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Research Report Update

AEMD: Hitting Milestones, Operational Progress

11/20/2012

By Brian Marckx, CFA

10-Q Filed for Fiscal Q2 2013 (9/30/2012)

Aethlon Medical (OTC BB:AEMD) filed their 10-Q for their fiscal Q2 2013.  Results remain very much in-line with our expectations with revenue continuing to come in from the DARPA contract and operating expenses and shares outstanding both coming in just about dead-on with our estimates.  There were no material surprises in the financials. 

Noteworthy events on the operational front during the quarter were that AEMD completed work on the final three milestones (all three of which are meaningful as they relate to the utility of Hemopurifier in removing and measuring targeted toxins from the blood and/or represent progress towards initiation of human studies - we list these milestones below) related to the initial 12-month DARPA contract and were awarded the second year option (which encompasses another eight milestones), management continued their awareness-building efforts through presentations at key conferences (including a presentation at MD Anderson Cancer Center for Hemopurifier's potential application in treatment of melanoma) highlighting the opportunity for Hemopurifier in HCV as well as cancer, AEMD raised additional operating capital (during Q2 and subsequent to 9/30/12 all of which was in the form of equity and doesn't add to their debt balance), the balance sheet was further cleaned up with the conversion of some debt to equity, and the company is getting closer to submitting for IDE approval to the FDA in their quest to initiate clinical studies in the U.S.  

Q2 revenue of $400k (vs. $300 E) was the final revenue from the initial 12-month DARPA contract.  AEMD has now invoiced for the full $1.98 million which represents eight milestones.  AEMD has already started work under the year 2 contract (worth up to $1.6MM) and subsequent to 9/30/2012 invoiced for $209k representing work completed under the first milestone.  DARPA has the option of entering into the remainder of the proposed contract for years three through five, which would pay Aethlon up to an additional $3.2 million, annual payments under which would range between $775k and $1.6 million.

Q2 operating expenses were $1.2 million, coming in right where we had modeled them.  Similarly net income and EPS of ($1.4) million and ($0.01) were in-line with our ($1.3) million and ($0.01) estimates.   

Cash

Aethlon exited fiscal Q2 (9/30/2012) with $272k in cash and equivalents, compared to $496k at the end of the prior quarter (6/30/2012).  AEMD also had $400k in A/R at current quarter end which we expect will be collected in the near-term.  Cash used in operations was $595k in Q2, compared to $320k used in Q1 and $1.84 million in fiscal 2012. 

Q2 ending cash balance benefitted from Aethlon raising approximately $271k from the September sale of 3.4 million restricted common shares (@ $0.08/share) with warrants.  AEMD sold another $135k (1.8MM shares @ $0.074) worth of restricted shares subsequent to Q2 quarter. 

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.  And while the A/R balance, additional recent financing and revenue from the year-2 DARPA contract should provide some breathing room, 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 for the longer-term.


Final Three Milestones Completed On Initial 12-month DARPA Contract

As noted, AEMD completed and invoiced for the final 3 of 8 total milestones under the initial 12-month DARPA award during fiscal Q2 2013.  All three milestones are meaningful from the perspective of the utility of Hemopurifier in removing targeted toxins from the blood and AEMD's quest towards initiating human studies in the U.S.  The three milestones were:

> Milestone 2.2.2.3 - Perform preliminary quantitative real time PCR to measure viral load, and specific DNA or RNA targets. AEMD demonstrated that they were able to measure viral load of one or more targets as part of their submission for approval.

> Milestone 2.2.1.4 - Obtain all necessary IRB documentation and obtain both institutional and Government approval in accordance with IRB documentation submission guidance prior to conducting human or animal testing. AEMD obtained all of the required documentation from both institutional and Government authorities.

>Milestone M2 – Target capture > 50% in 24 hours for at least one target in blood or blood components. AEMD demonstrated that they were able to capture > 50% in 24 hours of one of the agreed targets in blood or blood components.


Expanded Use Program Protocol Announced

Aethlon continues to make progress with increasing patient throughput in use of its Hemopurifier therapy in the treatment of HCV and in October announced the protocol which will govern use under a compassionate use/expanded access program and mark their initial foray into commercialization. 

As a reminder, Aethlon has been conducting a study at the Medicity Institute in India called Extract-1 with mostly hard to treat genotype-1 HCV patients.  Goal of the study is to show that the Hemopurifier is able to safely and effectively accelerate viral load depletion of HCV when used during the first three days of standard of care drug therapy (peginterferon/ribavarin).  The study expects to enroll up to 30 patients. Blood is pumped with the use of a dialysis machine, although only the Hemopurifier cartridge is used to filter the blood.  In late July AEMD announced interim results on the first 10 patients treated - see below. 

Relative to the compassionate use program (the protocol and patient inclusion/exclusion criteria for which AEMD outlines in their 10/2/2012 press release), earlier this year AEMD had petitioned the Medicity IRB for permission to increase frequency of treatment up to seven days and to open up treatment under an expanded access program.  The IRB gave the go-ahead to allow compassionate use for patients that have failed or relapsed on standard HCV therapy.  This should provide AEMD with another revenue stream (albeit likely minimal, particularly at the outset) and potentially more importantly, will increase the overall patient experience and treatment volume which could bode well for increasing awareness of Hemopurifier therapy and further bolster credibility of the technology.

Treatment under this program is open to patients worldwide and could potentially draw individuals from outside of India, including the U.S. and Europe - AEMD notes Medicity is a leading center for medical tourism. 


10th Patient Treated in Extract-1 Study

In July Aethlon reported that ten patients have been treated to-date in their Extract-1 study. 

As a reminder in February Aethlon reported data on the first three patients treated, indicating effectiveness in reducing HCV load through the 3-day Hemopurifier treatment phase.  IVR (undetectable viral load at 7 days) was achieved in 1 of the 3 patients and RVR (undetectable viral load at 30 days) was achieved in 2 of the 3 patients, with the third almost achieving RVR.  Then in May Aethlon reported that nine patients (six of which were infected with genotype-1 HCV) had been treated, seven of which had been followed for 90 days or more (including three for 48 weeks) and had undetectable viral load.  Specifics on the trial endpoints (change in HCV RNA from baseline to days 3, 7, and 30) were not offered. 

In late July came news that ten patients (six of which were infected with genotype-1 HCV) have now been treated, the two most recent of which achieved IVR.  Aggregate results of all ten patients on the three efficacy endpoints was not offered although Aethlon does note that four of the six (67%) genotype-1 patients have achieved RVR (undetectable viral load at 30 days).  Relative to data from large HCV studies, this RVR rate indicates that Hemopurifier may be having a positive effect on reducing HCV load. 

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