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 and nine months ended September 30, 2019. The company is a clinical-stage biopharmaceutical developer focused on Endoxifen formulations and intraductal drug-delivery technologies for breast cancer and other breast conditions. It was not marketing products and had no sustainable revenue.
Financial Condition and Key Metrics
| Metric | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1.68 million | $5.75 million |
| General and administrative expense | $1.61 million | $8.90 million |
| Total operating expenses | $3.30 million | $14.65 million |
| Net loss | $3.29 million | $14.62 million |
| Loss per common share | $0.36 | $1.77 |
| Operating cash flow | Not separately provided | $(6.42) million |
Because the company generated no revenue, gross and operating margins are not meaningful. Cash and cash equivalents were $15.29 million at September 30, 2019, and cash, cash equivalents and restricted cash totaled $15.40 million. Working capital was approximately $14.8 million. Total liabilities were $1.58 million, consisting primarily of current operating liabilities and lease liabilities; the filing does not report funded debt.
Financing activities provided $11.34 million during the first nine months, primarily from warrant exercises. The company had 1,070,028 common-stock warrants outstanding at September 30, 2019, exercisable at $4.05 per share through May 30, 2022.
Material Changes Versus the Prior Comparable Period
- Third-quarter operating expenses were broadly unchanged year over year, declining approximately 0.4% from $3.31 million to $3.30 million.
- Year-to-date operating expenses increased approximately 57%, from $9.33 million to $14.65 million. R&D expense increased approximately 71%, and G&A expense increased approximately 49%.
- Year-to-date net loss increased from $9.33 million to $14.62 million. The 2018 comparable period included an $11.48 million deemed preferred-stock dividend, resulting in a common-shareholder loss of $20.81 million and a $5.71 loss per share.
- Non-cash stock-based compensation was a major 2019 expense driver: $6.35 million for the nine-month period, compared with $0.73 million in 2018. This included $1.74 million recognized upon cancellation of liability options and substantial expense from executive option grants.
- Cash used in operations was approximately $6.42 million, modestly below the $6.52 million used in the prior-year period. Financing cash flow shifted from the 2018 preferred-stock and warrant offering to 2019 warrant exercises.
- Common shares outstanding increased to 9,130,984 at September 30, 2019 from 5,846,552 at December 31, 2018, primarily reflecting warrant exercises and preferred-stock conversions.
Outlook, Commentary, Risks, Contingencies and Unusual Items
Management stated that current funding was expected to be insufficient to finance operations for one year from the financial-statement date, depending on clinical-trial timing and scope. These conditions raised substantial doubt about the company’s ability to continue as a going concern. Management planned to seek equity financing, strategic partnerships, warrant exercises and potentially short-term borrowings, but provided no assurance that adequate capital would be available on acceptable terms.
- The company expected R&D spending to increase as it pursued additional Phase 2 studies of oral Endoxifen, continued development and manufacturing of a modified-release tablet, continued the intraductal fulvestrant study, and advanced preclinical CAR-T and immunotherapy programs.
- Management planned to initiate an oral Endoxifen Phase 2 study for mammographic breast density as early as the fourth quarter of 2019.
- Reported preliminary clinical findings included a statistically significant 14.3% average reduction in mammographic breast density at the 20 mg topical Endoxifen dose, but local rash and irritation affected approximately 72 participants and some did not complete six months of dosing.
- The company adopted lease accounting guidance in 2019 and recorded approximately $101,000 of operating lease liabilities and corresponding right-of-use assets; the adoption was not material to the financial statements.
- At September 30, 2019, approximately $14.67 million of cash exceeded FDIC insurance limits.
- The company reported no material litigation changes and no material changes to the risk factors in its 2018 Form 10-K.
- Management concluded that disclosure controls and procedures were not effective at the reasonable-assurance level. The filing discussed an unresolved material weakness related to the calculation of the 2018 deemed preferred-stock dividend and loss per share; remediation efforts were ongoing.
Facts an Investor Should Verify
- Whether the company obtained sufficient additional capital after September 30, 2019 to address the stated going-concern uncertainty.
- Subsequent cash burn, clinical-trial spending and the timing and terms of any equity, debt, partnership or warrant financing.
- Regulatory, enrollment, safety and efficacy developments for Endoxifen and intraductal fulvestrant programs.
- The final results and regulatory significance of the preliminary mammographic breast-density findings, including the tolerability issues.
- The effect of outstanding options, preferred-stock conversions and warrants on future dilution.
- Whether the disclosure-control material weakness was remediated and whether any further financial-statement restatements were required.