AEMD: FDA Study, DARPA Milestones, Productive Operationally

Zacks Small Cap Research

By Brian Marckx, CFA

10-Q (ending 9/30/2013):
DARPA Milestones, Initial Battelle Revenue, Productive Operationally….

Aethlon Medical (OTC BB:AEMD) filed their 10-Q for the fiscal second quarter 2014 ending 9/30/2013 on November 14th.  Revenue came at $645k and included $613k in DARPA related revenue and $32k in revenue for work under the subcontract agreement that the company has with Battelle related to the $22.8 million systems integrator contract with DARPA.  Revenue was ahead of our $424k estimate ($404k DARPA + $20k Battelle) with the majority of the difference being that AEMD recognized revenue for three milestones for the Year 2 DARPA contract while we expected only two milestones to be booked in Q2.  Through September AEMD had billed $3.4 million under the DAPRA awards, which represents $1.97 million under the initial year-1 contract and $1.42 million under the year-2 contract (worth $1.6 million and containing eight milestones), which was awarded to the company in August 2012.  We assume that the final milestone under the year 2 contract (worth ~$200k) is billed and paid in fiscal Q3 (ending 12/31/2013).  We also think that AEMD could book some revenue from the Year 3 contract, which was awarded to the company in September and will pay up to $1.53 million if all eight milestones are met, during the current fiscal year.

We also model additional, although relatively minimal revenue from the Battelle contract throughout fiscal 2014.  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 throughout the year.

On the operational front, the last few months have been particularly productive.  In addition to completing and receiving payment for DARPA milestones and commencing and being paid for work under the Battelle contract, AEMD officially launched their Exosome Sciences subsidiary and opened a lab in New Jersey where that business will work from.  The company also announced that they expect to begin manufacturing the Hemopurifier to be used in the FDA approved study and further noted that they now have a processing technique that optimizes the ability of the affinity agent in the device to bind to blood borne viruses and pathogens.  AEMD expects manufacturing to be completed by the current year-end.  They expect patient treatment for the study to begin in Q1 2014.

Noteworthy is that among the DARPA milestones completed in Q2 was one related to the capture of at least 90% of three or more targeted substances from the blood in 24 hours.  The milestone paid in Q2 related to the year-2 DARPA contract is (per AEMD's 10-Q);

Milestone 2.3.2.2 – Write and test software and conduct ergonomic research. Begin discussions with the systems integrator. The milestone payment was $195,581. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts.  We obtained wrote and tested software and conducted ergonomic research and began discussions with the systems integrator. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.

Milestone 2.3.3.2 – Cartridge construction with optimized affinity matrix design for each potential target. Complete the capture agent screening. The milestone payment was $208,781. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts.  We completed the cartridge construction with optimized affinity matrix design for each potential target and completed the capture agent screening. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.

Milestone M5 – Target capture > 90% in 24 hours for at least three targets in blood or blood components. The milestone payment was $208,781. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts.  We demonstrated that we were able to capture > 90% in 24 hours for at least three of the agreed targets in blood or blood components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.


As a reminder, DARPA has the option of entering into the remainder of the proposed contract for years four and five, which would pay Aethlon up to an additional $1.7 million. 

Q2 operating expenses were $875k, well below our $1.2 million estimate and the lowest since fiscal Q2 2012 (ending 9/30/2011).  This is a result of management's focus on conserving resources and keeping op expenses to a minimum as well as lower litigation and investor relations expense.  This is the second straight quarter that op expenses have come in well below our estimate.  Operating loss was just $230k, significantly better than our $756k loss estimate.  Q2 net income and EPS were ($3.4) million and ($0.02) and included a $3.0 million non-cash expense related to change in derivative liability - which is a result of the increase in the common stock price through Q3. 

Cash
Aethlon exited fiscal Q2 with $9k in cash and equivalents, compared to $32k at the end of fiscal Q1 2013 (6/30/2013).  However subsequent to fiscal Q2 quarter end the company shored up its cash position.  Subsequent to quarter end and through November 13th AEMD collected an additional $233k from government contracts.  In addition, in October they raised $230k (gross) from the sale of common stock with warrants.  The company also continues to make progress with cleaning up its balance sheet with converting some outstanding and non-performing debt to equity.

Cash used in operations was $522k in Q2.  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.  As we've noted in the past, AEMD has been very successful in raising operating capital on an ongoing basis.

Along with their ongoing ability to continue to raise operating capital, we have been encouraged, from the standpoint of strengthening their financial position and balance sheet, by the success of converting some of their outstanding debt to stock.  While a substantial portion of debt remains in default, the company continues to make progress on cleaning up their balance sheet, which we view as meaningful from a de-risking perspective.  We reiterate, however, as we have in the past, that Aethlon will need to raise a substantial amount of cash,

enter into partnering arrangements or score additional valuable contracts/grants in order to complete the recently announced <_st13a_country-region _w3a_st="on">U.S. safety study and to be able to maintain operations for the longer-term.  Nonetheless, we believe management's recent progress should not be marginalized.

We also note that we currently do not model a contribution from the recently launched Exosome Sciences business, which could potentially provide some upside to both the income statement as well as cash flow, potentially even in the near term.  We will update our model to incorporate a contribution from Exosome Sciences depending on its progression and when there's more insight into likelihood and timing of revenue generation.

See below for access to our full updated report on AEMD. 

A copy of the full research report can be downloaded here >> 
 Aethlon Medical Report

Please visit 
SCR.Zacks.com for additional information on our research and coverage universe, and Subscribe to receive our articles and reports emailed directly to you each morning.

View Comments (0)