Business context and reporting period
Atossa Genetics Inc. (now identified in the request as Atossa Therapeutics, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2015. The company was a clinical-stage pharmaceutical business focused on breast-cancer therapeutics and targeted delivery methods.
During 2015, Atossa shifted substantially away from medical devices and laboratory testing toward pharmaceutical development. On December 16, 2015, it sold approximately 81% of its NRLBH laboratory subsidiary and classified the laboratory business as discontinued operations.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Continuing-operations revenue | $1,758 | $40,138 |
| Gross profit/(loss), continuing operations | $(130,653) | $40,138 |
| Operating loss | $(12,758,618) | $(12,171,028) |
| Loss from discontinued operations | $(3,002,136) | $(2,487,158) |
| Net loss | $(15,760,323) | $(14,657,926) |
| Basic and diluted loss per share | $(0.55) | $(0.61) |
| Cash and cash equivalents at year-end | $3,715,895 | $8,500,718 |
| Net cash used in operating activities | $(13,953,296) | $(10,555,450) |
| Net cash provided by financing activities | $9,456,892 | $13,057,264 |
Continuing-operations operating expenses were $12.6 million, including $8.8 million of general and administrative expense, $2.4 million of research and development expense, and $1.4 million of selling expense. Research and development expense increased from $1.1 million to $2.4 million. The filing does not provide a meaningful consolidated operating margin because continuing-operations revenue was minimal and the company reported a gross loss.
The discontinued NRLBH business generated $5.5 million of revenue and $2.0 million of gross profit in 2015, but produced a $3.0 million net loss after operating expenses, exit costs, and a $670,943 loss on disposal. The company retained approximately 19% of NRLBH through preferred stock, with a right to sell after four years for the greater of $4.0 million or fair value, and may receive earn-out payments equal to 6% of NRLBH gross revenue, up to $10.0 million.
At December 31, 2015, total assets were $6.2 million, total liabilities were $2.5 million, working capital was approximately $1.9 million, and accumulated deficit was $50.9 million. The company reported no debt balance in the provided financial statements, although it had operating lease and other contractual commitments.
Material changes versus the prior comparable period
- Continuing-operations revenue declined to $1,758 from $40,138 as the company stopped marketing its devices and no longer recognized laboratory revenue in continuing operations.
- Net loss increased to $15.8 million from $14.7 million, while operating cash use increased by approximately $3.4 million.
- Research and development spending increased approximately 113% in continuing operations and 31% on a total company basis, reflecting investment in Afimoxifene Topical Gel, intraductal microcatheters, and other programs.
- The company raised capital through approximately $4.3 million of Aspire Capital stock sales and a June 2015 offering that generated approximately $5.2 million of net proceeds. All pre-funded warrants issued in that offering were exercised by year-end.
- Common shares outstanding increased from approximately 24.6 million at December 31, 2014 to approximately 32.7 million at December 31, 2015, before additional 2016 issuances.
- The $2.35 million impairment charge recorded in 2014 for Acueity intangible assets was not repeated in 2015.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continuing operating losses while advancing clinical programs. It stated that year-end resources were expected to fund planned operations for approximately four to six months and that additional capital would be required. The filing states that failure to raise capital could require substantial curtailment or cessation of operations. The independent auditor emphasized substantial doubt about the company’s ability to continue as a going concern.
The lead development program was intraductal delivery of fulvestrant through patented microcatheters. A Phase 2 study began in March 2016 at Columbia University Medical Center, with six patients receiving intramuscular fulvestrant and up to 24 patients receiving intraductal treatment. The company planned a Phase 2 study of AfTG in mid-2016, but development work was on hold pending resolution of its dispute with Besins.
Atossa held an exclusive worldwide license for AfTG, subject to royalties of 8% to 9% of net sales for the first 15 years of commercialization and potential milestone payments of $5 million and $20 million for certain additional indications. In January 2016, Atossa sued Besins for alleged breach of contract; Besins denied the claims and asserted counterclaims for breach of contract, fraud, and negligent misrepresentation. The potential financial impact was not estimable and no liability was recorded for the securities litigation described in the filing.
The company also disclosed a securities class-action appeal arising from claims related to its 2012 offering and prior diagnostic activities. The claims had been dismissed by the trial court, but an appeal was pending as of the filing date.
Additional risks include clinical-trial failure or delay, inability to obtain FDA or foreign regulatory approval, dependence on contract manufacturers and clinical providers, intellectual-property challenges, reimbursement uncertainty, dilution from future equity financings, and potential Nasdaq delisting. Nasdaq granted an extension through September 26, 2016 to regain compliance with the $1.00 minimum bid-price requirement.
Important facts for investors to verify
- Confirm the company’s current corporate name and whether subsequent filings materially changed the business, capital structure, or development programs.
- Review subsequent financing activity, cash runway, dilution, and whether the company resolved the going-concern uncertainty.
- Verify the status and clinical results of the fulvestrant intraductal microcatheter trial and the planned AfTG program.
- Check the disposition, earn-out payments, and retained preferred-stock interest related to NRLBH.
- Review the outcome and financial consequences of the Besins litigation and the securities-litigation appeal.
- Assess outstanding warrants, options, and other potential dilution; the filing reported 6.0 million outstanding warrants and 3.6 million outstanding options at year-end.
- Confirm Nasdaq listing compliance and any reverse split or other capital-structure actions taken after the filing.