Business Context and Reporting Period
Atossa Genetics Inc. (now identified in the request metadata as Atossa Therapeutics, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company develops breast-health pharmaceuticals, laboratory tests and medical devices. Its principal revenue source was pharmacogenomics testing through its wholly owned National Reference Laboratory for Breast Health subsidiary.
Key development programs included Afimoxifene Gel and Fulvestrant delivered through patented intraductal Microcatheters, both in Phase II development. FullCYTE and ForeCYTE breast aspirators had launched in the United States and Europe, respectively, but generated no reported 2015 product revenue.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | $772,244, versus $3,426 | $5,339,669, versus $37,425 |
| Gross profit | $458,838, versus $3,426 | $1,963,598, versus $37,425 |
| Gross margin | Approximately 59.4%, versus approximately 100.0% | Approximately 36.8%, versus approximately 100.0% |
| Operating loss | $(4,387,456), versus $(3,245,255) | $(10,865,276), versus $(8,842,713) |
| Net loss | $(4,318,111), or $(0.15) per share | $(10,798,727), or $(0.39) per share |
| Operating expenses | $4,846,294, up 49% | $12,828,874, up 44% |
- September 30, 2015 cash and cash equivalents were $7.84 million, with an additional $275,000 of restricted cash. Working capital was approximately $6.2 million.
- Total assets were $12.36 million and total liabilities were $3.30 million. The company reported no short-term or long-term lease obligations at September 30, 2015 and no material debt balance was identified in the filing.
- Accounts receivable were $1.06 million net of a $1.18 million allowance for doubtful accounts. Bad debt expense was $1.19 million for the nine months, compared with $80,870 in the prior-year period.
- Net cash used in operating activities was $10.00 million, compared with $7.84 million in the prior-year period. Investing activities used $110,749.
- Financing activities provided $9.45 million, primarily from equity and warrant issuances. Cash decreased by $661,279 during the first nine months, ending at $7.84 million.
- Shares outstanding at November 12, 2015 were 30,446,260. At September 30, 2015, the company had 8.24 million outstanding warrants and 4.41 million outstanding stock options, all excluded from diluted loss per share because they were antidilutive.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially from the minimal prior-year amounts because pharmacogenomics testing became the primary commercial activity; however, the company reported no 2015 revenue from its breast aspirators.
- Cost of revenue increased to $3.38 million for the nine months, producing a materially lower gross margin than in 2014, when reported revenue consisted largely of collections on previously performed NAF cytology tests.
- Operating expenses increased across all categories: selling expense rose 171% for the nine months, research and development expense rose 29%, and general and administrative expense rose 34%.
- The nine-month net loss increased by approximately $1.95 million, and operating cash burn increased by approximately $2.16 million.
- The Medicare contractor issued an adverse local coverage determination effective June 22, 2015. The determination narrowed covered indications and drugs and limited reimbursement to approximately $243 to $669 per test, below historical average reimbursement. A major commercial payer also denied coverage for a significant number of tests.
- In May 2015, the company licensed worldwide rights to develop and commercialize Afimoxifene Gel from Besins. The agreement includes 8% to 9% royalties on net sales and potential milestone payments of $5 million and $20 million for specified additional indications.
- In June 2015, the company raised approximately $5.8 million of gross proceeds through sales of common stock and pre-funded warrants, generating approximately $5.2 million of net proceeds after offering expenses.
Guidance, Outlook, Risks and Unusual Items
- Management withdrew previously issued 2015 revenue forecasts and stated that it was not providing a new 2015 revenue forecast because of uncertainty surrounding the Medicare coverage change and payer denials.
- Management expected a Phase II Fulvestrant study to commence in December 2015 and planned to begin enrollment in a Phase II Afimoxifene Gel study in mid-2016. The filing states that an IND for the Fulvestrant study was accepted in October 2015.
- Management expected existing resources to fund planned operations only through the first quarter of 2016. The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern.
- Management planned to seek additional capital through equity sales, product and laboratory-service revenue, and potential short-term borrowings. Additional financing could dilute existing shareholders or be unavailable on acceptable terms.
- On November 11, 2015, after quarter-end, the company entered into a new Aspire Capital purchase agreement under which Aspire committed to purchase up to $25 million of common stock over 30 months, subject to registration, pricing and other conditions. The agreement replaced the May 26, 2015 Aspire agreement and does not guarantee that the full amount will be raised.
- The company disclosed an ongoing securities class-action appeal arising from its 2012 initial public offering. The claims were dismissed by the trial court, but plaintiffs appealed. No liability was recorded because the potential loss could not be reasonably estimated.
- The company received a NASDAQ deficiency notice on September 28, 2015 for failing to maintain a $1.00 minimum closing bid price for 30 consecutive business days. It had until March 28, 2016 to regain compliance, potentially through a reverse stock split or other action.
- Material commitments included potential payments of up to $1.2 million to A5 Genetics upon regulatory clearance of the NextCYTE test, minimum annual purchases under a Luminex agreement, and royalties and service fees per NextCYTE test. The NextCYTE test remained in validation.
- Management stated that disclosure controls and procedures were effective as of September 30, 2015 and that no material change in internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after the stated first-quarter 2016 liquidity runway and the amount of equity actually issued under the Aspire Capital agreement.
- The ongoing effect of the Medicare LCD and commercial payer denials on test volume, reimbursement rates, accounts receivable and bad-debt expense.
- Whether pharmacogenomics testing can generate recurring gross profit sufficient to offset operating expenses and clinical-development spending.
- Progress, funding and regulatory status of the Fulvestrant and Afimoxifene Gel Phase II programs, including the timing and scope of clinical trials.
- The outcome of the securities litigation appeal and any related legal costs or potential exposure.
- NASDAQ listing compliance, any reverse stock split, and the resulting effect on liquidity and shareholder dilution.
- The potential dilution from 8.24 million warrants, 4.41 million options and additional shares issuable under the Aspire financing arrangements.