Business Context and Reporting Period
Atossa Genetics Inc. (now identified in the request as Atossa Therapeutics, Inc.) filed a Form 10-Q for the quarter ended March 31, 2019. The company was a clinical-stage biopharmaceutical business focused on Endoxifen therapies and intraductal drug-delivery technologies for breast cancer and other breast conditions. It was not marketing products and had no sustainable revenue.
Key programs included Phase 2 studies of topical Endoxifen for mammographic breast density, oral Endoxifen in a pre-surgery breast-cancer “window of opportunity,” and intraductal fulvestrant delivery. The company expected preliminary mammographic breast-density study results in the second quarter of 2019.
Financial Highlights
| Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1.45 million | $0.47 million |
| General and administrative expense | $2.61 million | $1.40 million |
| Total operating expenses | $4.06 million | $1.87 million |
| Operating loss | $4.06 million | $1.87 million |
| Net loss | $4.07 million | $1.87 million |
| Basic and diluted loss per share | $0.62 loss | $8.48 loss |
| Cash used in operating activities | $2.15 million | $2.39 million |
| Cash, cash equivalents and restricted cash at period-end | $19.68 million | $4.83 million |
Gross and operating margins are not meaningful because the company had no revenue. Cash and cash equivalents were $19.57 million at March 31, 2019, and working capital was approximately $19.3 million. Total liabilities were $1.53 million, consisting primarily of current operating liabilities and lease liabilities; the filing does not disclose material funded debt.
Material Changes Versus the Prior Comparable Period
- Total operating expenses increased 117% to $4.06 million.
- R&D expense increased 208%, primarily from personnel, clinical-trial activity and stock-based compensation related to the Endoxifen programs.
- G&A expense increased 86%, driven largely by compensation, professional services and the recognition of $1.07 million of expense associated with canceled liability options.
- Net loss increased to $4.07 million from $1.87 million, although loss per share improved because weighted-average shares increased to 6.57 million from 0.22 million.
- The company received $11.34 million from warrant exercises, issued approximately 2.8 million common shares, and ended the quarter with substantially higher cash.
- Series B preferred stock conversions resulted in 476,431 additional common shares. Remaining outstanding warrants totaled approximately 1.07 million at a $4.05 exercise price, expiring May 30, 2022.
- The company adopted the new lease standard and recognized approximately $101,000 of operating lease liabilities and corresponding right-of-use assets.
Guidance, Outlook, Risks and Unusual Items
Management expected continuing operating losses and increasing R&D spending as clinical studies and other development programs progressed. Management believed available funding would support operations for at least one year; elsewhere in the filing, management stated that funding was expected to support planned operations for at least 12 to 18 months from the report date. Additional capital would likely be required thereafter.
- If additional funding is unavailable, the company may reduce, delay or terminate development and commercialization activities, or relinquish rights through collaboration or licensing arrangements.
- Clinical, regulatory, manufacturing, intellectual-property and commercialization risks remain significant. The filing specifically highlights risks related to FDA and foreign approvals, enrollment and completion of clinical trials, trial outcomes, product development costs, third-party providers, litigation, key personnel and future capital raising.
- The company recorded $1.74 million of remaining unrecognized compensation expense when liability options were canceled. It also reclassified $3.15 million of the related stock-based compensation liability to additional paid-in capital.
- Disclosure controls and procedures were not effective as of March 31, 2019. Management cited a previously identified material weakness involving the calculation of a deemed dividend on Series B preferred stock and described a remediation plan involving enhanced technical-accounting review.
- The company had approximately $18.93 million of cash deposits above FDIC-insured limits, creating concentration-of-credit risk.
- Management stated that ordinary-course legal proceedings were not expected to have a material effect, and that there were no material changes to the risk factors in the 2018 Form 10-K.
Investor Verification Checklist
- Verify the company’s current legal name and whether the filing’s “Atossa Genetics Inc.” designation has since changed to Atossa Therapeutics, Inc.
- Reconcile cash runway assumptions with quarterly operating cash burn, expected clinical-trial spending and the company’s stated need for future financing.
- Review the status and results of the Endoxifen and intraductal fulvestrant studies, including the expected mammographic breast-density results.
- Assess dilution from outstanding warrants, options, preferred-stock conversion rights and any future equity financing.
- Review the disclosure-controls material weakness, prior restatement, and progress under the remediation plan.
- Confirm the accounting and economic impact of the canceled liability options and replacement 2019 option awards, including required stockholder approval.
- Monitor cash concentration above FDIC insurance limits and the company’s limited operating history without product revenue.