Aethlon Medical (NASDAQ:AEMD) Q2 2020 Earnings Call

0:00 Good afternoon, and welcome to the Athlon Medical Second Quarter Fiscal 2020 Earnings and Corporate Update Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, 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.

0:44 Thank you, Operator, and good afternoon, everyone. Welcome to Athlon Medical's second quarter 2020 earnings conference call. My name is Jim Frakes, and I'm Athlon's Chief Financial Officer. At 4.15 p.m. Eastern time today, Athlon Medical released financial results for its second quarter ended September 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. Chuck Fisher, will provide an overview of Athlon's strategy and recent developments.

1:34 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 result anticipated in the forward-looking statements.

2:23 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. Tim?

3:01 Thank you, Jim, and thank you, everybody, for calling in late on a 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-age children would be trigger treating. and we appreciate your taking time to hear this update. At Athlon, we are continuing to develop our proprietary device, the HemoPurifier, which is a first-in-class therapeutic device that's 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.

3:56 And then in late 2018, the hemopurifier received a second breakthrough designation for the treatment of individuals with advanced or 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 the severity of the disease. So we actually had two separate breakthrough device designations that were granted by different divisions at the FDA recognizing the potential for the hemopurifier in the treatment of multiple different diseases. Now, we've actually had a very eventful quarter. We previously announced that were preparing for the initiation of clinical trials in patients with advanced and metastatic cancer.

4:49 This work follows on a number of years of work in viral disease, representing over 400 hemopurifier treatments in patients with various viral infections, predominantly hepatitis C, establishing a very strong safety database for the hemopurifier. In June of this year, our team, including me, Dr. Chuck Fisher, who has joined us this afternoon and is with me, and Lisa Boswell, our newly recruited head of quality affairs and regulatory, met with 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 FDA to initiate clinical trials in cancer. That IDE was approved on October 4th, less than 30 days after filing.

5:49 We have to submit a final informed consent document to 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. I think that there has been somewhat of a view out there that The breakthrough designation is something that was generated by FDA to kind of convince people that they were moving quickly and provide a marketing ploy for companies. And our experience underlines the fact that this is anything but the case.

6:43 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 we filed seven amendments in 25 days. The IDE was then approved in less than the 30 days mandated after filing. Now in my over 30 years of experience in drug and biologics and device development, This is absolutely unprecedented. Prior to the breakthrough designation and the legislation that supports it, the standard process was that you would file an IND or an IDE and you would wait patiently for 29 days. And on day 29, FDA would call or email you and say either you can start your trial or you can't start your trial. So this type of interactive process Back and forth, collegial communication with the agency is exactly what was intended by the legislation that supports the breakthrough designation.

7:57 And the best thing I can tell you is it works. We're now in the process of starting up a clinical trial, which the earliest trial in the device world is called 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 very limited survival. Even patients who do have surgically or radiation amenable disease generally recur They can recur very quickly.

8:43 They can get second primary cancer. So this is one of the solid tumors that we've made the least progress in in medicine. Recently, one of the newer immuno-oncology agents, also known as checkpoint inhibitors, called Pembrolizumab or Keytruda from Merck, was approved in 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 that we work with and other laboratories have indicated that one of the primary mechanisms by which tumors are resistant to Keytruda and similar drugs is through the shedding by the tumor of immunosuppressive exosomes, the exact particles that are targeted for clearance by the hemopurifier.

9:53 With this in mind, our initial trial in head and neck cancer will investigate the combination of Keytruda with a preceding treatment with 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 have more to discuss about the details of the trial when it is launched. I should say 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 be opportunistic in treating patients with these diseases, also investigating other potential viral targets in the transplant area.

10:44 to increase, improve the take of transplanted solid organs. So we by no means abandon the viral field. We continue to develop there, but we also view cancer as being a clearer and more rapid path to potential approval for the hemopurifier. So I'd like to stop for a minute 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. Chuck and I have worked together for many years. We share a common philosophy about drug and device development and about how to run organizations. So our relationship is a collegial one, very different from the relationship generally between a chairman and and a CEO, and Chuck has been a meaningful part and a trusted advisor for me during this entire process. So, Chuck, do you want to make any comments on the regulatory and development process since you've been intimately involved in it?

11:57 Sure. Thanks very much, Tim, and good afternoon, everybody. And, again, thank you for taking this call late on a Friday afternoon. We deeply appreciate it. In my own career and in Tim's career, both of us have kind of sought medical first and have been successful in actually getting drugs and or devices approved in this space. So when we looked at making the management changes that we made, I wanted to bring in somebody that had a history of turnaround and a passion to seek medical first and do something to make a difference, and Tim, we found a real winner. To make the point that Tim just touched on, This breakthrough therapy is quite dramatic from what we've seen in the past.

12:42 And to have a really vibrant dialogue with the FDA, both over the phone and in person, during the time of working through the submission of the IDE, as Tim says, is extraordinarily unique and incredibly productive. In addition to Tim and what he's brought, he's recruited a couple of really very key and very strong people. So we have a very small team. We're being quite financially rigorous in terms of watching where we are, but we needed key people. And I think it's worth noting that an IDE of this quality or an MBA of this quality, usually in a larger company, having run large companies as well as small companies, you'd probably have 40 to 60 people involved, and it would take six to nine months. And this six-person team did it in a very short period of time. So I just want to emphasize the fact that not only have we expanded the target opportunities in this case, we think, as Tim mentioned, to market on the regulatory process, probably the cancer one is the one that's going to move the swiftest to be able to have, as we start moving into that space, to be aligned with what has become the number one target cancer, I think also burnishes our opportunity.

14:07 and we hope that over time that proves that we have an additive effect. And thirdly, I'd just like to call out the team again, in this case including also Jim Frakes. It's a small team, but it's very effective. I'm very pleased and honored to serve with them. Back to you, Jim.

14:26 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 I think many of you know, is our majority-owned subsidiary and is really the diagnostic side of our business. We've had two major developments in the last quarter on this side of the business. First, we announced a very important, I think it's going to turn out to be a very important, collaboration with the Precision Medicine Group that's run by an old colleague of mine at Hoag Hospital Systems in Newport Beach, California, to identify exosomal markers in patients with and in families at risk for a number of different cancers.

15:15 Hoag is a large private hospital group with a very busy genetics and oncology practice. It looks in many ways like a university center and is very heavily devoted to clinical research. Under this collaboration, we hope to advance our work in liquid biopsies, that is, in identifying blood-borne markers rather than requiring a surgical or a needle biopsy, identifying blood-borne markers based on exosomes that will predict the onset and the progression of various cancers. We're moving that collaboration forward, and we should have more to say about that in the reasonably near future.

16:01 Perhaps more importantly, we just announced that we've just 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 II contract followed the successful completion of a Phase I contract in the same area and demonstrates both the importance of the exosome story to the NCI and to other scientists as well as their confidence in our team. Now, I just received in my inbox this morning an offer to buy a market study for a gigantic price, but the title of the study is the Exosomes Market, a multibillion-dollar market identifying hidden gems. I think that shows that this is an area that now the business community and the commercial community are starting to pay attention to.

17:06 But over the last 10 years, it's become one of the most important areas of research in cancer. And if you look at the number of journal articles that are being published that are really meaningful in terms of understanding the mechanisms of cancer, this is probably one of the hottest areas in oncology today. We hope to have more to tell you in the coming months about our progress, so I will stop there. We'll be happy to take questions after Jim presents the financial results for the quarter. Jim?

17:40 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 increases 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.

18:40 The $360,000 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 related to their work on that grant. The increase in legal and accounting fees related to increased activity in our registration statement filings and Intellectual Property Actions, among other matters. The $71,000 increase in general and administrative expenses in 2019 was primarily due to the combination of a $21,000 increase in our clinical trial expense, primarily costs associated with the manufacturing of hematurifiers for the expected clinical trial in the cancer space, and a $45,000 increase in our lab supply expense primarily related to the SBIR Breast Cancer Grant and lab work related to the IDE application.

19:54 The $75,000 decrease in payroll and related expenses in the quarter ended September 30, 2019 was due to the combination of a $65,000 reduction in our cash-based compensation expense and a $10,000 decrease in stock-based compensation compared to the same period in 2018. Other expense during the three-month end of September 30, 2019 consisted of interest expense and a loss on share for warrant exchanges. And during the three-month end of September 30, 2018 consisted of interest expense only. Other expense for the three-month end of September 30, 2019 was approximately $4,000 in comparison with other expense of approximately $55,000 for the three-month end of September 30, 2018.

20:45 At September 30, 2019, we had a cash balance of approximately $800,000. Since September 30, we have raised approximately $473,000 under our at-the-market facility, and we've billed the National Cancer Institute, or NCI, for approximately $207,000 under our Phase II melanoma cancer contract with the NCI. In July 2019, we paid off the remaining principal balance and accrued interest on our outstanding convertible notes in the aggregate amount of approximately $904,000. So that amount is now removed from our balance sheet and capitalization table. We had previously paid off $100,000 of the outstanding balance on the notes during the June 2019 quarter.

21:38 Now, during our last earnings call on August 14th, I provided an update on our listing situation with NASDAQ. At that point in time, we had two issues with the stock exchange. The first issue related to our share price falling below the minimum continued listing threshold of $1 per share. We had until October 29, 2019 to regain compliance with this requirement by trading at or above the $1 per share price for 10 consecutive trading days. We were able to achieve that goal as a 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 to 1 reverse stock split effective as of October 14, 2019.

22:30 As a result, we are pleased to report that on October 29, 2019, NASDAQ notified us that we had regained compliance with NASDAQ's minimum bid price continued listing requirement. The second issue is 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 that number with our subsequent 10-Q filings. NASDAQ required that we file by August 26, 2019, a plan to regain compliance with that requirement, and we provided that plan to them on that date.

23:16 As a result, 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 our extension, NASDAQ has allowed us until the filing of our December 31, 2019 report on Form 10-Q, which will be filed no later than February 14, 2020, to evidence compliance with NASDAQ's minimum stockholders' equity threshold, subject to reporting to NASDAQ prior to that time on our fundraising progress. We included these earnings and related commentary in a press release earlier this afternoon.

24:02 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. 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. 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 two. At this time, we will pause momentarily to assemble our roster.

25:03 Our first question comes from Brian Marks with Zaks Investment Research. Please go ahead.

25:09 Hi, guys. Congrats on all the progress. I wonder if you guys can talk a little bit more about the EFS study and things like, do you have the site, I assume you have the site identified, or has that not happened?

25:32 Yeah, thanks for the question, Brian, and thanks for calling in. So the site is identified. We've been very closely working with them actually for the entire time that I've been at the company. And they were very heavily involved in developing the clinical protocol that 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. So the way that we wanted to do it was to announce the approval of the IDE and the indication. And then as we start up the study, we'll talk more about where we're doing it, why we're doing it there, and more about the study design.

26:17 What I didn't say in my initial remarks is a little bit more of the detail of the study. Like all early studies, a phase one study with a drug or a biologic, or in this case, an early feasibility study, with the device, the primary consideration initially is safety. Now, we don't have any major concerns about safety. Obviously, you're always paying attention to that, and it is the primary thing that both FDA and we as physicians and clinicians are concerned about. But because of our previous history in viral disease and the multiple times the hemopurifier has been used, We don't have any reason to think that safety in this particular patient population will be an issue in a different way than it has been with viral disease. We're also going to be looking at the clearance of exosomes, both the kinetics and the characterization of the exosomes that are being cleared by the hemopurifier. And we'll be looking at clinical outcomes like response to therapy, progression-free, and overall survival.

27:30 like any early study in a new indication, this is going to be a small trial. It will be 10 to 12 subjects, all of them with either advanced or metastatic cancer of the head and neck who are candidates for first-line Keytruda or Pembrolizumab treatment. So the idea here is that if we are able to clear immunosuppressive Tumor-derived exosomes in these patients prior to the administration of pembrolizumab, it at least would make sense theoretically that we would increase both the percentage of patients who are able to respond to pembrolizumab, which as it stands, even though it's very active, only about 30% of patients respond.

28:20 So we hope to increase both the percentage of patients who are able to respond and also the duration of those responses. So again, we'll talk in a lot more detail as we get moving, but we thought it was important initially to let folks know that the FDA had signed off on this, and we're now, our number one job right now is to get this trial moving as quickly as we can. Obviously, like any clinical trial, it has to be approved. by various groups at the trial site and ultimately the Institutional Review Board before we can start enrolling patients. But we're well on the way towards that.

29:00 Okay. Okay, great. And maybe this is an obvious answer to this question, but just for clarity, So assuming this EFS study is quote-unquote successful, should we assume that you would be looking to move to a formal regulatory program in this indication?

29:27 I think that's a fair assumption, but I think that the answer is much broader than that. So we selected head and neck as the kind of pilot setting in which to study the drug for a couple of reasons. The first is that head and neck cancer is an incredibly high need area. If you look at diseases like melanoma, like non-small cell lung cancer, there's been a lot of progress. There's still awful diseases, but in patients with melanoma or with lung cancer who respond, for instance, to drugs like pembrolizumab, some of those patients are alive at five years, and that's almost unheard of. But in head and neck, it really is not that good. So even the patients who respond still don't do that well.

30:15 They may live three months longer, but they don't live long term. So it's a very high need area. Secondly, both laboratories that we collaborate with and other labs, have demonstrated that the immunosuppression in head and neck cancer is a critical component of the reason the disease is so deadly. These patients have profoundly suppressed immune systems, and there are good data out there demonstrating that a major component of that immune suppression is mediated by exosomes. So it's a perfect target area for us to start out in. But data from this trial showing that we can clear exosomes Steven LaRosa, Steven LaRosa, Steven LaRosa, but also for multiple other solid tumors. So, you know, we view this as being the beginning of a process. Over the course of the next year, we plan to review with FDA our overall data development program, not only in head and neck cancer but also in other solid tumors. So this is kind of the first, you know, the first shot, but it can lead to, assuming a successful trial, it can lead to multiple pivotal programs in other tumor types. Chuck, do you want to comment on that at all?

31:54 Sorry, Chuck may be on mute.

31:59 You're correct. I was on mute. The only thing I'd just like to emphasize what Tim just mentioned is since it's a small trial, I don't think we should look for anything other than the safety side of it. We always look for signals. We will look at the degree of exosomes we capture and things like that that can help us further characterize it going forward, but the numbers are small. However, this is a critical first step because, as Tim just mentioned, it then opens the door to going broader after dialogue with the FDA and our data development plan. Okay. Thanks, Jim. Just kidding.

32:40 Just kind of curious about how much is known about exosomes in cancer and if it's homogenous. I don't know if that's the right word to use, but if it's similar to the way that they act in head and neck, would they act the same way in, say, melanoma, for example, or a different type of cancer? So could you potentially... What you learned from this study, would it have potential crossover to other tumors?

33:16 Yeah, it's a great question, and thank you. And without going into too much depth, what I will say is, first of all, there is no malignancy that has been described that is not at least partly characterized by the shedding of tumor-derived exosomes. So head and neck is simply an example. Thank you for having me. Thank you for having me.

34:28 exactly how what they do in different cancers may be somewhat different. We've focused on head and neck because of the immunosuppression and because of the prominent role of exosomes in generating that immunosuppression. But exosomes in other tumors have been shown to mediate resistance to chemotherapy, resistance to targeted agents, and metastasis. They actually contain fragments of of the tumor, proteins and nucleic acids that can move through the circulation, be taken up by normal cells, and transform those normal cells to metastatic cancer cells. So they're an agent of metastasis. So I think the bottom line is if we are able to show that we can capture them in head and neck and that that has a meaningful impact that pretty much opens up all of oncology to development of the hemopurifier.

35:30 It's a really good question and I appreciate it.

35:33 Yeah, 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 that is, any other organization that's involved in this EFA study, or is it all Athlon?

35:53 Well, I would say it is Athlon, and it is our academic collaborators, both bench collaborators, bench researchers, and clinical collaborators who are actually taking care of these patients. Those are the primary groups that are involved. Thanks, guys. Appreciate it. Thank you. Yeah, thanks. Again, if you have a question, please press star then 1.

36:41 Please stand by as we poll for questions. The next question is from Ken Seal, a private investor. Please go ahead.

37:00 Yes, there's been a lot of public... writing lately about the mosquito-borne virus that has killed several people. I think it's the EE virus is what I want to say. Was the hemopurifier considered for any type of treatment in those circumstances?

37:23 It's a great question, Ken. Thank you for asking. The virus you're referring to is EE, which is Eastern Equine Encephalitis Virus that's killed a number of people in predominantly kids. And we've been paying very close attention to that. Whether the hemopurifier could be used in that indication, we don't absolutely know. We have looked at it with other very closely related viruses, but not with EEE. And the other issue that we would have to deal with from a practical perspective is that By the time patients exhibit life-threatening manifestations of encephalitis with that virus, the virus is already in their brain, and the hemopurifier may or may not be able to help clear it. So it's potentially a target, and it's an area where we could get involved, but we don't have adequate data quite yet to be able to say that. But I think that it's an important consideration because, as I said earlier, virtually all of the viruses that affect humans, and I'm not just talking about Ebola and viruses like EEE, but also influenza and a number of those viruses, as well as chronic viral infections, those viruses have sugars on their surface and therefore should be Steven LaRosa, James Frakes

39:15 Whereas trying to intervene in individual viral infections with multiple different viruses is a little bit more complicated. But it's one we're looking at. So it could be a potential target. We don't have enough data quite yet to say so.

39:30 Okay, thank you.

39:31 Thank you. This concludes our question and answer session. I would like to turn the conference back over to Dr. Rodell for any closing remarks.

39:41 Thank you, Gary. and let me just say once again, we very much appreciate all of you calling in and staying up to date on the company. We think that we've made a lot of progress over the course of the last year. We are happy with our progress, but not satisfied. We have a lot of work to do. We hope to have a lot more to say over the course of the next few months. The conference is now concluded. thank you for attending today's presentation you may now disconnect