Atossa Genetics Inc. (now identified in request metadata as Atossa Therapeutics, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2013, covering the three and nine months ended September 30, 2013. The company was a development-stage breast-health company operating through its wholly owned CLIA-certified laboratory, the National Reference Laboratory for Breast Health. Its principal programs included the ForeCYTE/MASCT test, ArgusCYTE, FullCYTE, NextCYTE and intraductal therapeutic devices.
On October 4, 2013, after the reporting date, the company voluntarily recalled the ForeCYTE Breast Health Test and MASCT device in response to FDA concerns. The products could not be marketed or distributed in the United States pending additional FDA clearance.
Financial performance and liquidity
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Revenue | $76,597 | $105,576 | $585,345 | $383,386 |
| Gross profit | $50,659 | $90,499 | $270,783 | $323,517 |
| Gross margin | 66.1% | 85.7% | 46.3% | 84.4% |
| Operating loss | $(3,501,897) | $(1,135,672) | $(8,026,677) | $(3,363,652) |
| Net loss | $(3,501,845) | $(1,143,382) | $(8,026,984) | $(3,374,249) |
| Loss per share | $(0.22) | $(0.10) | $(0.55) | $(0.30) |
Revenue increased 53% for the nine-month period, primarily because of a $205,590 product sale to Millennium for 10,000 ForeCYTE kits. Quarterly revenue declined 27%, reflecting lower diagnostic testing revenue and limited product sales. Product sales generated a nine-month gross loss of $15,229, while diagnostic testing generated $286,012 of gross profit.
Operating expenses increased 125% year over year for the nine-month period to $8.30 million. General and administrative expense increased to $6.60 million, including stock-based compensation, capital-raising fees, legal and regulatory costs, recall-related costs, bad debt expense and director compensation. Selling expense increased to $965,383, while research and development expense declined 52% to $731,258.
Cash and cash equivalents were $7.69 million at September 30, 2013, compared with $1.73 million at December 31, 2012. Net cash used in operating activities was $6.18 million, net cash used in investing activities was $400,674, and net cash provided by financing activities was $12.55 million. Financing proceeds principally reflected common-stock and warrant issuances. Approximately $7.44 million of cash exceeded FDIC insurance limits.
The filing reports no material debt balance at September 30, 2013. Current liabilities were $1.94 million, including $402,840 of contingent liabilities related to the recall, $357,489 of payroll liabilities and $1.07 million of accrued expenses. Total assets were $13.48 million, including $4.41 million of net intangible assets.
Material changes versus the prior comparable period
- Nine-month revenue rose 53%, but gross profit declined 16% because product sales carried low or negative margins.
- Nine-month operating expenses more than doubled, driven mainly by higher administrative, selling, regulatory, consulting, stock-based compensation and recall-related costs.
- Nine-month net loss increased to $8.03 million from $3.37 million, and loss per share increased to $0.55 from $0.30.
- Bad debt expense of $228,841 was recorded, compared with none in the prior comparable period; the allowance for doubtful accounts was also $228,841 at September 30, 2013.
- The company recorded a $402,840 recall and regulatory loss contingency and reported $435,243 of estimated recall-related general and administrative costs, including actual expenses.
- The company sold substantial equity to Aspire Capital. From March 27 through November 7, 2013, aggregate gross proceeds under the prior agreement were approximately $11.3 million. The prior agreement was terminated on November 8, 2013 and replaced with a new agreement permitting up to $25 million of additional stock sales over 30 months, subject to registration and other limitations.
Guidance, outlook, risks and unusual items
Management expected existing resources to fund planned operations for approximately six to ten months from the report date and estimated a need for an additional $2 million to $5 million to fund at least 12 months of operations. Management stated that the company had not established recurring revenue sufficient to cover operating costs and that continuation as a going concern depended on additional financing and eventual profitability.
Management planned to seek a new FDA 510(k) clearance for ForeCYTE after a scheduled November 14, 2013 FDA pre-submission meeting. The company hoped for FDA review within 90 days after submission, but acknowledged that timing and outcome were uncertain. Management anticipated a possible ForeCYTE relaunch in the first quarter of 2014, FullCYTE and NextCYTE launches in the second half of 2014, and an ArgusCYTE relaunch in mid-2014; these projections were subject to regulatory clearance and other execution risks.
- Regulatory risk: The FDA warning letter cited changes to specimen collection instructions, promotional claims and good manufacturing practice issues. The prior 510(k) application was withdrawn in August 2013.
- Recall risk: Approximately 90% of recalled products were held by distributors, and the company reported that approximately 8% of MASCT pumps and 84% of patient collection kits had been returned as of the report date. Actual recall costs could exceed the recorded contingency.
- Legal risk: A putative securities class action was filed on October 10, 2013, seeking unspecified damages. The company recorded no liability because the potential amount could not be reasonably estimated. Separate claims involving former executives were directed to arbitration, with no liability recorded.
- Financing and dilution risk: Continued operations depend on additional equity financing. Sales to Aspire could dilute existing holders and are subject to a registration statement, market-price and Nasdaq issuance limitations.
- Commercial and reimbursement risk: The company had limited operating history, low cumulative revenue, no established profitability and limited reimbursement for nipple aspirate fluid collection procedures from Medicare and certain insurers.
- Contractual commitments: The Affymetrix agreement required purchases totaling $647,700 of GeneChip arrays over three years, plus a $51,600 service contract, subject to the stated contract terms.
Most important facts for investors to verify
- Whether and when FDA cleared the new 510(k) application and whether ForeCYTE was successfully relaunched.
- Actual cash burn, financing proceeds and remaining liquidity following the recall and subsequent Aspire transactions.
- The status, potential exposure and insurance coverage of the securities class action and arbitration matters.
- Whether revenue resumed and diversified beyond ForeCYTE-related products and services.
- The extent of dilution from Aspire sales, warrants and stock options; 2,246,651 options and 4,775,550 warrants were outstanding at September 30, 2013.
- Whether the $402,840 recall contingency and the $2 million to $5 million additional funding estimate were sufficient.
- The recoverability of the $4.41 million intangible-asset balance given the regulatory and commercialization setbacks.