Aethlon Medical Inc (AEMD)

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AEMD $$$$ Zacks Upgrades AEMD to Buy
Zacks Small Cap Research By Zacks Small Cap Research
November 12, 2014 8:00 AM

By Brian Marckx, CFA

Q2 10-Q Filed (ending 9/30/2014)

Aethlon Medical (AEMD) filed their 10-Q for the fiscal second quarter ending 9/30/2014. Revenue was $479k, well ahead of our $254k estimate as a result of AEMD recognizing more revenue from the year-3 contract during the quarter then we had anticipated. In total, AEMD booked $445k in DARPA related revenue in Q2 (reflecting three year-3 milestones) and $34k from the Battelle subcontract, compared to our $197k (we forecast only one milestone payment in Q2) and $57k respective estimates.

Through the end of fiscal Q2 2015 AEMD had billed approximately $4.5M under the DARPA awards which represents $1.97 million under the initial year-1 contract, $1.6 million under the year-2 contract and $905k under the year-3 contract, the latter which was awarded to the company in September 2013 and initially was to pay up to $1.53 million if all eight milestones are met. Through Q2 AEMD has billed six of the eight year-3 milestones. AEMD began work on the Battelle subcontract in early April 2013 and through Q2 has booked a total of $243k in revenue related to this.

In September 2014 AEMD announced that they were awarded the year-4 DARPA contract which will pay the company $669k if all three milestones are met. DARPA has the option of entering into the remainder of the proposed contract, that is, for year five. AEMD recently noted that due to budget restrictions, DARPA has reduced the scope of AEMD's contract for years three through five. The three through five year contracts were initially worth ~$3.2M. Due to the budget change, this amount is now ~$2.4M (the breakdown per contract-year was not disclosed). We had already adjusted our model to account for this change. We currently model approximately $950k in DARPA related revenue in the current fiscal year.

We also continue to look for additional, although relatively minimal revenue from the Battelle contract throughout fiscal 2015. As a reminder, AEMD's subcontract is a time and materials contract so the total that AEMD will eventually bill will not be known until their work is completed. We do, however, think it's likely that there will be additional revenue contribution from this contract.

Q2 operating expenses were $1.1M, slightly better than our $1.2M estimate. Aethlon has done a good job with controlling expenses and done so in concert with DARPA's announcement of the ~$800k reduction in aggregate contract amounts. Operating loss was $601k compared to our $942k estimate - the difference mostly related to earlier than modeled recognition of the DARPA milestones. Net income and EPS, excluding $210k in non-cash debt extinguishment and warrant expenses, was ($680)k and ($0.00), compared to our ($1.0)M and ($0.00) estimates.

We have upgraded our recommendation on AEMD from Neutral to Buy based on financial and operational progress. See below for free access to our latest report on the company.

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AETHLON MEDICAL INC Files SEC form 8-K/A, Entry into a Material Definitive Agreement, Financial Statements and Exhibi EDGAR Online 4 days ago
AETHLON MEDICAL INC Files SEC form 8-K, Financial Statements and Exhibits EDGAR Online 4 days ago
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Balance Sheet / Cash Balance

A significant highlight over the last few quarters has been the accelerated pace that AEMD has cleaned up their balance sheet. This included converting a significant amount of debt to equity, extending the maturity on other debt and a resultant reclassification of a large derivative liability balance to equity.

Since just early February of this year, AEMD has reduced the aggregate amount of debt that is past due from approximately $2.1M (plus ~$1.1M in accrued interest) to just $473k (plus ~$471k in accrued interest) through the end of September. This resulted from the conversion of debt to equity as well as extending the maturity of some debt which had previously been classified as past due. Subsequent to Q2 quarter-end, the company paid off an additional $383k in past due debt with cash, leaving the past due debt balance at just ~$90k. Pro forma for debt repayments subsequent to Q2 quarter-end, total debt balance (including that owed to related parties) was approximately $2.1M, down from $3.4M at the end of fiscal Q3 (12/31/2013).

As we have noted in our ongoing coverage of AEMD, their historical significant past due debt balance had kept their risk profile elevated. And while the debt conversions and related amendments will significantly increase the share outstanding count, this recent de-leveraging has provided meaningful de-risking in our opinion. This, along with positive and substantive operational progress that the company has made over the recent past, figured into our upgraded recommendation on AEMD.

Pro forma for the post-Q2 cash debt repayment and cash collections from the DARPA and Battelle contracts, AEMD had approximately $400k in cash and equivalence at Q2 quarter-end. Cash used in operating activities was $631k in Q2. AEMD raised $350k during Q2 through the issuance of common stock. We continue to expect cash generated from government and other contracts along with additional funds raised through the sale of securities to fund the company over the near-to-mid term.

Operational Update:

Aside from AEMD's continued focus and success with cleaning up their balance sheet and reducing the amount of non-performing debt, the company continues to make other progress on the operational front as well. At the forefront, in our opinion, is expansion of the potential applications for Hemopurifier and positive developments at ESI. While only recently AEMD's almost sole focus for application of the device was in HCV, the company has rapidly broadened their scope of potential indications and made what we believe is substantive progress in that regard. AEMD has also made recent progress in moving its HCV program forward including nearing commencement of the U.S.-based feasibility clinical study.

Ebola Could Offer A New Opportunity

AEMD has moved very quickly with the recent Ebola outbreak in West Africa in terms of seizing an opportunity to assess Hemopurifier in treatment of the virus. While AEMD had already demonstrated Hemopurifier can capture a significant amount of the Ebola virus, this was accomplished only in in-vitro studies. Human application, until this recent outbreak, was difficult given the issue of finding patients.

In mid-October AEMD announced that Hemopurifier was being used on an Ebola patient for the first time. Introduction of Hemopurifier was made possible by a special approval from the German Federal Institute for Drugs and Medical Devices. The patient, a Ugandan doctor who contracted the virus in Sierra Leone, was treated at Frankfurt Hospital in Germany. About three weeks later the company announced that the hospital reported that the patient has undetectable levels of Ebola and is expected to make a full recover.

AEMD will present the treatment findings at the American Society of Nephrology (ASN) Annual Meeting on November 14th during a special session on Ebola. The data presentation, which will conducted by the Chief of Nephrology at the hospital where the patient was treated, will include pre- and post-treatment patient viral load and quantity of Ebola virus captured in the Hemopurifier during treatment. This data may provide some early insight into the utility and effectiveness of Hemopurifier in treatment of Ebola. If indicated to be efficacious, application for Hemopurifier in treatment of Ebola could offer a significant and potentially very near-term opportunity for Aethlon.

Aethlon is also looking to introduce Hemopurifier treatment for Ebola in the U.S. and announced in late October that they will offer the treatment under FDA compassionate use access to physicians in the U.S. that request it. AEMD will submit to the FDA the data from the ASN presentation to further support the potential use of the device in the U.S. for Ebola.

In a similar vein as Ebola, AEMD is also now looking at treatment of Dengue Fever and in September announced that they entered an agreement with Qualtran, LLC, a CRO that AEMD worked with on their HCV studies in India. Dengue Fever effects approximately 100 million people/year but less than 4,000 in the U.S. The virus, similar to Ebola, is very difficult to treat and can be lethal.

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