AEMD Files 10-K, Revenue In-Line
Brian Marckx, CFA
10-K Filed for Fiscal 2012 (3/31/2012)
Aethlon Medical (AEMD) filed their 10-K for their 2012 fiscal year ending March 31. While Q4 revenue came in exactly in-line with our estimate, net income and EPS were well below our numbers, mostly due to (non-cash) loss on derivative liabilities (i.e. - change in the value of outstanding stock warrants and the conversion feature of convertible notes), which is almost impossible to forecast.
As expected, fiscal 2012 revenue of $1.36 million, including $402k in Q4 was almost entirely ($1.4k of revenue came from the first commercial sale of one of Aethlon's diagnostic products) from work performed under the DARPA contract which Aethlon commenced work under in October 2011. The DARPA related billings to-date relate to the first five performance and payment milestones (see Appendix at the end of this report for description of milestones billed). Aethlon is still eligible to provide work and bill for another ~$600k under the initial DARPA contract (which totals $1.98MM) over the next several months. DARPA has the option of entering into the remainder of the proposed contract for years two through five, which would pay Aethlon up to an additional $4.8 million, annual payments under which would range between $775k and $1.6 million.
Q4 operating expenses were $1.3 million, only slightly higher than our $1.1 million estimate on higher than anticipated professional fees related to the HCV trial in India. The major difference between estimated and actual net income (-$1.55MM E vs. -$4.50MM A) and EPS (-$0.01 E vs. -$0.04 A) was a $2.3MM derivative liability loss. As noted, this is a non-cash expense, not fundamental to Aethlon's operations and relates to the change in valuation of outstanding warrants and conversion option in convertible securities.
Aethlon exited fiscal 2012 (3/31/2012) with $144k in cash, compared to $355k at the end of the prior quarter (12/31/2011). Subsequent to 3/31/2012, Aethlon raised approximately $792k (gross) from the April sale of 2.5 million common shares (@ $0.08/share) with warrants and the June sale of 8.22 million common shares (@ $0.072/share) with warrants. In addition, the $402k in revenue booked in Q4 was carried as A/R, which was collected during fiscal Q1 2013 (ending 6/30/2012). And in June 2012 Aethlon invoiced for and received an additional $216k from the U.S. Government for the sixth milestone under the DARPA contract.
Despite being in default on the majority of their debt obligations (although they have recently successfully converted some debt to common stock), Aethlon continues to be successful in raising piecemeal capital to finance operations. We think this speaks positively to the ongoing investor interest in the company and faith in the potential for the Hemopurifier. As we've noted in the past, Aethlon will need to raise a substantial amount of cash, enter into partnering arrangements or score additional valuable contracts/grants in order to maintain operations.
Cash used in operations was $740k and $1.84 million in Q4 and fiscal 2012, respectively. Excluding changes in working capital, cash used in operations was 822k and $2.48 million in these same respective periods.
AEMD Looking At Melanoma (from our Note published on June 13, 2012)
Aethlon noted in a press release on 6/11/12 that based on findings from a study led by Cornell University and just published in the (online version) journal Nature, that the company may pursue a melanoma treatment study that has been proposed by a (unnamed) U.S. cancer research institute.
The Cornell study found that exosomes released by melanoma cancer cells facilitated the spread of the disease throughout the body and to other organs and bones. There was also a predictive relationship between exosome levels and severity of cancer with late-stage (:IV) patients presenting with much greater exosomes levels compared to earlier stage patients. This indicates that removal of exosomes from circulation could reduce progression of the deleterious effects of melanoma to other parts of the body and potentially improve patient outcomes. Aethlon has previously demonstrated in pre-clinical testing that their Hemopurifier can capture exosomes from patients with late-stage melanoma.
Melanoma, the incidence of which is growing rapidly, is the most deadly form of skin cancer, accounting for approximately 4% of all skin cancer cases. Melanoma can be lethal, especially if it penetrates the lowest skin layer and enters the lymph system. Statistics show that five-year survivability is as high as 97% if melanoma if diagnosed and treated at its earliest stage (:IA) but this drops precipitously as the disease progresses. As such, a device that could effectively treat these late-stage melanoma patients would have massive appeal, not just in the U.S. but worldwide.
U.S. Melanoma Survivability by Disease Stage
Source: American Cancer Society
Dramatically Escalating Incidence of Melanoma
Incidence of Melanoma in U.S.
As a melanoma study is still in the early proposal stage and Aethlon remains focused on the near-term opportunities with HCV and the DARPA contract, management does not currently have a timeline when a melanoma study may commence. We noted previously in our coverage of Aethlon that we view the company's cancer program as more of a work in progress relative to HCV but potentially offering a longer-term opportunity. This proposed melanoma study could potentially speed the cancer program along, although still likely to be more of a back-burner application as Aethlon pursues their near-term endeavors. Nonetheless, we view this as a positive development, potentially offering another opportunity for Aethlon and their Hemopurifier.
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