Business Context and Reporting Period
Atossa Genetics Inc. (now identified in the request as Atossa Therapeutics, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2019. The company is a clinical-stage biopharmaceutical developer focused on breast-cancer therapeutics and drug-delivery technologies, including oral and topical Endoxifen and intraductal delivery of fulvestrant and other therapies. It was not generating product or service revenue.
Financial Results and Liquidity
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $2.6 million | $4.1 million |
| General and administrative expense | $4.7 million | $7.3 million |
| Total operating expenses | $7.3 million | $11.4 million |
| Net loss | $7.3 million | $11.3 million |
| Net loss per common share | $0.80 | $1.44 |
| Net cash used in operating activities | Not separately provided | $4.7 million |
- Gross and operating margins are not meaningful because the company had no revenue or cost of revenue.
- Cash and cash equivalents were $17.1 million at June 30, 2019; cash, cash equivalents and restricted cash totaled $17.2 million.
- Working capital was approximately $17.4 million. Total liabilities were $1.1 million, consisting primarily of operating lease liabilities and current operating obligations; the filing reports no debt financing.
- Financing activities provided $11.3 million during the first six months, primarily from exercise of warrants issued in the 2018 financing. Investing cash use was $7,625.
- Stockholders’ equity was $17.6 million at June 30, 2019, compared with $8.8 million at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Three-month operating expenses increased 76% to $7.3 million from $4.1 million; six-month operating expenses increased 89% to $11.4 million from $6.0 million.
- Three-month R&D expense increased 78% to $2.6 million, while six-month R&D expense increased 110% to $4.1 million, reflecting higher clinical, personnel and stock-based compensation costs.
- Three-month G&A expense increased 75% to $4.7 million, and six-month G&A expense increased 79% to $7.3 million, primarily due to stock-based compensation and higher payroll costs.
- Operating cash use increased 10% to $4.7 million for the six months ended June 30, 2019, from $4.2 million in the prior-year period.
- Stock-based compensation expense increased to $5.3 million for the quarter and $5.6 million for the six-month period, versus $179,000 and $394,000, respectively, in the prior-year periods. The increase included expense from executive option grants and cancellation of liability-classified options.
- Common shares outstanding increased to 9.1 million from 5.8 million at December 31, 2018, principally from warrant exercises and preferred-stock conversions.
- The 2018 comparative financial statements were restated. The deemed dividend on Series B preferred stock was corrected from $4.8 million to $11.5 million, changing reported 2018 loss per share for the quarter and six months to $5.08 and $6.11, respectively. The correction did not affect cash or operating results.
Guidance, Outlook, Risks and Unusual Items
- Management expects available funding to support operations for at least one year from the financial-statement date, but expects additional funding will be needed thereafter. The company may need to reduce, delay or eliminate development and commercial activities if financing is unavailable.
- Management expects continuing operating losses and increased R&D spending as it advances oral and topical Endoxifen, additional Phase 2 studies, a modified-release oral Endoxifen tablet, intraductal fulvestrant, and preclinical CAR-T and immunotherapy programs.
- Following preliminary Phase 2 results showing a statistically significant average 14.3% reduction in mammographic breast density in the 20 mg topical Endoxifen group, the company planned to initiate a Phase 2 oral Endoxifen study as early as the fourth quarter of 2019.
- The company reported no material change to the risk factors in its 2018 Form 10-K. Key risks include clinical-trial execution, regulatory approval, commercialization, intellectual property, third-party suppliers, litigation, key personnel retention and the ability to raise capital.
- Disclosure controls and procedures were determined to be ineffective as of June 30, 2019. The weakness related to the technical accounting calculation of the 2018 Series B deemed dividend; management planned enhanced independent review procedures.
- The company adopted the new lease accounting standard in 2019 and recognized approximately $101,000 of operating lease liabilities and corresponding right-of-use assets. The adoption was not material to the financial statements.
- As of June 30, 2019, 1.07 million warrants remained outstanding with a $4.05 exercise price and May 2022 expiration. The company also had 4.35 million stock options outstanding, creating potential future dilution.
- Cash deposits exceeded FDIC insurance limits by approximately $16.4 million at June 30, 2019.
Investor Verification Items
- Verify the company’s current corporate name and whether subsequent filings changed the registrant name from Atossa Genetics Inc.
- Assess cash burn, clinical-development spending and the timing and terms of future capital raises.
- Review progress and final results for Endoxifen clinical programs and the intraductal fulvestrant program, rather than relying on preliminary results.
- Evaluate the dilution implications of outstanding options, warrants, preferred-stock conversions and future equity financing.
- Confirm remediation of the material weakness and whether subsequent filings identify additional accounting or disclosure-control issues.
- Review regulatory, clinical, intellectual-property and commercialization risks, including the absence of current revenue and the company’s stated going-concern funding needs.