Atossa Genetics, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Atossa Genetics, Inc. was a development-stage healthcare company focused on breast-health laboratory tests and medical devices, including the ForeCYTE Breast Aspirator, formerly the MASCT System. The report covers the three months ended March 31, 2014 and compares results with the three months ended March 31, 2013.
The company’s primary device was voluntarily recalled in October 2013 following FDA concerns. It was not being marketed or distributed in the United States during the quarter pending additional FDA clearance.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $24,124 | $182,670 | Down 87% |
| Gross profit | $24,124 | $116,206 | Down 79% |
| Operating expenses | $2,435,049 | $2,057,639 | Up 18% |
| Operating loss | $(2,410,925) | $(1,941,433) | Loss increased 24% |
| Net loss | $(2,411,531) | $(1,941,440) | Loss increased 24% |
| Basic and diluted loss per share | $(0.10) | $(0.14) | Improved due primarily to higher share count |
| Net cash used in operating activities | $(2,603,989) | $(1,334,812) | Use increased 95% |
Gross margin was approximately 100% in Q1 2014 because no cost of revenue was recorded, although revenue was minimal. The operating margin remained deeply negative because operating expenses substantially exceeded revenue.
Cash and cash equivalents were $16.6 million at March 31, 2014, compared with $6.3 million at December 31, 2013. The increase primarily reflected $13.0 million of net financing proceeds, principally from the January 2014 public offering. Total current liabilities were $1.1 million, and the filing does not show material debt or notes payable at quarter-end. Stockholders’ equity was $21.3 million, compared with $10.6 million at year-end 2013.
The company reported an accumulated deficit of $22.9 million and stated that it had not established recurring revenue sufficient to cover operating costs. Management expected existing resources to fund planned operations through the remainder of 2014, but stated that additional financing may be required earlier and that failure to obtain adequate capital could force the company to curtail or cease operations.
Material changes versus the prior comparable period
- Revenue declined sharply to $24,124 from $182,670. Q1 2014 revenue consisted of additional cash collections related to diagnostic services; product sales were zero.
- Revenue and cost of revenue were described as having virtually ceased after the October 2013 product recall.
- Research and development expense increased 92% to $422,503 as the company expanded development of tests, devices and therapeutic programs.
- General and administrative expense increased 13% to $1.8 million, driven principally by higher salaries and benefits, insurance, travel, legal and professional fees.
- Selling expense decreased 13% to $237,838 because of the recall, but management expected selling and marketing costs to rise if the ForeCYTE device were relaunched.
- Net cash used in operations increased to $2.6 million from $1.3 million.
- On January 29, 2014, the company completed a public offering of 5,834,234 units at $2.40 per unit, generating approximately $14.0 million of gross proceeds. Each unit included one common share and a warrant covering 0.20 of a share.
- Common shares outstanding increased to 24,428,568 at May 7, 2014 from 18,574,334 at December 31, 2013. Outstanding warrants covered 6,073,426 shares at March 31, 2014, creating potential future dilution.
Guidance, outlook, risks and unusual items
- The company submitted a new 510(k) application for the ForeCYTE Breast Aspirator in December 2013. The FDA requested additional information in February 2014, and the company had until August 20, 2014 to respond. No assurance was provided that clearance would be obtained.
- A March 2014 FDA follow-up inspection resulted in five Form 483 observations and additional discussion points involving quality systems, labeling, the pending 510(k) submission and other compliance matters. Potential outcomes included further regulatory action, fines, penalties or failure to obtain clearance.
- The company had incurred $339,042 of actual recall-related expenses and recorded a $96,201 contingent liability as of March 31, 2014. Management stated that the ultimate recall and clearance costs could be higher.
- Management expected continuing operating losses and increasing research, development, general and administrative expenses. The company did not expect significant revenue until FDA clearance and a potential relaunch of ForeCYTE.
- The company had a potential remaining financing source through its Aspire Capital agreement, under which up to $24 million remained available, subject to contractual restrictions and other conditions. The filing cautioned that additional financing might not be available on acceptable terms.
- The company disclosed a going-concern uncertainty because it lacked sufficient recurring revenue and remained dependent on additional capital.
- A securities class-action lawsuit and separate claims involving former executives remained unresolved. No liability was recorded for those matters because the potential loss could not be reasonably estimated, although an adverse outcome could materially affect the company.
- The company had contractual commitments including laboratory and office leases, an Affymetrix purchase commitment, and up to $1.2 million of future milestone payments under its A5 Genetics software agreement, plus per-test royalties and service fees.
- Subsequent to quarter-end, the company approved higher 2014 executive compensation and granted additional stock options. Its Senior Vice President of Global Regulatory Affairs and Quality Assurance resigned on May 12, 2014.
Most important facts for investors to verify
- Current FDA status of the ForeCYTE 510(k) application, responses to the Form 483 observations and the timing and likelihood of clearance.
- Actual cash burn, available financing capacity and whether the company obtained additional capital after March 31, 2014.
- Whether revenue resumed following the recall and whether the company successfully relaunched the ForeCYTE device and related laboratory services.
- Potential additional recall, regulatory, litigation and compliance costs, including exposure from the securities class action.
- Share-count growth, outstanding warrants and stock options, and the resulting dilution risk.
- Whether the company’s cash balance was sufficient to support operations beyond 2014 without additional financing.
- The sustainability and collectability of diagnostic-testing revenue, including the $382,721 allowance for doubtful accounts at March 31, 2014.