Atossa Genetics, Inc. (now identified in request metadata as Atossa Therapeutics, Inc.) — Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2015. The company develops breast-health laboratory services, medical devices and potential therapeutics through its wholly owned National Reference Laboratory for Breast Health subsidiary. Products and services include pharmacogenomics and nipple-aspirate-fluid cytology testing, the FullCYTE Breast Aspirator for the United States, and the ForeCYTE Breast Aspirator for the European Union and EFTA markets.
In March 2015, the company launched the FullCYTE device in the United States and the ForeCYTE device in selected European markets. The company remained in an early commercialization and development stage and had not established recurring revenue sufficient to cover operating costs.
Key financial metrics
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 |
|---|---|---|
| Total revenue | $1.873 million | $0.024 million |
| Gross profit | $0.665 million | $0.024 million |
| Gross margin | 35.5% | 100.0% |
| Operating expenses | $3.949 million | $2.435 million |
| Operating loss | $(3.284) million | $(2.411) million |
| Operating margin | (175.3%) | (9,994.6%) |
| Net loss | $(3.335) million | $(2.412) million |
| Basic and diluted loss per share | $(0.13) | $(0.10) |
| Cash used in operating activities | $(2.999) million | $(2.604) million |
| Cash and cash equivalents at period-end | $9.728 million | $16.591 million |
Diagnostic testing services generated $1.873 million of Q1 revenue; product sales were $470. Cost of revenue was $1.208 million, primarily related to pharmacogenomics testing. General and administrative expense was $2.605 million, research and development expense was $0.797 million, and selling expense was $0.547 million.
At March 31, 2015, total assets were $13.803 million, current assets were $11.367 million, and current liabilities were $3.487 million, producing working capital of approximately $7.9 million. Total liabilities were $3.519 million. The filing reports lease obligations but no material conventional borrowing or long-term debt. The company had $1.280 million of accounts receivable, net, and recorded $0.218 million of bad debt expense during the quarter.
Investing cash use was $0.066 million. Financing activities provided $4.292 million from the issuance of common stock to Aspire Capital. The company issued 2,653,199 shares during March 2015 and stated that no shares remained available for sale under that Aspire agreement. Shares outstanding increased to 27,217,257 at March 31, 2015, from 24,564,058 at December 31, 2014. Warrants to purchase 6,033,426 shares and options to purchase 4,354,418 shares were outstanding at quarter-end.
Material changes versus the prior comparable period
- Revenue increased to $1.873 million from $24,124, driven primarily by pharmacogenomics testing launched in late 2014.
- Gross profit increased to $0.665 million, but gross margin declined because testing-related costs were incurred in 2015.
- Operating expenses increased 62% to $3.949 million. Selling expense increased 130% due mainly to commercialization activities, while general and administrative expense increased 47% and research and development expense increased 89%.
- Net loss increased to $3.335 million from $2.412 million, and operating cash use increased by approximately $0.395 million.
- Cash increased during the quarter by $1.228 million because $4.292 million of equity financing exceeded operating and investing cash requirements.
- Accounts receivable increased substantially to $1.280 million from $0.298 million, while the allowance for doubtful accounts was $0.317 million at March 31, 2015.
Guidance, outlook, commentary, risks and unusual items
Management expected existing resources as of March 31, 2015 to fund planned operations through 2015, but stated that additional capital would be required to fund continuing losses until profitability. Planned funding sources included equity offerings, product and laboratory-service revenue, and potential short-term borrowings. The company warned that unavailable or unfavorable financing could require it to curtail or cease operations.
The financial statements include an explicit going-concern qualification. Management reported cumulative losses and negative operating cash flows since inception and stated that substantial doubt exists regarding the company’s ability to continue as a going concern. No adjustments were made to the financial statements for this uncertainty.
On May 7, 2015, after the reporting date, the applicable Medicare Administrative Contractor issued a local coverage determination effective June 22, 2015. The determination limits Medicare reimbursement for pharmacogenomics tests to specified drugs and conditions and provides reimbursement of $243 to $669 per test, compared with the company’s historical average of approximately $1,100. Management expected to redirect efforts toward commercial payors and covered indications; the change could materially reduce revenue and operating cash flow.
Other significant risks include regulatory compliance and additional FDA clearances, product adoption, reimbursement and payor coverage, dependence on distributors and suppliers, development and commercialization of tests and therapeutics, intellectual-property protection, and the need to expand sales and marketing infrastructure. The company also disclosed a securities class-action appeal pending in the Ninth Circuit. The claims were dismissed by the district court, but the company has recorded no liability because the potential financial impact cannot be reasonably estimated.
The company had a minimum purchase commitment of approximately $647,700 under an Affymetrix agreement, additional service commitments, minimum annual purchases of approximately $452,408 under a Luminex agreement, and a potential payment of up to $1.2 million to A5 Genetics upon regulatory clearance of the NextCYTE test, plus per-test royalties and service fees.
Most important facts for investors to verify
- Whether pharmacogenomics revenue and collections remain viable after the Medicare coverage determination becomes effective on June 22, 2015.
- Whether cash resources and planned financing are sufficient to fund operations beyond 2015, given quarterly operating cash use of approximately $3.0 million and the going-concern warning.
- Actual commercial adoption, pricing and margins for the FullCYTE and ForeCYTE devices following their March 2015 launches.
- Regulatory status of the company’s devices and laboratory-developed tests, including FDA inspection remediation and any required clearances.
- The outcome and potential cost of the securities litigation appeal, for which no liability was recorded.
- Accounts-receivable collectability, allowance adequacy and the effect of reimbursement changes on cash conversion.
- Potential dilution from outstanding options, warrants and future equity financing.