Business Context and Reporting Period
Atossa Genetics Inc. (now identified in the request as Atossa Therapeutics, Inc.) is a clinical-stage biopharmaceutical company developing Endoxifen formulations and intraductal drug-delivery technologies for breast cancer and other breast conditions. The Form 10-Q covers the quarter and nine months ended September 30, 2018, and was filed November 13, 2018. The company had no commercial revenue and remained in the research and development stage.
Atossa was conducting Phase 2 studies of topical Endoxifen for mammographic breast density and oral Endoxifen in breast cancer patients, as well as a Phase 2 study using its intraductal microcatheter technology to deliver fulvestrant. A Phase 1 topical Endoxifen study in men was completed in September 2018, with preliminary results described as positive.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1.42 million | $3.36 million |
| General and administrative expense | $1.89 million | $5.97 million |
| Total operating expenses | $3.31 million | $9.33 million |
| Net loss | $3.31 million | $9.33 million |
| Net loss applicable to common shareholders | $3.31 million | $20.81 million |
| Basic and diluted loss per share | $0.64 loss | $5.71 loss |
| Net cash used in operating activities | Not provided for the quarter | $6.52 million |
The nine-month net loss applicable to common shareholders included an $11.48 million deemed dividend associated with the Series B convertible preferred stock financing. This non-cash accounting item did not affect cash or operating activities.
- Cash and cash equivalents at September 30, 2018 were $12.94 million; restricted cash was $55,000, resulting in cash, cash equivalents and restricted cash of approximately $12.99 million.
- Working capital was approximately $10.4 million.
- Total assets were $14.12 million and total current liabilities were $3.56 million.
- The filing reports no debt balance; financing was primarily through equity and preferred-stock securities.
- Stockholders’ equity was $10.57 million, compared with $6.94 million at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- Operating expenses increased 61% year over year for the quarter and 65% for the nine-month period.
- R&D expense increased 92% for the quarter and 59% for the nine months, driven principally by higher stock-based compensation and the commencement of two Phase 2 Endoxifen studies.
- G&A expense increased 44% for the quarter and 68% for the nine months, reflecting higher stock-based compensation, salary increases, bonuses, legal and professional fees, and other public-company costs.
- Net loss increased from $2.18 million to $3.31 million for the quarter and from $6.13 million to $9.33 million for the nine months.
- Operating cash usage increased from $4.91 million to $6.52 million for the nine months.
- In May 2018, the company completed a rights offering of Series B convertible preferred stock and warrants, generating net proceeds of approximately $12.3 million. It issued 13,624 preferred shares and warrants to purchase 3,869,216 common shares.
- Series B preferred stock conversions resulted in the issuance of 2.87 million common shares during the nine months, contributing to significant share-count expansion.
- Outstanding warrants to purchase 4.32 million common shares were reported at September 30, 2018, and 783,761 stock options were outstanding.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing resources were expected to fund planned operations for approximately 9 to 15 months from the filing date, but additional capital would be required for longer-term operations. Management discussed potential equity offerings, strategic partnerships, warrant exercises, licensing arrangements, and short-term borrowings as possible funding sources, without assuring that financing would be available on acceptable terms.
The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern because it has incurred recurring losses and negative operating cash flows, has no established recurring revenue source, and depends on additional financing or eventual profitability.
- The company is not currently marketing products and does not expect revenue unless and until its pharmaceutical programs are successfully developed and launched.
- Clinical, regulatory, manufacturing, intellectual-property, financing, personnel, and commercialization risks could materially affect results.
- The mammographic breast density study was fully enrolled in October 2018, but skin rashes and irritation caused some participant withdrawals. The company was evaluating ways to reduce these reactions.
- The company restated previously reported June 30, 2018 results because the deemed dividend on Series B preferred stock had been understated at $4.78 million rather than $11.48 million. The correction affected reported loss attributable to common shareholders and loss per share but did not affect cash or operations.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2018. The identified material weakness related to technical accounting for the Series B deemed dividend; remediation includes enhanced independent review of technical accounting analyses.
- A securities class action was settled for $3.5 million, fully funded by defendants’ insurers, and was considered closed as of September 30, 2018.
- The company had approximately $12.69 million of cash in excess of FDIC insurance limits at September 30, 2018.
Key Facts for Investor Verification
- Confirm the company’s current legal name and ticker relative to the filing’s stated name, Atossa Genetics Inc.
- Verify cash runway assumptions and the timing, size, terms, and potential dilution of future financing.
- Assess the impact of 4.32 million outstanding warrants, convertible preferred stock, and stock options on potential dilution.
- Review clinical-trial enrollment, skin-reaction withdrawals, safety data, regulatory status, and expected timing for Endoxifen programs.
- Monitor remediation of the material weakness and whether subsequent filings report effective disclosure controls.
- Reconcile the $11.48 million deemed dividend and restated 2018 interim results when comparing per-share figures.
- Evaluate whether the company can obtain regulatory approval and develop a recurring revenue source before available cash is exhausted.