Business Context and Reporting Period
Atossa Genetics Inc. (the filing predates the company name “Atossa Therapeutics, Inc.”) filed this Form 10-Q for the quarter ended March 31, 2016. The company is a clinical-stage pharmaceutical business focused on breast-cancer therapeutics and drug-delivery methods, including intraductal microcatheters for fulvestrant and Afimoxifene Topical Gel (AfTG).
In December 2015, the company sold approximately 81% of its laboratory subsidiary, NRLBH. The laboratory business is reported as discontinued operations, and the company shifted its focus to pharmaceutical development.
Financial Performance, Cash Flow, Liquidity and Capitalization
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $0 | $0 from continuing operations; discontinued NRLBH revenue was $1.9 million |
| Operating expenses | $2.3 million | $3.3 million |
| Operating loss | $2.3 million | $3.3 million |
| Net loss | $2.3 million | $3.3 million |
| Loss per share | $0.07 | $0.13 |
| Cash used in operating activities | $3.0 million | $3.0 million |
| Cash and cash equivalents, period-end | $2.9 million | $9.7 million |
There was no revenue or gross profit from continuing operations, so gross and operating margins are not meaningful. Research and development expense was $150,000, general and administrative expense was $2.2 million, and selling expense was zero. The company recognized a $163,333 loss from terminating the NextCYTE license and writing off the related net intangible assets.
Net cash used in investing activities was $5,020. Financing activities provided $2.2 million, primarily from the issuance of 6,086,207 common shares to Aspire Capital for gross proceeds of $2.2 million. The company also issued 80,000 shares to Ensisheim Partners for $24,420 during the quarter.
At March 31, 2016, total assets were $5.1 million, total current assets were $3.4 million, and working capital was approximately $2.1 million. Current liabilities were $1.3 million. The filing does not report outstanding debt or interest-bearing borrowings. Restricted cash was $275,000, and $2.6 million of cash exceeded FDIC insurance limits.
Material Changes Versus the Prior Comparable Period
- Continuing-operations expenses declined 29%, or $945,132, primarily because the company stopped commercializing its breast-aspirator products and reduced development of discontinued programs.
- Research and development expense fell 73% to $150,000, although management expected R&D spending to increase as the fulvestrant clinical trial progressed.
- Selling expense declined from $345,845 to zero.
- General and administrative expense decreased 7% to $2.2 million.
- Q1 2015 included $1.9 million of NRLBH revenue and a $61,204 loss from discontinued operations; no comparable discontinued-operations activity was reported for Q1 2016.
- Weighted-average shares outstanding increased to 31.5 million from 24.9 million, reflecting equity financing and resulting dilution.
- Cash declined by $833,238 during Q1 2016 despite $2.2 million of financing proceeds, because operating cash use was approximately $3.0 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing resources were expected to fund planned operations for only four to six months after March 31, 2016. The company expects continuing operating losses and plans to seek additional equity financing, third-party capital, short-term borrowings, collaborations, debt financing or licensing arrangements.
The financial statements include a going-concern disclosure. Management stated that the company has no ongoing revenue source sufficient to cover operating costs and that failure to obtain additional capital could require it to cease or substantially curtail operations.
In March 2016, the company opened enrollment in a Phase 2 study of intraductally delivered fulvestrant. The planned study includes six participants receiving intramuscular fulvestrant and 24 receiving intraductal treatment. Regulatory approval, clinical execution, funding, manufacturing and commercialization remain uncertain.
AfTG development was on hold pending litigation with Besins Healthcare Luxembourg. Atossa alleges breach of its exclusive license agreement; Besins denied liability and asserted counterclaims seeking unspecified damages and injunctive relief.
A previously dismissed securities class action remained on appeal. The company recorded no liability because the potential loss could not reasonably be estimated. The filing states that no material changes had occurred to the risk factors disclosed in the 2015 Form 10-K.
As of March 31, 2016, the company had 6.0 million warrants outstanding and 3.2 million stock options outstanding. Approximately 9.2 million potential common shares were excluded from diluted loss per share because they were anti-dilutive.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after the reported four-to-six-month liquidity runway.
- Progress, enrollment, safety results and regulatory interactions for the Phase 2 intraductal fulvestrant study.
- The status and potential financial impact of the Besins litigation and counterclaims.
- Whether AfTG development resumed and whether the company retained enforceable exclusive license rights.
- Actual cash burn, operating expenses and dilution from subsequent equity, warrant or option issuances.
- Potential value and timing of the retained 19% NRLBH interest, the $4.0 million-or-fair-value put right, and earn-out payments beginning in December 2016.
- Expiration and exercise status of the 4.3 million 2011 private-placement warrants expiring June 23, 2016.