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 ended March 31, 2013. The company was a development-stage healthcare business focused on breast-cancer prevention diagnostics, including the ForeCYTE and ArgusCYTE tests, the MASCT System, and related microcatheter technologies. Its CLIA-certified National Reference Laboratory processed diagnostic specimens for physicians.
The company reported 14,508,019 shares outstanding at March 31, 2013 and 14,677,241 shares outstanding as of May 10, 2013.
Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 |
|---|---|---|
| Total revenue | $182,670 | $54,713 |
| Diagnostic testing revenue | $169,230 | $52,713 |
| Product sales | $13,440 | $2,000 |
| Cost of revenue | $66,464 | $3,197 |
| Gross profit | $116,206 | $27,709 |
| Gross margin | Approximately 63.6% | Approximately 50.6% |
| Operating expenses | $2,057,639 | $1,089,877 |
| Operating loss | $1,941,433 | $1,062,168 |
| Net loss | $1,941,440 | $1,062,918 |
| Basic and diluted loss per share | $0.14 | $0.09 |
| Net cash used in operating activities | $1,334,812 | $1,005,149 |
| Net cash provided by financing activities | $1,003,314 | $(6,178) |
Cash and cash equivalents were $1,385,199 at March 31, 2013, down from $1,725,197 at December 31, 2012. Total assets were $8,911,829, including $2,521,098 of prepaid expenses, substantially reflecting a $2,307,925 prepaid stock-purchase-agreement service fee. Current liabilities were $1,936,265, including $1,901,674 of accrued expenses. The filing does not report outstanding bank or other debt at March 31, 2013.
Accumulated deficit was $11,673,348 at March 31, 2013. Stockholders’ equity was $6,975,564. Stock-based compensation was $274,512 for the quarter, and depreciation and amortization was $98,945.
Material Changes Versus the Prior Comparable Period
- Revenue increased $127,957, or approximately 234%, primarily because diagnostic testing revenue increased to $169,230 from $52,713.
- Gross profit increased to $116,206 from $27,709, although product sales generated a $5,425 gross loss in 2013. The MASCT System was sold below manufacturing cost and related inventory had previously been written down to zero net realizable value.
- Operating expenses increased $967,762, or approximately 89%. General and administrative expense increased 160% to $1,564,872, while selling expense increased 287% to $272,575 in connection with the ForeCYTE national launch.
- Research and development expense decreased 47% to $220,192, primarily because MASCT System development was substantially completed.
- Net loss increased approximately 83% to $1,941,440, and operating cash burn increased approximately 33% to $1,334,812.
- On March 27, 2013, Aspire Capital Fund, LLC purchased 83,333 shares for gross proceeds of $1 million and received 250,000 commitment shares. The agreement permits Aspire to purchase up to $30 million of common stock over three years, subject to its terms and limitations.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected existing capital resources to fund planned operations for at least four months from the report date. It estimated that $4 million to $10 million of additional capital would be needed to fund operations for at least 12 months under the current plan.
- The company had not established recurring revenue sufficient to cover operating costs. Management stated that failure to obtain additional capital could require it to curtail or cease operations, creating substantial doubt regarding the company’s ability to continue as a going concern.
- Management expected continuing operating losses and increasing research, development, general and administrative, sales, marketing, manufacturing, and laboratory expenses.
- The company received an FDA Warning Letter on February 21, 2013 concerning the MASCT System, including an alleged device change potentially requiring an additional 510(k), marketing practices, and good manufacturing practices. The company responded on March 13, 2013 and recorded no liability, but acknowledged that the estimated liability could change.
- Former President Robert Kelly sought $450,000 in compensatory damages in arbitration and also pursued federal litigation. Victor Cononi filed a related complaint seeking damages that were not specified. No liability was recorded because management believed its defenses were strong, although an adverse determination could affect earnings.
- Subsequent to quarter-end, Aspire purchased an additional 225,000 shares for aggregate gross proceeds of $1,266,325 under the stock purchase agreement. On April 30, 2013, Millennium Medical Devices entered into a distribution and marketing agreement and placed an initial order for 10,000 patient collection kits.
- The company had future minimum operating lease payments of $445,242 after March 31, 2013, including $265,266 due in 2013 and $179,976 in 2014.
- At March 31, 2013, $1,135,199 of cash exceeded FDIC insurance limits.
Most Important Facts for Investors to Verify
- Whether the company can secure the estimated $4 million to $10 million of additional capital and maintain access to the Aspire financing facility.
- The duration of available cash, given $1.33 million of quarterly operating cash burn and only $1.39 million of quarter-end cash.
- FDA resolution of the Warning Letter and any resulting remediation, 510(k) filing, marketing restrictions, manufacturing costs, or penalties.
- Whether ForeCYTE and ArgusCYTE adoption, reimbursement, and collections can scale sufficiently to offset operating expenses.
- Whether the MASCT System can be manufactured at materially lower unit costs; it was being sold substantially below cost during the period.
- Potential dilution from the Aspire agreement, commitment shares, outstanding options, and warrants. Options outstanding totaled 1,650,299 shares at March 31, 2013.
- The potential financial impact of the Kelly and Cononi legal proceedings, for which no liability was recorded.
- The filing’s going-concern disclosure and the absence of assurance that management’s financing and commercialization plans will succeed.