Chairman and a CEO, and Chuck has been a meaningful part and a trusted advisor for me throughout this process. So, Chuck, do you want to make any comments on the regulatory and development process since you’ve been closely involved in it?

Sure. Thanks very much, Tim, and good afternoon, everybody. Again, thank you for taking this call late on a Friday afternoon. In both Tim's career and mine, we have succeeded in actually getting drugs and/or devices approved in this space. When we looked at making the management changes, I wanted to bring in someone who had a history of turnaround and a passion to seek medical firsts and make a difference, and Tim, we found a real winner. The breakthrough therapy designation is dramatically different from what we've seen in the past. Having a vibrant dialogue with the FDA, both over the phone and in person during the submission of the IDE is extraordinarily unique and very productive. Tim has recruited some very key and strong individuals to our small team, and we are being financially rigorous in watching our situation. However, we need key people. An IDE of this quality in a larger company would typically involve 40 to 60 people and take six to nine months to achieve. Yet, our six-person team accomplished it in a very short timeframe. I’d like to emphasize that we not only expanded the target opportunities but believe that moving into the cancer regulatory process will align us with what has become the number one treatment for cancer. I think this also enhances our future opportunities, and we hope that over time, we can prove that we have an additive effect. I’m very pleased and honored to serve with our team. Back to you, Tim.

Thanks, Chuck. Now, I'd like to spend a few minutes talking about Exosome Sciences before I turn it over to Jim to review the financial data for the quarter. Exosome Sciences, as many of you are aware, is our majority-owned subsidiary and represents the diagnostic side of our business. We had two major developments in the last quarter on this front. First, we announced a significant collaboration with the Precision Medicine Group, led by an old colleague of mine at Hoag Hospital Systems in Newport Beach, California, to identify exosomal markers in patients and families at risk for various cancers. Hoag is a large private hospital group with a busy genetics and oncology practice, resembling a university center, heavily devoted to clinical research. Through this collaboration, we aim to advance our work in liquid biopsies, identifying blood-borne markers using exosomes that will predict the onset and progression of various cancers. We are making progress in that collaboration and will provide more updates in the near future. Perhaps more importantly, we have been awarded a $1.86 million two-year contract from the National Cancer Institute under the Small Business Innovative Research program to develop a benchtop instrument for the isolation and characterization of exosomes in cancer. This Phase 2 contract followed a successful completion of a Phase 1 contract in the same area, demonstrating both the importance of the exosome story to the NCI and their confidence in our team. I also received an offer this morning for a market study titled “The Exosomes Market: Identifying Hidden Gems.” This indicates growing attention from the business and commercial sectors. Over the last decade, exosomes have become a critical area of research in cancer, reflected in the number of significant articles published in this field. We hope to share more about our progress in the coming months. I will stop here and hand it over to Jim to present the financial results for the quarter. Jim?

Thanks, Tim, and good afternoon again, everybody. Our net loss was approximately $1.7 million or $1.29 per share for the second quarter ended September 30, 2019, compared to a net loss of approximately $1.4 million or $1.17 per share for the quarter ended September 30, 2018. Our consolidated operating expenses for the quarter ended September 30, 2019 were approximately $1.7 million compared to approximately $1.35 million for the quarter ended September 30, 2018. This increase of approximately $350,000 in 2019 was due to an increase in professional fees of $360,000 and in general and administrative expenses of $71,000, which were partially offset by a decrease in payroll and related expenses of $75,000. The increase in professional fees in 2019 was primarily due to a $279,000 increase in legal fees, a $69,000 increase in accounting fees, and a $65,000 payment to the University of Pittsburgh, a subcontractor on our SBIR breast cancer grant. The increase in legal and accounting fees related to increased activity in our registration statement filings and in intellectual property actions. The increase in general and administrative expenses in 2019 was primarily due to a combination of a $21,000 increase in our clinical trial expense, primarily costs associated with manufacturing Hemopurifiers for an expected clinical trial in the cancer space, and a $45,000 increase in our lab supplies expense related to the SBIR breast cancer grant and lab work for the IDE application. The decrease in payroll and related expenses for the quarter ended September 30, 2019 was due to a combination of a $65,000 reduction in cash-based compensation expense and a $10,000 decrease in stock-based compensation compared to the same period in 2018. Other expense for the three months ended September 30, 2019 consisted of interest expense and a loss on share warrant exchanges; for the three months ended September 30, 2018, it consisted only of interest expense. Other expense for the three months ended September 30, 2019 was approximately $4,000, compared to other expense of approximately $55,000 for the same three months in 2018. At September 30, 2019, we had a cash balance of approximately $800,000. Since then, we raised approximately $473,000 under our at-the-market facility and billed the National Cancer Institute for approximately $207,000 under our Phase 2 melanoma cancer contract with them. In July 2019, we paid off the remaining principal balance and accrued interest on our outstanding convertible notes, amounting to approximately $904,000. This amount is now removed from our balance sheet and capitalization table, having previously paid off $100,000 of the outstanding balance on the notes during the June 2019 quarter. During our last earnings call on August 14th, I updated our listing situation with NASDAQ. At that time, we had two issues with the exchange. First, our share price fell below the minimum continued listing threshold of $1 per share. We had until October 29, 2019 to regaim compliance by trading at or above $1 per share for 10 consecutive trading days. We achieved that goal as the majority of our shares outstanding voted in favor of a reverse stock split at our annual meeting on October 14, 2019. Our Board of Directors then approved a 15:1 reverse stock split effective as of October 14, 2019. We are pleased to report that on October 29, 2019, NASDAQ notified us that we have regained compliance with the minimum bid price continued listing requirement. The second issue was meeting NASDAQ's continued listing requirement of maintaining a minimum stockholders’ equity of $2.5 million. We fell slightly below that threshold in our March 31, 2019 10-K, filed on July 1, and fell further below in our subsequent 10-Q filings. NASDAQ required that we file by August 26, 2019 a plan to regain compliance with that requirement, which we provided on that date. Consequently, on October 3, 2019, NASDAQ granted us an extension of time to regain compliance with their continued listing requirement of a minimum $2.5 million of stockholders’ equity. Under this extension, NASDAQ has allowed us until the filing of our December 31, 2019 report on Form 10-Q, to evidence compliance with their minimum stockholders’ equity threshold, subject to reporting to NASDAQ regarding our fundraising progress prior to that time. We included these earnings and related commentary in a press release earlier this afternoon. That release included the balance sheet for September 30, 2019 and the statements of operations for the three and six-month periods ended September 30, 2019 and 2018. We will file a report on Form 10-Q following this call, and our next earnings call will coincide with the filing of our quarterly report on Form 10-Q in early February. Now, Chuck, Tim, and I will be happy to take any questions you may have. Operator, please open the call for questions.

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.

Hi, guys. Congrats on all the progress. I wonder if you could talk a little bit more about the EFS study and things like -- I assume you have the site identified or has that not happened?

Yes. Thanks for the question, Brian, and thanks for calling in. The site is identified. We’ve been closely working with them for the entire time that I’ve been at the Company. They have been heavily involved in developing the clinical protocol we filed with the IDE. We haven’t disclosed the name of the site because, like all large academic centers, they also have PR groups that need to approve things. Our strategy was to announce the approval of the IDE and indication first. As we start up the study, we’ll provide more details about the site, the reasons for our choice, and more about the study design. One detail I didn't mention initially is that, like all early Phase 1 studies, the primary consideration is safety. We don’t have major safety concerns. This is the primary aspect that both the FDA and we as physicians and clinicians focus on. Because of our previous history in viral disease and the multiple times the Hemopurifier has been used, we believe safety in this patient population shouldn’t be an issue. We’ll also study the kinetics and characterization of the exosomes being cleared by the Hemopurifier and look at clinical outcomes, such as response to therapy, progression-free survival, and overall survival. As with any early study on a new indication, this will be a small trial for 10 to 12 subjects, all with advanced or metastatic head and neck cancer who are candidates for first-line Keytruda treatment. The hypothesis is that if we can clear immunosuppressive tumor-derived exosomes in these patients before administering pembrolizumab, it could theoretically increase both the percentage of patients who respond to the drug, which currently is only about 30%, as well as the duration of those responses. We will share more details as we make progress, but it was important to inform everyone that the FDA has approved the study, and our primary goal now is to initiate the trial as quickly as possible. As with any clinical trial, it must be approved by various groups at the trial site and ultimately the Institutional Review Board before we can start enrolling patients, but we are well on our way.

And maybe this is an obvious answer to this question, but just for clarity. If the EFS study is successful, should we assume that you would be looking to move to a formal regulatory program in this indication?

I think that's a fair assumption. The answer is much broader than that. We selected head and neck as the pilot setting to study the drug for several reasons. Firstly, head and neck cancer is an incredibly high-need area. Diseases like melanoma and non-small cell lung cancer have seen progress, with some patients surviving five years. However, in head and neck cancer, even patients who respond generally don’t live long-term. Secondly, available data shows that immunosuppression in head and neck cancer significantly contributes to the severity of the disease—thus, making it an optimal target area for us. Positive data from this trial will provide safety data and a semblance of clinical impact, though we cannot statistically confirm efficacy with just 10 patients. This pilot trial is the starting point for not just head and neck cancer but multiple solid tumors. We plan to collaborate with the FDA over the next year to outline our overall data development program across various indications.

The only thing I’d like to emphasize is, since it's a small trial, we shouldn’t expect anything beyond safety metrics. We will look for signals, and the degree of exosome recapture can help us characterize outcomes moving forward. However, the small sample size necessitates caution. Nevertheless, this is a critical first step that opens broader avenues after engaging in dialogue with the FDA.

Okay. Just curious about how much is known about exosomes in cancer, and if it's homogeneous—if it’s the right word to use. In the way that they act in head and neck, would they act similarly in, say, melanoma for example, or a different type of cancer? Could what you learn from this study have potential crossover to other tumors?

Yes, that’s a great question, thank you. Some malignancies have not been characterized by shedding tumor-derived exosomes. However, exosome production is a phenomenon present across all malignancies, including hematologic cancers such as leukemias and lymphomas. We have conducted extensive preclinical studies in other tumor types; about a year ago, we completed an NCI-funded grant examining exosomes in melanoma. This research demonstrated that melanoma sheds vast amounts of exosomes, and small devices similar to the Hemopurifier can capture these exosomes. We’re currently working on another NCI-funded study in triple-negative breast cancer. The bottom line is exosomes are ubiquitous in oncology, although their functions can vary by cancer. Head and neck cancers are particularly significant due to the role of exosomes in inducing immunosuppression. In other tumor types, exosomes have been implicated in chemotherapy resistance, targeted therapy resistance, and metastasis, and can contain tumor proteins and nucleic acids that can transform normal cells into metastatic cancer cells. The initial study may provide results applicable across the oncology spectrum if successful. I appreciate your insightful question.

Yes, I appreciate that. Thanks, Tim. Just one last one; I don’t want to take all the Q&A time here. Is there anybody else involved in this EFS study, or is it entirely Aethlon?

Well, it's primarily Aethlon and our academic collaborators, including both bench researchers and clinical practitioners who will care for these patients. We do have many other scientists involved, developing antibodies and characterizing exosomes through other institutions. While it’s a broad effort, the core relationship is between Aethlon and several related academic institutions.

[Operator instructions] The next question is from Ken Seel, a private investor. Please go ahead.

Yes, there's been a lot of public writings lately about the mosquito-borne virus that has killed several people. I think it's referred to as the EEE virus. Was Hemopurifier considered for any type of treatment in those circumstances?

It’s a great question, Ken. The virus you're referring to is Eastern Equine Encephalitis (EEE), which has unfortunately killed a number of people, predominantly children. We have been paying careful attention to this virus. Whether or not the Hemopurifier could be utilized for this indication is still uncertain. We have explored its efficacy with other closely related viruses, but not specifically with EEE. The practical challenge lies in the timing, as patients exhibiting life-threatening encephalitis from EEE would already have the virus in their brain. Therefore, it's uncertain whether the Hemopurifier could effectively help clear it. While it’s a potential target we've identified, we need more data to say anything definitive. However, it's crucial to recognize the potential applications of the Hemopurifier across virtually all viruses that affect humans, which include EEE, influenza, and chronic viral infections, potentially trapping them. As Chuck previously mentioned, targeting cancer may provide a faster pathway for us due to the identifiable patient population. Still, EEE remains on our radar as an area to investigate, albeit without adequate data as of now.

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

Thank you again for calling in and staying updated on the company. We believe we've made considerable progress over the last year. While we’re pleased with our advancements, we remain unsatisfied as there is much more work to do. We hope to share a lot more in the upcoming months. As I've said before, if you have questions you didn't have a chance to ask or think of later, we’re open to emails and phone calls for further discussion. As Jim mentioned, we plan to file our next 10-Q in February. Thank you, and we hope you all enjoy a great holiday season.

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