Atossa Genetics, Inc. 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed March 16, 2017. The company is a clinical-stage pharmaceutical business focused on breast-cancer therapeutics and targeted intraductal drug delivery. Its principal programs were fulvestrant delivered through intraductal microcatheters and oral/topical endoxifen. The former laboratory subsidiary, NRLBH, was sold in December 2015 and is reported as a discontinued operation.
Financial performance and position
| Metric | 2016 | 2015 comparable |
|---|---|---|
| Continuing-operation revenue | $0 | $1,758 product sales |
| Discontinued-operation revenue | $0 | $5,523,116 |
| Operating loss | $7,968,590 | $12,758,618 |
| Net loss | $6,368,885 | $15,760,323 |
| Loss per share | $2.80 | $8.31 |
| Research and development expense | $770,427 | $2,359,593 |
| General and administrative expense | $6,479,193 | $8,846,963 |
| Impairment of intangible assets | $718,970 | None |
| Cash used in operating activities | $5,374,589 | $13,953,296 |
| Cash and cash equivalents at year-end | $3,027,962 | $3,715,895 |
| Working capital at year-end | Approximately $2.2 million | Not clearly stated |
Gross margin is not meaningful for 2016 because the company generated no revenue or cost of revenue. Other income was $1,599,705, primarily reflecting the approximately $1.8 million termination payment received from Besins Healthcare for relinquishing the Afimoxifene Topical Gel program. No income tax benefit was recognized because of uncertainty regarding the utilization of tax attributes.
Total liabilities were $1,047,266, consisting of current liabilities. The filing does not identify material interest-bearing debt. Stockholders’ equity was $3,097,106 at December 31, 2016, compared with $3,741,734 at December 31, 2015.
Material changes versus 2015
- The company generated no sustainable revenue after the sale of NRLBH and discontinued commercialization of its medical devices and laboratory services.
- Operating expenses declined 37% to $7.97 million, principally because of the NRLBH sale and the shift away from device commercialization.
- Research and development expense declined 67% as prior programs were discontinued or deprioritized; management expected R&D spending to increase in 2017 as the fulvestrant and endoxifen programs advanced.
- Net loss improved by approximately $9.4 million, although the 2015 loss included $3.0 million from discontinued operations.
- Cash used in operating activities declined 61.5%, but operating cash burn still exceeded year-end cash reserves.
- The company completed a 1-for-15 reverse stock split in August 2016 and increased shares outstanding to 3,786,913 at year-end from 2,177,151 at year-end 2015.
- Financing activities provided $4,695,869 in 2016, including approximately $2.13 million net from Aspire Capital and $2.56 million net from an August public offering.
- The company recorded a $718,970 impairment of Acueity-related intangible assets and terminated the NextCYTE license, writing off the remaining $163,333 license balance.
Liquidity, outlook, risks and unusual items
- Going concern: Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern. Management stated that existing resources were expected to fund planned operations for only two to four months after filing.
- Funding: The company planned to raise additional capital through equity sales, borrowings, or other financing arrangements. The May 2016 Aspire Capital agreement permitted sales of up to $10 million, but no shares had been sold under that agreement as of the filing date. Future equity financing could materially dilute shareholders.
- Clinical outlook: The Phase 2 fulvestrant microcatheter study began enrollment in March 2016, was being transferred from Columbia University Medical Center to Montefiore Medical Center, and was expected to complete enrollment by August 2017. The planned study included six intramuscular and 24 intraductal participants.
- Endoxifen outlook: The company expected to complete initial manufacturing and begin a Phase 1 study in the second quarter of 2017, with a Phase 2 study planned for the second half of 2017, subject to regulatory and ethics approvals.
- Regulatory risk: No development product had received marketing approval. The microcatheter programs may be regulated as combination drug-device products, potentially requiring extensive clinical and regulatory work.
- Legal contingencies: A securities class-action appeal remained pending, with oral argument scheduled for May 18, 2017. No liability was recorded because the potential loss could not be reasonably estimated. The separate Besins litigation was settled in August 2016.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2016 because of a material weakness in the Acueity patent impairment analysis. A $366,000 initial valuation error was corrected before issuance of the financial statements.
- Execution risks: The company relied extensively on third-party manufacturers, clinical sites and contract research organizations, including a single planned supplier for endoxifen drug substance.
Most important facts for investors to verify
- Whether the company obtained sufficient financing after filing to address the stated two-to-four-month liquidity runway.
- Enrollment, safety, tolerability and distribution results from the fulvestrant intraductal microcatheter study.
- Whether the endoxifen Phase 1 study began on schedule and whether subsequent regulatory milestones were achieved.
- Actual cash burn, operating expenses, share issuances and dilution under the Aspire Capital facility and other financing arrangements.
- Resolution and financial impact of the securities class-action appeal.
- Remediation of the material weakness in internal control over financial reporting.
- Whether the company generated any commercial revenue or obtained regulatory approval for a product after December 31, 2016.