Atossa Genetics, Inc. 2013 Form 10-K Summary
Business context and reporting period
Atossa Genetics, Inc. is a development-stage healthcare company focused on breast-health laboratory-developed tests, medical devices and potential therapeutics. Its wholly owned National Reference Laboratory for Breast Health performs cytology and molecular diagnostic testing. The fiscal year ended December 31, 2013; the filing was signed March 27, 2014. The company was formerly focused on the MASCT System, now called the ForeCYTE Breast Aspirator, and related nipple aspirate fluid testing.
The ForeCYTE device was launched nationally in early 2013 but was voluntarily recalled beginning October 4, 2013 following FDA concerns regarding instructions for use, promotional claims and changes to the specimen-collection process. The company was not marketing the device in the United States at year-end.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $632,558 | $481,842 | 31% increase |
| Product revenue | $223,440 | $6,440 | Significant increase |
| Diagnostic testing revenue | $409,118 | $475,402 | 14% decrease |
| Gross profit | $137,093 | $416,213 | 67% decrease |
| Gross margin | Approximately 21.7% | Approximately 86.4% | Lower |
| Operating expenses | $10,921,736 | $5,485,243 | 99% increase |
| Net loss | $10,784,708 | $5,079,851 | 112% increase in loss |
| Basic and diluted loss per share | $0.70 | $0.41 | Higher loss per share |
| Cash used in operating activities | $8,830,044 | $3,899,964 | Higher cash burn |
| Cash and cash equivalents at year-end | $6,342,161 | $1,725,197 | Increase |
Operating expenses included $8,558,835 of general and administrative expense, $1,257,791 of selling expense and $1,105,110 of research and development expense. The company recorded $149,946 of obsolete-inventory expense, $435,243 of recall expense, $354,860 of bad-debt expense and $158,292 of impairment on fixed assets. The filing separately recorded a $211,493 contingent liability related to the recall and related 510(k) process.
Total assets were $12,009,047 at December 31, 2013, including $4,395,633 of net intangible assets. Current liabilities were $1,407,396, including $211,493 of contingent liabilities. The filing does not identify material outstanding debt at year-end; interest expense was only $360 for 2013. Stockholders’ equity was $10,601,651, and the accumulated deficit was $20,516,614.
Material changes versus the prior comparable period
- Revenue increased 31%, primarily because of $205,590 of product sales to Millennium for an initial order of 10,000 ForeCYTE kits. Diagnostic testing revenue declined as activity virtually ceased after the October recall.
- Gross margin fell sharply because product costs exceeded product revenue and the company recorded a $149,946 obsolete-inventory charge.
- Operating expenses nearly doubled, driven by commercialization efforts, increased staffing, regulatory and legal services, recall costs, bad debt and other professional expenses.
- Research and development expense declined 44% as development of the MASCT System for the national launch was substantially completed; management expected R&D to increase for pipeline programs.
- Common shares outstanding increased from 12,919,367 at year-end 2012 to 18,574,334 at year-end 2013, reflecting equity financing, warrant activity and other issuances.
- The company raised approximately $11.3 million under its March 2013 Aspire Capital agreement and sold an additional $1.0 million under the November 2013 agreement. Subsequent to year-end, it completed a January 2014 public offering with gross proceeds of approximately $14.0 million.
Guidance, outlook, risks and unusual items
Management expected to respond to FDA questions regarding the ForeCYTE 510(k) submission by August 20, 2014 and targeted a potential ForeCYTE relaunch in the fourth quarter of 2014. It also targeted potential launches or relaunches of the ArgusCYTE and NextCYTE tests in the fourth quarter of 2014 or first quarter of 2015, subject to development and regulatory requirements. These are forward-looking targets, not assurances.
On March 14, 2014, the FDA completed a follow-up inspection and identified five Form 483 observations involving the quality-management system, together with five verbal discussion points. The company submitted proposed corrective actions on March 26, 2014, but stated that FDA acceptance was uncertain. Further enforcement action, additional warning letters, fines, penalties or failure to clear the pending 510(k) could materially affect the business.
The independent auditor expressed substantial doubt about the company’s ability to continue as a going concern. The company had not established recurring revenue sufficient to cover operating costs and stated that additional capital would be required. Management expected resources at December 31, 2013 to fund planned operations for at least the first six months of 2014, and expected the January 2014 offering proceeds to extend funding through 2014, but acknowledged that additional financing could be required earlier.
Major risks include continued FDA delays or non-clearance, the effects of the product recall, limited reimbursement for the NAF collection procedure, uncertain market adoption, continued operating losses, possible dilution from equity financing, dependence on third-party manufacturers and distributors, evolving regulation of laboratory-developed tests, and competition from established diagnostic laboratories and testing platforms.
Legal contingencies include a putative securities class action filed in October 2013 and claims by a former president and another claimant. The company stated that it believed the claims were without merit and had recorded no liability for these matters because potential losses could not be reasonably estimated.
Most important facts for investors to verify
- Current status and likely timing of FDA clearance for the ForeCYTE Breast Aspirator, including resolution of the March 2014 inspection findings and the February 2014 FDA information request.
- Actual cash runway after the January 2014 public offering, ongoing monthly cash burn and the amount and terms of any additional financing required.
- Whether the company can generate recurring revenue after a relaunch and whether reimbursement will cover both laboratory testing and the NAF collection procedure.
- The ultimate cost of the recall and 510(k) process compared with the recorded $211,493 contingency and $223,750 of actual expenses reported at year-end.
- Potential dilution from the Aspire Capital facility, outstanding warrants, stock options and subsequent equity offerings.
- Potential exposure from the securities class action and other legal proceedings, none of which had a recorded liability at December 31, 2013.
- The filing reports differing cumulative sample counts in separate sections, including approximately 2,808 and 3,041 NAF samples; investors should reconcile this discrepancy to the underlying records.