Aethlon Medical (NASDAQ:AEMD) Q1 2020 Earnings Call

0:00 Good day and welcome to the Ethlon Medical first quarter 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.

0:45 Thank you, operator, and good afternoon, everyone. Welcome to Athlon Medical's first quarter 2020 earnings conference call. My name is Jim Frakes, and I am Athlon's Chief Financial Officer. At 4.15 p.m. Eastern Time today, Athlon Medical released financial results for its first quarter ended June 30, 2019. If you have not seen or received Athlon Medical's earnings release, please visit the investors page at www.athlonmedical.com. Following this introduction and the reading of our forward-looking statement, Athlon CEO, Dr. Tim Rodell, and our chairman, Dr.

1:30 Chuck Fischer, will provide an overview of Athlon's strategy and recent developments. I will then make some brief remarks on Athlon's financials. We will then open up the call for the Q&A session. Before I hand the call over to Dr. Rodel, please note that the news released 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.

2:24 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. Acceptance 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, Athlon Medical's CEO.

3:00 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, Athlon is a development stage device company. We are developing our proprietary blood purification cartridge called the Hemopurifier, which is a single-use therapeutic device, first-in-class therapeutic device that is 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.

4:02 The hemopurifier has been designated as a breakthrough device for the treatment of glycosylated life-threatening viruses, including Ebola and other hemorrhagic fever viruses. And in late 2018, was actually additionally designated was given a second breakthrough device designation by FDA for the treatment of cancer, specifically advanced and metastatic cancers that are unresponsive to or intolerant of standard of care therapy. And we are advancing development programs in both of those areas. I'm going to talk predominantly today about our programs in cancer, We have talked previously about what the development process is for a new device in the treatment of cancer and what the regulatory components of that are. And over the course of the last quarter, we've been making very good progress in advancing our development plan.

5:16 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. And following that, we are now in the process of preparing an investigational device exemption application, which is the application to FDA that will allow us to initiate clinical trials. Those communications with FDA have been helpful, have been profitable, have been collegial, and we're looking forward to getting the IDE filed and getting authorization from the FDA to initiate clinical trials.

6:08 As we previously disclosed, our initial targets in oncology are in the area of solid tumors, These include 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 both by us, by our collaborators, and by others to be driven significantly by circulating exosomes. And so it is our belief that using the hemopurifier to clear those tumor-derived exosomes will allow for improved outcomes in patients and specifically improved responses to some of the newer chemotherapeutic and immunotherapeutic agents that are currently approved and under development.

7:10 As we move forward in the development process, we'll have more to say specifically about what tumor or tumors we're going to be targeting, what those trials are going to 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 getting ready to move into clinical trials. I want to talk about a couple of other areas in a few minutes, but before I do, Dr. Fischer, our chairman, has been working with me and has been heavily involved in the development of our strategy as well as our communications with 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 and talk about a few other things.

8:06 Thanks, Tim. My comments will be brief, but thanks to all of you who joined our call today. We appreciate your interest on an ongoing basis. 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. So what I want to do is simply say I think the team's doing a great job in that regard. The relationships with the FDA, which I've attended, are very legal, as Tim outlined, and I think that's a good area to move forward on. So, I'll stop there, and we can comment later, but I'll hand it back to Tim.

8:55 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 or discussed 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 complimentary to what we are doing here at Athlon in a number of areas. And we had actually just signed that agreement when we last spoke. So I'd like to talk a little bit about kind of my view of how this is gonna proceed and where we are.

9:57 As you know, and as we previously discussed, what the hemopurifier is capable of doing is 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 other potential components of both inflammatory, infectious, and oncologic We have collectively a series of devices that address multiple different synergistic components of these complex disease pathways.

10:42 As such, putting these devices, combining these devices and investigating them in a number of indications. And these can be indications in oncology, in infectious disease, in organ transplantation and rejection, and a number of other areas. So it's our belief, and I think I can speak for Seastar, although I don't, that putting these two sets of technologies together in various ways will allow us to address more diseases, to get better activity in those diseases and, incidentally, to learn a great deal about exactly how those diseases work because, and I've said this before, but having a cartridge like the hemopurifier or like the C-Star cartridges allows us to intervene in disease processes and better understand how those processes work.

11:41 as an example of that, the experiment that we will be initiating in humans shortly, looking at clearance of exosomes in patients with advanced cancer, will allow us to understand better what the role of exosomes is in cancer, because we've got a great deal of literature, there's a great deal of research that's been done showing correlative relationships between the presence of exosomes and outcomes in cancer, but nobody has ever previously been in a position to clear them and then see what the impact of that is on disease. Similarly, the story is similar for the C-Star cartridges. So I'm very excited about this. There will be a number of steps that we're going to be investigating as we move forward.

12:27 But the first part of this is simply to start to work on how these cartridges will work together. That is how we will hook them up together, what kinds of parameters will affect how they work, how they're able to clear various particles like exosomes, inflammatory mediators, and other cells. So we're early on in this. We're initiating these early studies to look at combining the technologies, and then as we move forward from here, we'll be using those combinations to investigate, probably initially in animals and then ultimately in humans, the impact of that on human disease. Again, we're early there, but we announced this recently, and we're starting very aggressively to move into the development process.

13:20 Finally, I'd like to make a couple of comments about our majority-owned subsidiary, Exosome Sciences, about which we have talked a bit, but we've always been primarily focused on the hemopurifier. And what I'd like to say is that one of the things that attracted me to this company when I joined it late last year was the combination of the therapeutic technology that the hemopurifier brings to the table and also the potential for developing diagnostics through the XSM Sciences division of the company or subsidiary of the company. When I got here, the primary focus of what most of the conversation was about was the use of These types of diagnostics in the diagnosis of chronic traumatic encephalopathy, the neurodegenerative disease that's seen in football players and other individuals that have been subjected to repeated head trauma, and we still are maintaining our research focus there. We are aggressively collecting data in that area.

14:31 But one of the things that I'm actually the most excited about is that exosomes not only have an impact on how tumors progress, and we already know that, and we intend to demonstrate what the impact is of removing those exosomes on the outcome of disease. but they also potentially can tell us a lot about what's happening in these diseases. And that's an area that is right in the wheelhouse for XSM Sciences. So we're beginning to work with other groups to identify patient populations where we may be able to develop a diagnostic and Prognostic Markers using exosomes to identify those patients who are at highest risk of progression and potentially could benefit from treatment with the hemopurifier and also be able to help physicians and their patients understand better, number one, where the disease is, when the disease is occurring, and what the risks are of the disease advancing.

15:31 will have more to say about that in the future, but it's an area that we're now starting to pursue very aggressively, and it really represents a complementary but substantial additional value area involving the use of exosomes. So let me stop there, and I'll turn it back over to Jim Frakes, our CFO, to discuss our financials, and then following that, will make a couple closing remarks and open up for questions. Tim?

16:05 Thanks, Tim, and good afternoon again, everyone. Our net loss was approximately $2.1 million, or 11 cents per share, for the first quarter ended June 30, 2019, compared to a net loss of approximately $1.1 million, or 6 cents 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 $188,000 increase in general and administrative expenses in 2019 was primarily due to a combination of the $120,000 increase in our clinical trial expense largely due to costs associated with the manufacturing of hemopurifiers for an expected clinical trial in the cancer space, a $39,000 increase in our lab supplies expense, primarily related to our breast cancer

17:37 grant, and a $39,000 increase in travel expense. The $158,000 increase in our professional fees in 2019 was primarily due to a $153,000 increase in our legal fees. Our other expense during the quarter ended June 30, 2019 consisted of interest expense and a non-cash loss on debt extinguishment. And during the quarter ended June 30, 2018 consisted of interest expense only. Other expense for the June 2019 quarter was approximately $501,000 in comparison with other expense of approximately $55,000 for the June 2018 quarter. We recorded government contract and grant revenue in the first quarters ended June 30, 2019 and 2018.

18:28 This revenue arose from work performed under two government contracts with the National Institutes of Health, or NIH. In the quarter ended June 30, 2019, we recorded $30,000 in aggregate revenue from our breast cancer grant. And in the quarter ended June 30, 2018, We recorded approximately $150,000 in revenue from our melanoma cancer contract with the NIH. Subsequent to June 30, 2019, we paid off the remaining principal balance and accrued interest on our outstanding convertible promissory notes in the aggregate amount of approximately $904,000. So that amount is now removed from our balance sheet and capitalization table.

19:14 We had previously paid off $100,000 of the outstanding balance on the notes during the quarter end of June 30, 2019. Now, 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 the combination of contractually agreed severance payments to our former CEO and president, increased professional fees, and increased clinical trial costs.

20:04 Now, let me provide an update on our listing situation with NASDAQ. We currently have two issues with the stock exchange. The first issue is with 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 that we filed on July 1 and fell further below that number with a report on Form 10-Q that we are filing today. NASDAQ initially required that we file by August 19, 2019. plan to regain compliance with that requirement. And NASDAQ recently provided us a one-week extension to that, so our response is now due by August 26, 2019.

20:54 We are currently working on our response, which will include a plan to raise additional capital for sales of our common stock in order to meet the minimum stockholders' equity requirements. If NASDAQ accepts our plan, then NASDAQ will grant an extension of 180 calendar days from the date of their July 5th, 2019 letter 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 29th, 2019 to regain compliance with this requirement by trading at or above $1 per share for 10 consecutive trading days. It is possible that we can regain a $1 or higher share price as we hit the milestones that Tim Rodell has noted earlier. However, there is no assurance that would be the case.

21:50 The company is also evaluating its alternatives to achieve this if the price does not recover organically. We included these earnings and related commentary in a press release earlier this afternoon. That release included the balance sheet for June 30, 2019, and the statements of operations for the quarters ended June 30, 2019 and 2018. We'll file our report on Form 10-Q following this call. Our next earnings call will coincide with the filing of our quarterly report on 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. We will now begin the question and answer session.

22:36 To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian Marks of Zacks Investment Research. Please go ahead.

23:14 Hi, guys. Can you hear me okay? Yes. Hi, Brian. Hi. I was jumping between two different calls, so I apologize if I if I missed anything that relates directly to my questions. But I did hear you mention that you plan to file an IMD, so congratulations on that. Just wondering, in terms of timelines, do you have any idea of when you think you may have it filed?

23:54 Yeah, 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 investigational new drug application. As you probably know, these documents are huge. They contain massive amounts of preclinical data, manufacturing information, quality information, and clinical trials plans. So they're quite a project. We are very far along in that. I'm not going to say exactly when we're going to file, but I will say that it's fairly imminent.

24:43 So we're talking about weeks, not months or years.

24:47 Okay, okay, great. Yeah, and I apologize. I meant IDE, not IND. Is it your sense that given the safety data that you have, not necessarily all in cancer, but you have a reasonable amount of human data, that assuming the IDE is approved, that you can go straight to a larger study than phase one? Could you start with phase two? Do you think

25:19 I would say the answer to that is theoretically yes, but I think from a development perspective, it would be inadvisable. And the reason I say that is that while as a physician, I've reviewed all of the data from the previous viral studies, and 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, with different susceptibilities, and in different physical settings, hospital-type settings than we've treated in the past. And that brings additional complexity, number one, to the equation. The second thing is that, as I mentioned earlier, we're intervening in a process that no one's ever intervened in before.

26:15 And that doesn't generate, particularly for me, safety questions. And the reason I say that is because even though 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 that. So I don't have particular new safety, novel safety concerns, although the populations are different. But we're going to learn a lot from the first few patients. And one of the things I think is critical for people to understand is that what we need to understand first is not only safety, but we also need to understand what percentage of exosomes we can clear, which are the important exosomes.

27:01 and what the target should be for clearing exosomes in order to make sure that when we do the kind of larger trial you're talking about, we're getting the effect that we need to get in order to see therapeutic benefits. So, you know, I think from a sort of generic question. We could jump to a larger trial, but I think the right thing to do, the smart thing to do, and the way that we and others who do this have always operated is to initially get some experience of a small number of patients, learn how they're managed, learn how the device impacts with their clinical situation, and then based on what we learn there to move as quickly as possible to larger trials.

27:47 Okay. Great. That's all I have. Thanks, Tom.

27:50 Thank you, Brian. The next question comes from Daryl Patrick of SJ Wolf Investment. Please go ahead.

27:57 Hello. Is the hemopurifier, is that very similar to what they would use in kidney dialysis?

28:11 Yes. It's a good question, Daryl, and thank you for dialing in, and thanks for the question. If you were to stand in a room and look at the two devices, look at the two cartridges, a hemodialysis cartridge and a hemopurifier cartridge, they would look similar. That is, they're large plastic cartridges through which you can filter blood. But what the hemopurifier does is categorically different from what a dialysis cartridge does. A dialysis cartridge is capable of taking off fluid and is capable of taking out toxins in patients who are in renal failure. What the hemopurifier is doing is actually taking blood and passing it over a matrix with a protein that binds to viruses and exosomes. So, you know, physically they are similar pieces of equipment, but what they're doing is very different.

29:08 Okay, then the secret sauce is what's in the capsule as opposed to the capsule itself?

29:19 I think that's a fair statement, yeah. The actual piece of plastic that we're using is used in a number of other applications. So, yes, the secret sauce is what we put into that cartridge that allows it to clear out viruses and exosomes.

29:38 Okay, how long does an individual have to be on that system?

29:46 Well, we're going to learn a lot about that once we start using it in the clinic, but basically on the order of four to six hours.

29:55 Okay, and then you haven't determined exactly how often they'll have to do it? Is it an everyday thing?

30:03 No, it's not an everyday thing. And initially, what we're looking at is combining clearance of exosomes using the hemopurifier with other drugs that are used in cancer patients. So it would be used, if you're familiar, if you've ever had a family member who's had cancer and has had to have chemotherapy, Patients go into an outpatient infusion center, they're hooked up, and they have drugs administered. In this setting, what we'll be doing is using the hemocurifier prior to the administration of one or more drugs. So it would happen sort of on the same kind of schedule as chemotherapy is generally used.

30:47 You mentioned, I believe it could be used, I think you said in transplant patients.

30:56 Well, there are a number of different areas where it could be used and where exosomes could be involved in outcome. One of the areas that we are the most interested in is the role of viruses in organ transplant. As you're probably aware, a number of patients who would otherwise be organ donors may be infected with viruses like hepatitis C. Up until fairly recently, that was a contraindication to transplanting their organs. Now that there are good drugs for hepatitis C, Those organs are sometimes transplanted, but the cost of those drugs can be well over $100,000.

31:42 So one of the areas that we're interested in is looking at the hemopurifier for clearing hepatitis C in organ donors and subsequently potentially in organ transplant recipients. Another area where it could be very important is that one of the most common causes of transplant failure That is of the failure of a transplanted organ to work in the recipient is a virus that we're all infected with that we don't really know about. And it generally doesn't cause problems called cytomegalovirus or CMV. It's a member of the herpes virus family. and we actually have data showing that the hemopurifier can clear cytomegalovirus. So this is another area that we're looking at for investigation. Can we improve the outcome of transplanted organs either by clearing hepatitis C from the donor or by clearing viruses like cytomegalovirus and potentially others in the recipient at the time of the transplant?

32:52 Okay, you mentioned NASH. the intention here to use this before an operation or a transplant or afterwards?

33:05 Well, there are a number of different areas, again, where it could be used. It could be used to cleanse the blood of a brain-dead organ donor. And that, incidentally, is an area that Seastar is involved in. and it could also be used in the recipient at the time of transplant. But again, these are early concepts. There are potential areas that we intend to develop, but our primary focus right now is on initiating trials with the hemopurifier in solid tumors and cancer.

33:43 Okay, and on encephalopathy, you mentioned in the reports that a large number of people who suffer with that are and other former football players who get smacked on the head a lot of times. But there are other reasons for encephalopathy. Would the hemopurifier be just as effective that way in that situation?

34:14 Well, to be clear, our current focus in chronic traumatic encephalopathy is in the diagnosis This concludes our question and answer session. I would like to turn the conference back over to Dr. Tim Rodell for any closing remarks.

34:55 Tim Rodell Yeah, thank you, Andrew. I would just say in closing, thank you everyone again for dialing in. We appreciate your continued interest and look forward to keeping you up to speed as we move our development programs forward. from my perspective, there's a huge amount going on in the company today that I'm very excited about and look forward to telling you more about what we're doing as we progress through our development plan. So thanks again for dialing in, and we look forward to continuing the conversation. The conference has now concluded. Thank you for attending today's presentation.

35:41 You may now disconnect.