ATOSSA THERAPEUTICS, INC. quarterly report, Q3 FY2014

ATOSSA GENETICS, INC. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2014. The filing identifies the registrant as Atossa Genetics, Inc. (the company is now identified in the request as Atossa Therapeutics, Inc.). Financial statements are unaudited except for the December 31, 2013 balance sheet.

Business Context

The company develops breast-health medical devices, laboratory services and potential therapeutics through its subsidiary, The National Reference Laboratory for Breast Health. Its principal programs include the ForeCYTE and FullCYTE Breast Aspirators, nipple aspirate fluid cytology, pharmacogenetics testing, NextCYTE and intraductal microcatheters.

The October 2013 voluntary recall of the MASCT/ForeCYTE system substantially eliminated product revenue and caused laboratory-service revenue to virtually cease. In September 2014, the FDA determined that the ForeCYTE Breast Aspirator was not substantially equivalent to its predicate device and therefore was not cleared for U.S. marketing.

Key Financial Metrics

Metric	Three months ended September 30	Nine months ended September 30
Total revenue	$3,426, versus $76,597 in 2013	$37,425, versus $585,345 in 2013
Gross profit	$3,426, versus $50,659 in 2013	$37,425, versus $270,783 in 2013
Operating expenses	$3,248,681, versus $3,552,556 in 2013	$8,880,138, versus $8,297,460 in 2013
Operating loss	$3,245,255	$8,842,713
Net loss	$3,245,395, or $0.13 per share	$8,844,902, or $0.37 per share
Net cash used in operating activities	Not separately presented	$7,836,146, versus $6,182,060 in 2013

Gross margin was effectively 100% in both 2014 periods because reported revenue had no associated cost of revenue; this is not indicative of a sustainable operating margin given the negligible revenue base. Nine-month research and development expense increased 154% to $1.86 million, while selling expense declined 23% to $743,597 and general and administrative expense declined 5% to $6.28 million.

At September 30, 2014, cash and cash equivalents were $11.37 million, up from $6.34 million at December 31, 2013. Total current assets were $11.72 million and current liabilities were $1.54 million. Stockholders’ equity was $15.23 million, compared with $10.60 million at year-end. The filing does not report conventional long-term debt; it reports current liabilities, deferred financing costs and operating commitments.

Financing activities provided $13.16 million during the first nine months, primarily from the January 2014 public offering. The offering issued 5,834,234 units for gross proceeds of approximately $14.0 million, with each unit including one common share and a warrant for 0.20 of a share.

Material Changes Versus Prior Comparable Period

• Nine-month revenue fell approximately 94% to $37,425 from $585,345, reflecting the product recall and near cessation of laboratory services.
• Nine-month gross profit declined to $37,425 from $270,783.
• Nine-month operating expenses increased approximately 7%, primarily because higher product-development and regulatory spending offset lower selling, recall and capital-raising costs.
• Nine-month net loss increased to $8.84 million from $8.03 million, while loss per share improved to $0.37 from $0.55 because the share count increased materially.
• Common shares outstanding increased to 24,564,058 from 18,574,334 at December 31, 2013, primarily due to equity financing and other issuances.
• The company recognized $545,115 of stock-based compensation during the first nine months and had 3,464,232 options and 6,033,426 warrants outstanding at September 30, 2014.

Outlook, Risks and Unusual Items

• Management stated that existing resources were expected to fund planned operations through at least the first quarter of 2015, but substantial doubt about the company’s ability to continue as a going concern remained.
• Management expects continuing operating losses and increasing cash use while developing and commercializing the FullCYTE and ForeCYTE products, NextCYTE and other laboratory services. Additional capital may be required earlier than anticipated and may not be available on acceptable terms.
• The company plans to obtain funding through equity sales, potential product and laboratory-service revenue, and possible borrowings. Up to $24 million remained available under the Aspire Capital purchase agreement, subject to its conditions and limitations.
• The ForeCYTE device was not FDA-cleared for U.S. marketing as of the filing date. The company also reported five FDA Form 483 observations and additional discussion points following a March 2014 inspection, with the outcome of corrective actions uncertain.
• Cumulative recall expenses totaled $429,829 through September 30, 2014. The ForeCYTE product was not being marketed or distributed in the United States.
• Material commitments included operating lease payments of $1.16 million, remaining Affymetrix purchases under a $647,700 commitment, minimum Luminex product purchases of $452,408 per year, and potential payments of up to $1.2 million to A5 Genetics upon commercial launch and FDA approval of NextCYTE, plus per-test fees and royalties.
• A securities class action was dismissed in October 2014, but plaintiffs appealed in November 2014. The company recorded no liability because the potential loss could not be reasonably estimated. Separate litigation involving former executives was settled for an immaterial amount.
• In October 2014, after the quarter ended, the company received a CE Mark for the ForeCYTE Breast Aspirator for foreign markets. The filing does not provide a revenue forecast or formal earnings guidance.

Investor Verification Checklist

• Confirm the company’s current corporate name and compare subsequent filings with the Atossa Genetics, Inc. filing identity used here.
• Verify the FDA pathway and clearance status for ForeCYTE, FullCYTE and related laboratory services, including the response to the Form 483 observations.
• Assess available cash, monthly cash burn and whether additional financing was obtained after September 30, 2014.
• Review the sustainability of laboratory and product revenue following the recall and the timing of any commercial launches.
• Reconcile the filing’s going-concern disclosure with subsequent financing, operating results and liquidity.
• Monitor dilution from outstanding options, 6.03 million warrants and potential Aspire Capital equity sales.
• Track the securities-litigation appeal and other regulatory, contractual and product-recall contingencies.