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 three months ended March 31, 2018. The company was a clinical-stage pharmaceutical company developing Endoxifen formulations and intraductal microcatheter delivery technologies for breast cancer and other breast conditions. It was not marketing products or services and had no operating revenue.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | None reported | None reported |
| Research and development expense | $471,000 | $544,000 |
| General and administrative expense | $1.403 million | $1.159 million |
| Total operating expenses | $1.874 million | $1.704 million |
| Operating loss | $1.874 million | $1.704 million |
| Net loss | $1.874 million | $1.704 million |
| Basic and diluted loss per share | $0.71 loss | $5.40 loss |
| Net cash used in operating activities | $2.387 million | $1.861 million |
Because the company had no revenue, gross profit and operating margin were not meaningful. Cash and cash equivalents were $4.780 million at March 31, 2018, plus $55,000 of restricted cash. Working capital was approximately $5.0 million. Current liabilities were $721,000, and the company reported no debt balance in the financial statements. Total assets were $5.980 million and stockholders’ equity was $5.260 million.
Material Changes Versus the Prior Comparable Period
- Total operating expenses increased 11.8%, or approximately $201,000, primarily because G&A expense rose 21.1% due to higher patent costs and investor relations activity.
- R&D expense decreased 13.5%, or approximately $73,000, although management expected R&D spending to increase as additional clinical studies progressed.
- Net cash used in operations increased approximately $526,000, reflecting the higher operating loss and working-capital changes.
- Cash and cash equivalents declined from $7.217 million at December 31, 2017 to $4.780 million at March 31, 2018.
- Weighted-average shares increased to 2,651,952 from 315,576, while the reported loss per share improved because of the substantially higher share count. All share and per-share data were retrospectively adjusted for the subsequent 1-for-12 reverse stock split.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing resources, without giving effect to the planned rights offering, were expected to fund planned operations for approximately five to eight months from the filing date. Additional long-term capital was required.
- The company disclosed substantial doubt about its ability to continue as a going concern because of recurring losses, negative operating cash flows, and the absence of sufficient ongoing revenue.
- On May 9, 2018, after quarter-end, the rights offering registration statement became effective. If fully subscribed, management estimated net proceeds of approximately $23 million from units consisting of convertible preferred stock and warrants. Completion and subscription levels were not assured.
- Management planned to continue a Phase 1 topical Endoxifen study in men, open Phase 2 studies for mammographic breast density and oral Endoxifen, and advance its fulvestrant microcatheter study. Enrollment in the planned Phase 2 studies was expected to be completed in the second half of 2018.
- Key risks included the need for additional financing, potential dilution, clinical-trial and regulatory uncertainty, reliance on third-party suppliers and service providers, intellectual-property protection, commercialization risk, and the ability to retain key personnel.
- The company had 914,777 warrants outstanding at March 31, 2018, including substantial 2017 private-placement warrants with a $3.78 exercise price expiring in August and December 2018.
- A putative securities class action was subject to a proposed $3.5 million settlement funded entirely by defendants’ insurers. The settlement remained subject to final court approval, with a hearing scheduled for July 20, 2018; management did not expect a material financial impact.
- On April 20, 2018, the company completed a 1-for-12 reverse stock split and increased authorized common shares to 175 million. The 2018 annual meeting also approved an additional 500,000 shares for the stock option plan.
Important Facts for Investors to Verify
- Whether the rights offering was completed, the amount subscribed, the securities issued, and the resulting dilution.
- Actual cash runway and subsequent financing needs relative to the stated five-to-eight-month estimate.
- Enrollment progress, safety results, and timing for the Endoxifen and fulvestrant clinical programs.
- Final court approval and insurance funding of the proposed securities-litigation settlement.
- Expiration, exercise, or repricing of outstanding warrants and the potential effect on share count.
- The filing’s going-concern disclosure and whether the company has developed recurring revenue or achieved profitable operations.