ATOSSA GENETICS INC. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed August 14, 2017. The filing identifies the registrant as Atossa Genetics Inc. (now associated with Atossa Therapeutics, Inc.). The company is a clinical-stage pharmaceutical developer focused on breast-cancer therapeutics and drug-delivery technologies, with no marketed products or recurring revenue.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | None reported | None reported |
| Research and development expense | $824,094 | $1,368,396 |
| General and administrative expense | $1,072,169 | $2,214,712 |
| Total operating expenses | $1,896,263 | $3,583,108 |
| Operating loss | $(1,896,263) | $(3,583,108) |
| Net loss | $(2,241,489) | $(3,945,043) |
| Net loss applicable to common stockholders | $(4,809,621) | $(6,513,175) |
| Basic and diluted loss per share | $(0.64) | $(1.15) |
| Net cash used in operating activities | $3,209,575 for the six months |
Balance sheet at June 30, 2017: Cash and cash equivalents were $3.69 million, restricted cash was $55,000, total assets were $4.71 million, and total current liabilities were $1.91 million. Reported working capital was approximately $2.1 million. The company had no conventional debt disclosed; liabilities included an $864,371 common-stock warrant liability, $495,811 of accounts payable, and $482,420 of payroll liabilities.
Liquidity: Financing activities generated $3.87 million during the first six months, principally from the April 2017 public offering. Cash increased by $662,061 from December 31, 2016 to June 30, 2017. Approximately $3.44 million of cash exceeded FDIC insurance limits.
Material Changes Versus the Prior Comparable Period
- Six-month total operating expenses declined 10.0% to $3.58 million from $4.05 million, primarily because of lower general and administrative costs following headcount, rent, consulting, and exit-cost reductions.
- Six-month R&D expense increased 328.9% to $1.37 million from $319,000, reflecting endoxifen manufacturing and clinical-study activity. Management expected R&D spending to increase through 2017.
- Six-month net loss improved modestly from $4.05 million to $3.95 million before the preferred-stock deemed dividend. The $2.57 million deemed dividend caused loss applicable to common stockholders to increase to $6.51 million.
- Operating cash burn declined to $3.21 million from $4.65 million, while financing proceeds increased to $3.87 million from $2.13 million.
- Common shares outstanding increased to 10,032,410 at June 30, 2017 from 3,786,913 at December 31, 2016, largely due to preferred-stock conversions and warrant exercises.
Programs, Outlook, Risks, and Unusual Items
- The company was conducting a Phase 1 study of oral and topical endoxifen in Australia and had completed enrollment. Subject to positive results, management planned to begin Phase 2 studies in the second half of 2017.
- A Phase 2 study was evaluating intraductal delivery of fulvestrant through the company’s microcatheter technology. The study targeted 30 patients; management could not estimate when enrollment would be completed.
- Management stated that existing resources were expected to fund planned operations for only four to six months, while additional capital would be required for the following twelve months. The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern.
- The April 2017 offering generated approximately $4.4 million of gross proceeds and approximately $3.9 million of net proceeds through Class A units and Series A convertible preferred-stock units.
- On June 30, 2017, the exercise price of the 2017 warrants was reduced to $0.26. Holders of warrants covering approximately 3.0 million shares accepted a temporary cashless-exercise modification, resulting in issuance of approximately 1.5 million common shares. Approximately 2.87 million of these warrants remained outstanding at June 30.
- Subsequent to June 30 through August 11, 2017, an additional 1,656,666 warrants were exercised for $434,733 in cash proceeds; 1,215,000 warrants remained outstanding as of August 14.
- The company recognized $152,447 of warrant fair-value expense and $192,817 of warrant financing expense during the six months. The warrant liability was classified as a Level 3 fair-value measurement.
- A securities class-action lawsuit remained pending on appeal in the Ninth Circuit after oral argument on May 18, 2017. The company recorded no liability because the potential financial effect could not be reasonably estimated.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2017. Previously identified material weaknesses related to patent impairment valuation and weighted-average share and earnings-per-share calculations were under remediation.
- NASDAQ had notified the company that it was not in compliance with the $1.00 minimum bid-price requirement. The company had until November 7, 2017 to regain compliance or request additional time, creating a potential delisting risk.
Investor Verification Checklist
- Verify the company’s current cash runway, financing plans, and ability to raise capital without substantial dilution.
- Assess the going-concern uncertainty and whether subsequent financing or warrant exercises materially changed liquidity.
- Review the clinical status, enrollment, safety data, and regulatory path for oral and topical endoxifen and the fulvestrant microcatheter program.
- Reconcile the significant increase in common shares, preferred-stock conversions, outstanding warrants, and potential future dilution.
- Monitor the securities litigation appeal and any potential financial or operational consequences.
- Confirm remediation of the disclosed material weaknesses and the company’s continued compliance with NASDAQ listing standards.