AEMD Further De-Risks Balance Sheet

Zacks Small Cap Research

By Brian Marckx, CFA


10-K Filed (Year-ending 3/31/2014)

Aethlon Medical (AEMD) filed their 10-K for the fiscal year ending 3/31/2014.  Q4 revenue of $707k was well ahead of our $478k 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 $658k in DARPA related revenue (reflecting the final year-2 milestone and three year-3 milestones) and $49k from the Battelle subcontract, compared to our $453k and $25k respective estimates.

Through the end of fiscal 2014 AEMD had billed approximately $4.1M under the DARPA awards, which represents $1.97 million under the initial year-1 contract, $1.6 million under the year-2 contract and $462k 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.  AEMD began work on the Battelle subcontract in early April 2013 and through March 31 has booked a total of $157k in revenue related to this.    

DARPA has the option of entering into the remainder of the proposed contract for years four and five. AEMD recently noted that due to budget restrictions, DARPA plans to reduce 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 will now be ~$2.4M (the breakdown per contract-year was not disclosed). We had already adjusted our model to account for this change.  We currently model just over $700k in DARPA related revenue in the current 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.

Q4 operating expenses were $1.5M, compared to our $1.3M estimate - the difference mostly related to stock compensation and higher professional fees. Operating loss came in at $810k versus our $790 estimate.  Net income and EPS, excluding $6.2M in non-cash change in derivative liability, was ($1.3)M and ($0.01), compared to out ($960)k and ($0.00) estimates.  

Balance Sheet / Cash Balance

A significant highlight over the last few months 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 ~$830k in accrued interest) through early July.  This resulted from the conversion of $660k of notes (plus an additional $460k of interest) to equity and extending the maturity of another ~$780k of debt which had previously been classified as past due.  Debt balance (including that owed to related parties), pro forma for the conversions and reclassifications subsequent to 2014 fiscal year end, stood at $2.7M compared to $3.4M at the end of fiscal Q3 (12/31/2013).  In addition, the derivative liability balance (which was $5.6M at the end of Q3 and $10.7M at fiscal 2014 year end) was subsequently reclassified as equity and therefore completely eliminated. 

As we have noted in our ongoing coverage of AEMD, their historical significant past due debt balance has 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.            

AEMD exited fiscal 2014 with $1.3M in cash and equivalents, compared to $1.9M at the end of fiscal Q3.  Cash used in operating activities was $555k in Q4.  Subsequent to year-end AEMD collected $135k from the DARPA and Battelle contracts.  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 progress on the operational front as well.  This includes further investigation of the potential of Hemopurifier for the treatment of cancer.  With Hemopurifier being validated in the capture of exosomes for a variety of cancer types including breast, ovarian, colorectal, lymphoma and melanoma and a recent published study naming Hemopurifier as having potential in the treatment cancer, this application appears to be gaining meaningfully more traction.  AEMD now hopes to submit an IDE for cancer-related studies by this Fall. And while development of Hemopurifier for a potential cancer-related application remains at an early stage, we view this an especially attractive market given its relatively large size, obvious dearth of effective treatment options and early indications that Hemopurifier may have real utility in addressing it. 

The newly launched ESI lab should afford the potential to accelerate R&D efforts for cancer.  The lab is also looking at other markers including Alzheimer's Disease, potentially providing AEMD with other shots on goal and applications for Hemopurifier.

Relative to the U.S. safety study in HCV patients, AEMD recently noted that they are now in process of manufacturing a second batch of devices for use in the study and they now hope to initiate the trial in September of this year.  If all goes well in the study, the follow-on game plan is expected to include development of feasibility studies in HCV, HIV and cancer.   


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