Washington, D.C. 20549
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
¨
No
x
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes
¨
No
x
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2
of the Exchange Act.
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
As of June 30,
2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value
of the voting and non-voting common equity held by non-affiliates was $27,422,532. Shares of common stock held by each officer
and director and by each person who is known to own 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares outstanding of the
registrant's Common Stock, par value $0.001, as of March 28, 2016 was 38,823,464.
Statements made
in this report on Form 10-K that are not statements of historical information are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act
”
) and
Section 21E of the Securities Exchange Act of 1934, as amended (the
“
Exchange Act”
). We have
made these statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from
those projected or anticipated. Although we believe our assumptions underlying our forward-looking statements are reasonable
as of the date of this report we cannot assure you that the forward-looking statements set out in this report will prove to
be accurate. We typically identify these forward-looking statements by the use of forward-looking words such as
“expect,” “potential,” “continue,” “may,” “will,”
“should,” “could,” “would,” “seek,” “intend,”
“plan,” “estimate,” “anticipate” or the negative version of those words or other
comparable words. Forward-looking statements contained in this report include, but are not limited to, statements about:
These and other forward-looking
statements made in this report are presented as of the date on which the statements are made. We have included important factors
in the cautionary statements included in this report, particularly in the section titled “ITEM 1A. RISK FACTORS,” that
we believe could cause actual results or events to differ materially from the anticipated results as set forth in the forward-looking
statements that we make. Our forward-looking statements do not reflect the potential impact of any new information, future events
or circumstances that may affect our business after the date of this report. Except as required by law, we do not intend to update
any forward-looking statements after the date on which the statement is made, whether as a result of new information, future events
or circumstances or otherwise.
Unless otherwise noted, the term
“Atossa Genetics” refers to Atossa Genetics Inc., a Delaware corporation, the terms “Atossa,”
the “Company,” “we,” “us,” and “our,” refer to the ongoing business
operations of Atossa and the historic business of The National Reference Laboratory for Breast Health, Inc. (the
“NRLBH”), whether conducted through Atossa Genetics or the NRLBH; however unless the context otherwise
indicates, references to “we,” “our” or the “Company” as they relate to laboratory tests
generally refers to activities conducted by the NRLBH. We were incorporated in Delaware in April 2009. Our principal
executive offices are located at 2300 Eastlake Ave. East, Suite 200, Seattle WA 98102, and our telephone number is (800)
351-3902.
Mammary Aspiration Specimen Cytology Test (MASCT), is our registered trademark and Oxy-MASCT and our name
and logo are our trademarks. ForeCYTE, FullCYTE, NextCYTE, ForeCYTE Breast Aspirator and ArgusCYTE are our service marks. This
report also includes additional trademarks, trade names and service marks of third parties, which are the property of their respective
owners. You are advised to read this Annual Report on Form 10-K in conjunction with other reports and documents that we file from
time to time with the Securities and Exchange Commission (the “SEC”). In particular, please read our definitive proxy
statement, which will be filed with the SEC in connection with our 2016 Annual Meeting of Stockholders, our Quarterly Reports on
10-Q and any Current Reports on Form 8-K that we may file from time to time. You may obtain copies of these reports after the date
of this annual report from the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. In addition
the SEC maintains information for electronic filers (including Atossa) at its website
www.sec.gov
. The public may obtain
information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
PART I
ITEM 1. BUSINESS
Overview
We are a clinical-stage pharmaceutical company
focused on the development of novel therapeutics and delivery methods for the treatment of breast cancer and other breast conditions.
Our leading program uses our patented intraductal microcatheters which deliver pharmaceuticals through the breast ducts. We initiated
a Phase 2 clinical study in March 2016 using our microcatheters to deliver fulvestrant as a potential treatment of ductal carcinoma
in-situ, or DCIS, and breast cancer. This study is being conducted by Columbia University Medical Center Breast Cancer Programs.
Our second pharmaceutical program under development is Afimoxifene Topical Gel, or AfTG, for the treatment and prevention of hyperplasia
of the breast.
In addition to our clinical-stage pharmaceutical
programs, we are in the process of evaluating other therapeutic candidates to treat other breast conditions, including breast
cancer. Factors we are considering in evaluating potential drug candidates include, for example, the ability to obtain expedited
regulatory approval, significance of unmet medical need, size of the patient population, intellectual property opportunities and
the anticipated pre-clinical and clinical pathway.
Through mid-2015, we were primarily focused
on the development and commercialization of our medical devices and laboratory tests. Our medical devices include the ForeCYTE
Breast Aspirator and the FullCYTE Breast Aspirator. These devices are intended for the collection of nipple aspirate fluid, or
NAF, for cytological testing at a laboratory. We are not, however, currently marketing and promoting our breast aspirators nor
any laboratory tests as we are devoting substantially all of our resources to our pharmaceutical business. Other devices under
development also include intraductal microcatheters for the potential administration of targeted pharmaceuticals, and various tools
for potential use by breast surgeons.
Our laboratory tests have historically been developed and performed by The National Reference Laboratory
for Breast Health, Inc., or the “NRLBH.” The NRLBH was our wholly-owned subsidiary until December 16, 2015 when, pursuant
to a stock purchase agreement, we sold approximately 81% of the capital stock of the NRLBH to the NRL Investment Group, LLC. We
have determined that the disposition of the lab business qualifies for reporting as a discontinued operation since the sale represents
a strategic shift that will have a major effect on our operations and financial results. We have elected to recognize any subsequent
gain from the earn-out payments payable to us pursuant to the stock purchase agreement as they are determined realizable.
We are now focusing our business on our
pharmaceutical programs and delivery methods. Our key objectives are to advance our pharmaceutical candidates through Phase 2 trials
and then evaluate further development independently or through partners and to advance one or more of our pre-clinical programs
into the clinical trial stage.
Our common stock is
currently quoted on The NASDAQ Capital Market under the symbol “ATOS.”
Our Clinical-Stage Programs Under Development
Delivery of Therapeutics via our Microcatheters
We believe our patented intraductal microcatheters
may be useful in delivering a number of therapeutics to the ducts in the breast. Doing so is intended to provide a therapeutic
directly to the breast tissue. We must obtain FDA approval of any drug delivered via our intraductal microcatheters devices which
will require expensive and time-consuming studies. For example, we must complete clinical studies to demonstrate the safety and
tolerability of fulvestrant using our delivery method. We may not be successful in completing these studies and obtaining FDA approval.
Although breast cancers and precancerous
lesions are detected at an earlier stage, and despite the use of systemically administered agents such as tamoxifen and Faslodex®,
serious side effects remain a major challenge, and may lead to poor patient compliance with the drug regimens. The American Cancer
Society estimates over 292,000 American women were diagnosed with breast cancer (both local and invasive) in 2015. They also estimate
that over 40,000 women died in 2015 due to their disease. Providing drug directly into the ducts targeting the site of the localized
cancerous lesions could reduce the need for systemic anti-cancer drugs, and potentially reducing or eliminating the systemic side
effects of the drugs and morbidity in such patients, and ultimately improve patient compliance and ultimately reduce mortality.
One potential market for intraductal therapy is to take advantage of the large difference in the amount
of drug that potentially gets into the breast tissue with the intraductal administration versus the intramuscular injection. One
analysis suggests that the drug levels in breast tissue might be over 20,000-times higher with the intraductal route than the drug
levels following systemic delivery of the same dose. This provides the potential to test a ‘one and done’ intraductal
treatment modality instead of the monthly injections and with potentially higher tissue levels than are possible with intramuscular
injection which should represent a significant cost savings to the healthcare system.
A second potential
indication for intraductal therapy is in the neoadjuvant setting, meaning that the drug would be delivered before the primary treatment
of surgery. High drug concentration at the site of the tumor and lack of systemic exposure and subsequent toxicity could represent
treatment advances. The current neoadjuvant schedules can run for three months before surgery and the ability to shorten that by
one or even two months has value for the patient and the healthcare system.
Fulvestrant Delivered
Via our Microcatheters
The initial drug we are studying using our
microcatheters for intraductal delivery is fulvestrant. Fulvestrant is FDA-approved for metastatic breast cancer. It is administered
as a monthly injection of two shots, typically into the buttocks. In 2012 a published study documented that the single dose cost
of intramuscular fulvestrant was approximately $12,000.
We own one issued patent and several pending applications directed to the treatment of breast conditions,
including cancer, by the intraductal administration of therapeutics including fulvestrant.
We do not yet have FDA’s input, but
our preliminary analysis, subject to FDA feedback, is that the intraductal fulvestrant program could qualify for designation under
the 505(b)(2) status. This would allow us to file with only clinical data and without having to perform additional, significant
clinical or pre-clinical studies. So the path to market is both faster and less expensive than a standard new drug application,
or NDA, program.
To support this development program, we
have successfully produced microcatheters for the fulvestrant Phase 2 clinical trial. The FDA has also issued a “Safe to
Proceed” letter for our first Investigational New Drug application (IND) for the Phase 2 study and the institutional review
board approval has also been received.
In March 2016, we opened enrollment in the study ATOS-2015-007, which will be conducted by The Columbia
University Medical Center Breast Cancer Program and is known as the “007 Trial”. The 007 Trial is a Phase 2 study in
women with DCIS or invasive breast cancer slated for mastectomy or lumpectomy. This study will assess the safety, tolerability
and distribution of fulvestrant when delivered directly into breast milk ducts of these patients compared to those who receive
the same product intramuscularly. The first six study participants will receive the standard intramuscular fulvestrant dose of
500 mg to establish the reference drug distribution. The subsequent 24 participants will receive fulvestrant by intraductal instillation
utilizing our microcatheter device. The total dose administered in this manner will not exceed 500 mg.
The primary endpoint of the clinical trial
is to assess the safety, tolerability and distribution of intraductally administered fulvestrant in women with DCIS or Stage 1
or 2 invasive ductal carcinoma prior to mastectomy or lumpectomy. The secondary objective of the study is to determine if there
are changes in the expression of Ki67 as well as estrogen and progesterone receptors between a pre-fulvestrant biopsy and post-fulvestrant
surgical specimen. Digital breast imaging before and after drug administration in both groups will also be performed to determine
the effect of fulvestrant on any lesions as well as breast density of the participant. Additional information about the study can
be found at:
https://clinicaltrials.gov/ct2/show/NCT02540330?term=atossa&rank=2.
Other Studies
of Intraductal Administration using our Microcatheters
An October 2011 peer-reviewed paper published
in Science
Translational Medicine
reported the results of a study conducted at the Johns Hopkins Medical School demonstrating
the prevention of breast cancer in rats with intraductal non-systemic chemotherapy, and a proof-of-principle Phase 1 clinical trial
involving 17 women with breast cancer who subsequently received surgery. An accompanying editorial commented that “intraductal
treatment could be especially useful for women with premalignant lesions or those at high risk of developing breast cancer, thus
drastically improving upon their other, less attractive options of breast-removal surgery or surveillance (termed ‘watch
and wait’).”
In a December 2012 peer-reviewed paper published
in
Cancer Prevention Research,
Dr. Susan Love and her colleagues reported the results of a Phase I clinical trial of intraductal
chemotherapy drugs administered into multiple ducts within one breast in women awaiting mastectomy for treatment of invasive cancer.
Thirty subjects were enrolled in this dose escalation study conducted at a single center in Beijing, China. Under local anesthetic,
one of two chemotherapy drugs, carboplatin or pegylated liposomal doxorubicin (PLD), was administered into five to eight ducts
at three dose levels. Pharmacokinetic analysis has shown that carboplatin was rapidly absorbed into the bloodstream, whereas PLD,
though more erratic, was absorbed after a delay. Pathologic analysis showed marked effects on breast duct epithelium in ducts treated
with either drug compared with untreated ducts. The investigators concluded the study showed the safety and feasibility of intraductal
administration of chemotherapy drugs into multiple ducts for the purpose of breast cancer prevention and that this was an important
step towards implementing of this strategy as a "chemical mastectomy," potentially eliminating the need for surgery.
Afimoxifene Topical Gel (AfTG)
Overview
We hold the worldwide exclusive rights to
develop and commercialize AfTG for the potential treatment and prevention of hyperplasia of the breast. The active pharmaceutical
ingredient in AfTG is Afimoxifene (4-hydroxytamoxifen), which is an active metabolite of tamoxifen. Afimoxifene is an anti-estrogen
with an affinity for estrogen receptor that is up to 50 fold higher compared with that of tamoxifen. AfTG is a proprietary transdermal
gel formulation of Afimoxifene protected by 10 patent families. We are evaluating AfTG for potential use in several patient populations,
including but not limited to: high risk women as determined by family history, etc.; women with breast hyperplasia; and women with
a biopsy showing either atypical hyperplasia or DCIS.
AfTG can be dispensed
from a convenient metered-dose container. We have rights to a comprehensive preclinical pharmacology and toxicology package on
AfTG and its manufacturing CMC package is expected to be sufficient to support our Phase 2 and 3 programs. A total of 16 Phase
1 and Phase 2 studies have been conducted in a variety of indications in the United States, United Kingdom, France, Poland, and
Czech Republic. These studies enrolled over 450 patients total, and results were published in leading medical journals such as
the Journal of Clinical Oncology (J Clin Oncol 2005;23:2980-87), Clinical Cancer Research (Clin Cancer Res 2014;20:3672-82), and
Breast Cancer Research and Treatment (Breast Cancer Res Treat 2007;106:389-97).
Potential Funding by NCI
The National Cancer Institute, Division of Cancer Prevention, has indicated that a member of the Consortia
for Cancer Prevention Clinical Trials Program will be conducting a study of AfTG in women with DCIS and another in women with breast
density. The Consortia includes five major medical research centers: the University of Arizona, Northwestern University, Mayo Clinic
Foundation, M. D. Anderson Cancer Center and the University of Wisconsin. The next step is for the academic investigator to develop
a clinical protocol. The majority of the cost of the clinical trial is expected to be paid for by the NCI. This program could provide
major clinical validation of AfTG by the NCI and leading breast cancer academic investigators.
Existing
Data on AfTG
AfTG has been used
in 16 Phase 1 and Phase 2 studies conducted in a variety of indications with over 450 patients. We are in the process of re-establishing
the clinical supply of AfTG and plan to commence a Phase II clinical trial in mid-2016.
The results of previous
studies show that the efficacy of oral tamoxifen in preventing cancer in the study patient populations varies from a low of about
50% to a high of almost 85%. The cancers that did occur in the patients in these studies had a common theme: none of them were
estrogen receptor positive. So, the most common kind of breast cancer, estrogen positive, is almost entirely prevented by oral
tamoxifen. The most common form of male breast cancer is also estrogen receptor positive, so there is potential for this currently
underserved breast cancer population.
These studies demonstrate that tamoxifen
is quite effective in preventing breast cancer in these patient populations. We anticipate that our studies will show that AfTG
is also effective but because it is delivered topically rather than orally (as in tamoxifen) that AfTG will have a superior safety
profile.
In a previous study conducted by the National
Cancer Institute and academic centers in women with DCIS, oral tamoxifen or AfTG was given to women for a month and the amount
of drug was measured in the breast, and in the blood: blood levels are associated with toxicity. The results show that there were
similar amounts of active drug in the breast of both groups but <5% of drug in the blood with our gel compared to oral tamoxifen.
The blood markers of stroke, blood clots, and uterine cancer were increased by oral tamoxifen but not AfTG. Additionally, the biomarker
in the breast of blocking estrogen effect, called Ki-67, showed similar blockage of cell growth.
Summary
of our Rights to AfTG
These AfTG rights were
granted to us pursuant to a May 14, 2015, Intellectual Property License Agreement with Besins Healthcare Luxembourg SARL. The agreement
requires that we pay a royalty of 8% to 9% of net sales for the first 15 years of commercialization. We have the non-exclusive
right to also develop AfTG for breast cancer and other breast diseases, which would require the payment of the following milestone
payments for these additional indications: (i) $5,000,000 for the exclusive right to review, access, and reference a Besins investigational
new drug application (IND) for each additional indication, and (ii) $20,000,000 when we commence a Phase 3 clinical trial for
each additional indication.
Besins has a limited
right of first refusal to commercialize AfTG on a country-by-country basis in countries where Besins has a marketing presence.
The agreement automatically
expires on a country-by-country basis fifteen years after the first commercial sale of AfTG in the particular country. The agreement
may be terminated (i) by either party upon a material breach of the agreement that is not cured by the breaching party, (ii) by
mutual agreement of the parties, (iii) by Atossa at its discretion if it elects to stop developing or commercializing AfTG, (iv)
by Besins on a country-by-country basis or indication-by-indication basis if we fail to commercialize or commence commercial sales
within a specified time, or (v) by Besins if we fail to accomplish any aspect of the development plan within six months of target
date set forth in the development plan. The development plan covers an 18-month period and is required to be updated by us every
six months during the term of the agreement.
Besins has informed
us that they plan to develop AfTG for the reduction of breast density, which we believe is within the scope of our exclusive rights
under the License Agreement. We have informed Besins that its efforts to develop AfTG for breast density would infringe our exclusive
rights under the License Agreement, including our exclusive rights to develop AfTG for treatment and prevention of hyperplasia
of the breast, and would constitute a breach of the License Agreement by Besins.
On January 28, 2016, we filed a complaint
in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins Healthcare Luxembourg
SARL
. The complaint asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing,
and for declaratory relief against Besins. On March 7, 2016, Besins responded to our complaint by denying our claims and
asserting counterclaims against us for breach of contract, fraud, and negligent misrepresentation and declaratory relief. We believe
that these counterclaims are without merit and we plan to defend our self vigorously; however, failure by us to obtain a favorable
resolution of the counterclaims could have a material adverse effect on our business, results of operations and financial condition.
Next steps
with AfTG
We have engaged AAIPharma/Cambridge Major
Laboratories to manufacture Afimoxifene, the API in AfTG. They are an experienced pharmaceutical manufacturer with a good FDA track
record and we are confident will be able to produce the cGMP quantities in a timely manner to support our study plans.
Although we have received written FDA guidance
pertaining to our AfTG development program, all work is on hold pending resolution of our dispute with Besins.
Our Pre-Clinical Programs
Under Development
In addition to our clinical-stage pharmaceutical
programs, we are in the process of evaluating other therapeutic candidates to treat breast conditions, including breast cancer.
Factors we are considering in evaluating potential drug candidates include, for example, the ability to obtain expedited regulatory
approval, significance of unmet medical need, size of the patient population, intellectual property opportunities and the anticipated
pre-clinical and clinical pathway.
NRLBH and our Laboratory Tests
The NRLBH, located
in Seattle, Washington, is certified under CLIA and ISO 15189:2012 and is certified by the College of American Pathologists. We
believe the NRLBH is one of fewer than ten laboratories in the United States to hold the ISO 15189:2012 certification and it was
the first commercial lab in the country to offer enhanced pharmacogenomics testing based on the Luminex xTAG platform. Historically,
substantially all of our revenue has been generated by the NRLBH from its pharmacogenomics test services.
Through December 16, 2015, our laboratory tests consisted of NAF cytology tests, pharmacogenomics tests
and various tests under development including our NextCYTE Breast Cancer Test. These tests were developed by the NRLBH, and in
the case of the NAF cytology and pharmacogenomics tests, were also marketed and sold by the NRLBH. The NRLBH generally owned the
equipment and supplies necessary to develop the tests and to perform the tests and generally contracted directly with third parties
for necessary supplies and services to develop and conduct the tests. Significant assets and contracts of the NRLBH as of December
16, 2015 included, for example, the following:
Affymetrix - GeneChip System 3000Dx v.2
and related GeneChip Human Genome U133 Plus 2.0 arrays for a total purchase obligation of $647,700 with a minimum purchase of ten
30-pack arrays per contract year, and a two year service contract for $51,600 to cover maintenance of the instrument. On September
29, 2015, we entered into a new agreement with Affymetrix to purchase the instrument for $129,000 and all of the prior purchase
commitments under the initial Affymetrix agreement were terminated.
Tissue Specimens for
NextCYTE Test - On September 1, 2014, we entered into a three year agreement with TME Research LLC which requires TME to provide
100 tissue specimens in connection with the development of the NextCYTE test. Fees payable to TME under the agreement includes
$99,600 up front, $31,500 upon supplying the first 25 specimens and $31,500 at the time of final delivery of all specimens. The
agreement is terminable with 60 days prior written notice or immediately upon a material breach. As of December 31, 2015, the
Company has paid $131,000 in set-up fees, which were recorded as R&D expenses in 2014 and $41,000 in 2015 for additional R&D
spending on NextCYTE.
On June 10, 2013, we
entered into an irrevocable license and service agreement with A5 Genetics KFT, Corporation, pursuant to which we received the
world-wide (other than the EU) exclusive license to the software used in the NextCYTE test. We have the right to prosecute
patents related to this software, two of which we have filed in the United States. The patent applications have been
assigned to us. We paid a one-time fee of $100,000 to A5 Genetics in 2013 and in March 2014 we completed software validation
and paid an additional $100,000 to A5 Genetics. We are obligated to pay up to an additional $1.2 million to A5 Genetics upon
commercial launch of the NextCYTE test and receiving FDA approval. We must also pay a royalty of $50 and a service fee of
$65 for each NextCYTE test performed. The NextCYTE test is still in the validation stage and no royalty or service fees have
been paid as of December 31, 2015. The agreement was terminated on February 23, 2016 with no further milestones due to A5 Genetics.
The Affymetrix machine and GeneChips were
included with the NRLBH assets at the time of the transaction with the NRL.
We are not currently developing the NextCYTE Breast Cancer test nor any other tests as we are devoting
substantially all of our resources to the development of our pharmaceutical programs.
On December 16, 2015, we announced the sale
of approximately 81% of the capital stock of the NRLBH to the NRL Investment Group, LLC, for an initial payment of $50,000 and
potential future earn-out payments based on 6% of gross revenue of the NRLBH beginning in December 2016, up to a maximum earn-out
of $10,000,000. We retained 19% ownership through preferred stock which we have the right to sell after four years at the greater
of $4,000,000 or fair market value. We have elected to recognize the subsequent gains from the earn-out payments as they are determined
realizable.
As of the date of this report, we are no
longer involved in the management and operations of the NRLBH as we are devoting substantially all of our resources towards the
development of our pharmaceutical programs. The disposition of the NRLBH business qualifies for reporting as a discontinued operation
since the sale represents a strategic shift that will have a major effect on our operations and financial results. Financial results
of the NRLBH are presented separately as discontinued operations for both years presented.
Our Medical Devices
The ForeCYTE Breast Aspirator is a medical device which consists of a reusable hand-held pump for the
collection of NAF, single-use patient kits that include two NAF sample collection tools per kit, and shipment boxes for the transportation
of NAF samples to any testing laboratory for cytological analysis. The FullCYTE Breast Aspirator is FDA-cleared and is simpler
in design as it contains four parts in a fully disposable, single-use aspirator. This device operates slightly differently than
the ForeCYTE Breast Aspirator in that the NAF sample is captured via capillary tubes prior to being sent to any lab for analysis.
We have also developed a universal transport kit to assist with the packaging and transport of NAF samples to a laboratory. NAF
cytology testing is an Laboratory Developed Test (LDT) consisting of receiving and accessioning the two NAF samples from each patient,
preparing routine and immunohistochemistry, or IHC, in the case of NAF collected with the current ForeCYTE or FullCYTE device,
staining of slides from the NAF samples, and generating a report of the findings. The NAF is analyzed by microscopy for cytological
abnormalities and by a patent-pending IHC staining technique for five biomarkers of hyperplasia and a sample integrity marker.
The NAF cytology test on samples collected with the ForeCYTE device also involves one biomarker of sample integrity and has been
validated to CLIA standards. However, we are not currently commercializing our breast aspirator devices nor any NAF cytology tests.
In 2012 we acquired from Acueity Healthcare
various medical devices consisting primarily of tools to assist breast surgeons. Our breast aspirator devices, universal transport
kit and devices acquired from Acueity are not currently being marketed and sold as we are devoting substantially all of our resources
to the development of our pharmaceutical programs.
Our patented intraductal microcatheter devices
are being developed for the targeted delivered of potential pharmaceuticals, as described above.
Our Capital Resources
We have not yet established an ongoing source
of revenue sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going
concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. We plan to obtain additional
capital resources by selling our equity securities and borrowing from stockholders or others when needed. However, we cannot assure
you that we will be successful in accomplishing any of these plans and, if we are unable to obtain adequate capital, we could be
forced to cease operations. Since inception, substantially all of our revenue has been from sales of our breast aspirator
devices and from laboratory testing performed by the NRLBH. We have shifted our business strategies to focus on our pharmaceutical
programs, and as a result, we sold 81% of the ownership of the NRLBH and are not currently marketing and promoting our devices
nor the NRLBH testing services. We do not anticipate any revenue until our pharmaceutical programs are developed, including receiving
all necessary regulatory approvals, and until we successfully commercialize these programs.
As of December 31, 2015, we had cash and
cash equivalents of $3,715,895. Our capital raising activity from January 2014 through the date of filing this report consists
of the following:
2014:
On January 29, 2014, we completed a public
offering of approximately 5.8 million units at the price of $2.40 per unit, with each unit consisting of one share of common stock
and a five year warrant to purchase 0.20 of a share of common stock, for gross proceeds of approximately $14.0 million. The warrants
are exercisable at $3.00 per share and are callable by us if and when the trading price of our common stock is $6.00 per share
over a defined period and subject to a daily volume minimum.
2015:
During the first quarter
of 2015, we sold a total of 2,653,199 shares of common stock to Aspire Capital under the stock purchase agreement dated November
8, 2013 with aggregate gross proceeds to us of $4,292,349. That agreement has been terminated.
On May 26, 2015, we
entered into a new common stock purchase agreement with Aspire Capital Fund, LLC, which provides that, upon the terms and subject
to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $25.0 million
of shares of our common stock over the 30-month term of the purchase agreement. Concurrently with entering into the purchase agreement,
we also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements,
as permissible and necessary to register under the Securities Act of 1933, registering the sale of the shares of our common stock
that have been and may be issued to Aspire Capital under the purchase agreement. In consideration for entering into the purchase
agreement, concurrently with the execution of the purchase agreement, we issued to Aspire Capital 375,000 shares of our common
stock.
In June 2015, we sold 1,454,003 shares of
common stock at the purchase price of $1.15 per share and pre-funded warrants to purchase 3,610,997 shares of common stock (the
“Pre-Funded Warrants”) at a purchase price of $1.14 per share for total gross proceeds of $5.8 million (the “2015
Offering”). Each Pre-Funded Warrant was exercisable for $0.01 per share, subject to adjustments from time to time and certain
limits on each holder’s beneficial ownership of common stock of the Company. As of December 31, 2015, all Pre-Funded Warrants
had been exercised and none remain outstanding.
On November 11, 2015,
we terminated the May 26, 2015 agreement with Aspire and entered into a new common stock purchase which provides that, upon the
terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate
of $25.0 million of our shares of Common Stock over the approximately 30-month term of the Purchase Agreement. Concurrently with
entering into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital in which we agreed
to register 6,086,207 shares of our common stock.
On December 17, 2015,
the conditions necessary for purchases to commence under the November 11, 2015 agreement were satisfied. On any trading day on
which the closing sale price of our common stock exceeds $0.10, we have the right, in our sole discretion, to present Aspire Capital
with a purchase notice, directing Aspire Capital (as principal) to purchase up to 150,000 shares of our common stock per trading
day, provided that the aggregate price of such purchase shall not exceed $500,000 per trading day, up to $25.0 million of our Common
Stock in the aggregate at a per share price calculated by reference to the prevailing market price of our common stock.
In addition, on any date on which we submit
a purchase notice for 150,000 shares to Aspire Capital and the closing sale price of our stock is equal to or greater than $0.50
per share of Common Stock, we also have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average
price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of stock equal
to up to 30% of the aggregate shares of our Common Stock traded on the NASDAQ on the next trading day (the “VWAP Purchase
Date”), subject to a maximum number of shares we may determine (the “VWAP Purchase Share Volume Maximum”) and
a minimum trading price (the “VWAP Minimum Price Threshold”). The purchase price per share pursuant to such VWAP Purchase
Notice (the “VWAP Purchase Price”) is calculated by reference to the prevailing market price of our Common Stock.
The Purchase Agreement provides that we
and Aspire Capital shall not affect any sales under the Purchase Agreement on any purchase date where the closing sale price of
our Common Stock is less than $0.10 per share (the “Floor Price”). This Floor Price and the respective prices and share
numbers in the preceding paragraphs shall be appropriately adjusted for any reorganization, recapitalization, non-cash dividend,
stock split, reverse stock split or other similar transaction. There are no trading volume requirements or restrictions under the
purchase agreement, and we will control the timing and amount of any sales of our common stock to Aspire Capital. Aspire Capital
has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the purchase
agreement. There are no limitations on use of proceeds, financial or business covenants, and restrictions on future fundings, rights
of first refusal, participation rights, penalties or liquidated damages in the purchase agreement. Aspire Capital may not assign
its rights or obligations under the purchase agreement. The purchase agreement may be terminated by us at any time, at our discretion,
without any penalty or cost to us.
The issuance of the
all shares to Aspire Capital under the purchase agreement is exempt from registration under the Securities Act, pursuant to the
exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule
506 of Regulation D promulgated thereunder.
2016:
In 2016 through the date of filing this report, we have sold 6,086,207 shares of common stock to Aspire
under the November 11, 2015 agreement with them for aggregate gross proceeds to us of $2,153,583. As a result, no shares are available
for sale under this agreement.
Research and Development
Our pharmaceutical programs are in the research
and development phase. In 2014 and 2015, we incurred significant research and development expenses to develop our medical devices
and laboratory tests. Research and development costs are generally expensed as incurred. Our research and development expenses
consist of costs incurred for internal and external research and development. These costs are also comprised of costs incurred
to develop new technology and carry out clinical studies and includes salaries and benefits. Research and development expenses
for the years ended December 31, 2015 and 2014 were $2,359,593 and $1,110,329, respectively.
Intellectual Property
As of December 31, 2015, and based on a
recent periodic review of our patent estate, we own 147 issued patents (45 in the United States and approximately 102 in foreign
countries), and 22 pending patent applications (10 in the United States, and 12 pending international applications) directed to
our products, services, and technologies. Our patent estate consists primarily of the following:
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United States
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Foreign/PCT
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Description
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Issued
(1)
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Expiration
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Pending
(1)
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Issued
(1)
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|
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Expiration
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Pending
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ForeCYTE Breast Aspirator Program
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|
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7
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2016 – 2031
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4
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12
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|
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2016 – 2031
|
|
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8
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FullCYTE Microcatheters & FullCYTE Breast Aspirators Program
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20
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2019 – 2031
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5
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|
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53
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|
|
2019 – 2031
|
|
|
4
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|
NextCYTE Test Program
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|
|
0
|
|
|
2031
|
|
|
1
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|
|
|
0
|
|
|
2031
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|
|
1
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|
Intraductal Treatment Program
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|
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12
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|
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2030
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|
|
3
|
|
|
|
47
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|
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2030
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|
|
1
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|
Carbohydrate Biomarkers Program
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|
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2
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|
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2022
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|
|
0
|
|
|
|
3
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|
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2022
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|
|
0
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|
Acueity Tools
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|
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12
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2015 – 2024
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|
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0
|
|
|
|
2
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|
|
2015 – 2024
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|
|
0
|
|
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(1)
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The total number of patents issued or pending, as applicable, in the respective descriptive columns exceed the totals because some patents and applications contain more than one type of claim directed to methods, kits, compositions, devices and/or technology and the patent counts disclosed herein are subject to change.
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Atossa, Atossa Genetics (stylized), MASCT
and ArgusCYTE are our registered trademarks. We have pending allowed applications with the United States Patent and Trademark Office
for registration of the use of the marks FullCYTE and NextCYTE.
Manufacturing, Distribution, and Associated
Operations
Our manufacturing strategy utilizes third
party contractors for the procurement and manufacture, as applicable, of raw materials, active pharmaceutical ingredients and finished
drug products, as well as for storage, and distribution of our products and associated supply chain operations. As our business
continues to expand, we expect that our manufacturing, distribution, and related operational requirements will correspondingly
increase. Each third party contractor will always undergo a formal qualification process by Atossa subject matter experts prior
to signing any service agreement and initiating any manufacturing work.
Integral to our manufacturing strategy is
our quality control and quality assurance program, which includes standard operating procedures and specifications with the goal
that our compounds are manufactured in accordance with current Good Manufacturing Practices (cGMP), and other applicable global
regulations. The cGMP compliance includes strict adherences to regulations for quality control, quality assurance, and commercialized
products must have acquired FDA, EMA, and any other applicable regulatory approval. In this regard, we expect to rely on our contract
manufacturers to produce sufficient quantities of our products in accordance with cGMPs for use in clinical trials and ultimately
commercial distribution.
We believe our operational strategy of utilizing
qualified contractors and suppliers in the foregoing manner allows us to direct our financial and managerial resources to development
and commercialization activities, rather than to the establishment and maintenance of a manufacturing and distribution infrastructure.
Government Regulation
Drug Regulations
We are subject to extensive regulation
by the FDA and other federal, state, and local regulatory agencies. The Federal Food, Drug, and Cosmetic Act, or the FDCA, and
its implementing regulations set forth, among other things, requirements for the testing, development, manufacture, quality control,
safety, effectiveness, approval, labeling, storage, record keeping, reporting, distribution, import, export, advertising and promotion
of our products. Our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed
in the U.S., although there can be important differences. Additionally, some significant aspects of regulation in the E.U. are
addressed in a centralized way through the EMA and the European Commission, but country-specific regulation by the competent authorities
of the E.U. member states remains essential in many respects.
U.S. Regulations
In the U.S., the FDA regulates drugs under
the FDCA and its implementing regulations, through review and approval of NDAs. NDAs require extensive studies and submission of
a large amount of data by the applicant.
Drug Development
Preclinical Testing:
Before testing any compound in human subjects in
the U.S., a company must generate extensive preclinical data. Preclinical testing generally includes laboratory evaluation of
product chemistry and formulation, as well as toxicological and pharmacological studies in several animal species to assess the
quality and safety of the product. Animal studies must be performed in compliance with the FDA’s Good Laboratory Practice
regulations and the U.S. Department of Agriculture’s Animal Welfare Act.
IND Application:
In most cases, human
clinical trials in the U.S. cannot commence until an Investigational New Drug Application (IND) is submitted to the FDA for review
and a “Safe to Proceed” letter has been provided to the sponsor. The sponsor must prepare a dossier of information
that includes the results of preclinical studies; detailed drug manufacturing information and results; and proposed clinical studies,
design and development strategy. The FDA then evaluates if there is an adequate basis for testing the drug in an initial (human)
clinical study. Unless the FDA raises concerns, the IND application becomes effective 30 days following its receipt by the FDA
at which time written notification is provided. Once human clinical trials have commenced, the sponsor is obligated to report serious
side effects to the FDA. The FDA may suspend a clinical trial by placing it on “clinical hold” if the FDA has concerns
about the safety of the product being tested, subject risks, investigator actions, related product information or for other reasons.
Clinical Trials:
Clinical trials
involve the administration of the drug to healthy human volunteers or to patients, under the supervision of a qualified investigator
according to vetted and approved protocol.
The conduct of clinical trials is subject
to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and Good Clinical Practice,
or GCP, requirements, which establish standards for conducting, recording data from and reporting the results of, clinical trials,
and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being
of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters
for monitoring safety, and the efficacy criteria, if any, to be evaluated. Each protocol is reviewed by the FDA as part of the
IND application. In addition, each clinical trial must be reviewed, approved, and conducted under the auspices of an institutional
review board, or IRB, at the institution conducting the clinical trial. Companies sponsoring the clinical trials, investigators,
and IRBs also must comply with regulations and guidelines for obtaining informed consent from the study subjects, complying with
the protocol and investigational plan, adequately monitoring the clinical trial and timely reporting adverse events. Foreign studies
conducted under an IND application must meet the same requirements that apply to studies being conducted in the U.S. Data from
a foreign study not conducted under an IND application may be submitted in support of an NDA if the study was conducted in accordance
with GCP and the FDA is able to validate the data.
A study sponsor is required to submit certain
details about active clinical trials and clinical trial results to the National Institutes of Health for public posting on http://clinicaltrials.gov.
Human clinical trials typically are conducted in three sequential phases, although the phases may overlap with one another:
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Phase 1 clinical trials include the initial administration
of the investigational drug to humans, typically to a small group of healthy human subjects, but occasionally to a group of patients
with the targeted disease or disorder. Phase 1 clinical trials generally are intended to determine the metabolism and pharmacologic
actions of the drug, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.
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•
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Phase 2 clinical trials generally are controlled studies
that involve a relatively small sample of the intended patient population, and are designed to develop data regarding the product’s
effectiveness, to determine dose response and the optimal dose range and to gather additional information relating to safety and
potential adverse effects.
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•
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Phase 3 clinical trials are conducted after preliminary
evidence of effectiveness has been obtained, and are intended to gather the additional information about safety and effectiveness
necessary to evaluate the drug’s overall risk-benefit profile, and to provide a basis for physician labeling. Generally,
Phase 3 clinical development programs consist of expanded, large-scale studies of patients with the target disease or disorder
to obtain statistical evidence of the efficacy and safety of the drug, or the safety, purity, and potency of a biological product,
at the proposed dosing regimen.
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The sponsoring company, the FDA or the
IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects are being exposed
to an unacceptable health risk. Further, success in early-stage clinical trials does not assure success in later-stage clinical
trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that
could delay, limit or prevent regulatory approval.
There are regulatory pathways that can
accelerate the speed with which a product can be developed, including a Special Protocol Assessment (SPA), Break-through therapy
designation, etc. The designations are obtained from the FDA on a case-by-case basis and do not guarantee the ultimate approval
of a product for commercialization.
Drug Approval
Assuming successful completion of the required
clinical testing, the results of the preclinical studies and of the clinical trials, together with other detailed information,
including information on the manufacture and composition of the investigational product, are submitted to the FDA in the form of
an NDA (New Drug Application) requesting approval to market the product for one or more indications. The testing and approval process
requires substantial time, effort and financial resources. Submission of an NDA requires payment of a substantial review user fee
to the FDA. The FDA will review the application and may deem it to be inadequate to support commercial marketing, and there can
be no assurance that any product approval will be granted on a timely basis, if at all. The FDA may also seek the advice of an
advisory committee, typically a panel of clinicians practicing in the field for which the product is intended, for review, evaluation
and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the advisory
committee.
The FDA has various programs, including
breakthrough therapy, fast track, priority review and accelerated approval that are intended to expedite or simplify the process
for reviewing drugs and/or provide for approval on the basis of surrogate endpoints. Generally, drugs that may be eligible for
one or more of these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical
needs and those that provide meaningful benefit over existing treatments. We cannot be sure that any of our drugs will qualify
for any of these programs, or that, if a drug does qualify, the review time will be reduced or the product will be approved.
Before approving a NDA, the FDA usually
inspects the clinical sites with the greatest accrual to confirm the veracity of the clinical data, execution of the clinical study
and protection of patient safety. The FDA will inspect the facility or the facilities where the product is manufactured, tested
and distributed. Approval is not granted if these inspections raise concerns about the execution of the clinical studies or there
is a lack of cGMP compliance. If the FDA evaluates the NDA and determines the clinical trial execution and manufacturing facilities
as acceptable, the FDA may issue an approval letter If the NDA is not approved, the FDA issues a complete response letter which
is only issued for applications that are not approved The approval letter authorizes commercial marketing of the drug for specific
indications. As a condition of approval, the FDA may require post-marketing testing and surveillance to monitor the product’s
safety or efficacy, or impose other post-approval commitment conditions.
In some circumstances, post-marketing testing
may include post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, which are used primarily to gain additional
experience from the treatment of patients in the intended population, particularly for long-term safety follow-up. In addition,
the FDA may require a Risk Evaluation and Mitigation Strategy, or REMS, to ensure that the benefits outweigh the risks. A REMS
can include medication guides, physician communication plans and elements to assure safe use, such as restricted distribution methods,
patient registries or other risk mitigation tools.
After approval, certain changes to the
approved product, such as adding new indications, making certain manufacturing changes or making certain additional labeling claims,
are subject to further FDA review and approval. Obtaining approval for a new indication generally requires that additional clinical
trials be conducted.
Post-Approval Requirements
Holders of an approved NDA are required
to: (i) report certain adverse reactions to the FDA; (ii) comply with certain requirements concerning advertising and promotional
labeling for their products; and (iii) continue to have cGMP compliance and all aspects of product manufacturing in a “state
of control.” The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing and
distribution facilities; this latter effort includes assessment of compliance with cGMP. Accordingly, manufacturers must continue
to expend time, money and effort in the area of production, quality control and distribution to maintain cGMP compliance. Future
FDA inspections may identify compliance issues at manufacturing facilities that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of problems with a product after approval may result in restrictions on
a product, manufacturer or holder of an approved NDA, including withdrawal of the product from the market.
Marketing of prescription drugs is also
subject to significant regulation through federal and state agencies tasked with consumer protection and prevention of medical
fraud, waste and abuse. After approval in the U.S., we must comply with FDA’s regulation of drug promotion and advertising,
including restrictions on off-label promotion, and we comply with federal anti-kickback statutes, limitations on gifts and payments
to physicians and reporting of payments to certain third parties, among other requirements.
Failure to comply with applicable U.S.
requirements may subject us to administrative or judicial sanctions, such as clinical holds, FDA refusal to approve pending NDAs
or supplemental applications, warning letters, product recalls, product seizures, total or partial suspension of production or
distribution, injunctions and/or criminal prosecution.
Non-U.S. Regulation
Before our products can be marketed outside
of the U.S., they are subject to regulatory approval similar to that required in the U.S., although the requirements governing
the conduct of clinical trials, including additional clinical trials that may be required, product licensing, pricing and reimbursement
vary widely from country to country. No action can be taken to market any product in a country until an appropriate application
has been approved by the regulatory authorities in that country. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product
must also be approved. The pricing review period often begins after market approval is granted. Even if a product is approved by
a regulatory authority, satisfactory prices may not be approved for such product.
In the E.U., marketing authorizations for
medicinal products can be obtained through several different procedures founded on the same basic regulatory process. The centralized
procedure is mandatory for certain medicinal products, including orphan medicinal products, medicinal products derived from certain
biotechnological processes, advanced therapy medicinal products and certain other new medicinal products containing a new active
substance for the treatment of certain diseases. It is optional for certain other products, including medicinal products that are
significant therapeutic, scientific or technical innovations, or whose authorization would be in the interest of public or animal
health. The centralized procedure allows a company to submit a single application to the EMA which will provide a positive opinion
regarding the application if it meets certain quality, safety, and efficacy requirements. Based on the opinion of the EMA, the
European Commission takes a final decision to grant a centralized marketing authorization which is valid in all 28 E.U. Member
States and three of the four European Free Trade Association states (Iceland, Liechtenstein and Norway). Cancer products are usually
required to go through the centralized procedure.
Unlike the centralized authorization procedure,
the decentralized marketing authorization procedure requires a separate application to, and leads to separate approval by, the
competent authorities of each E.U. Member State in which the product is to be marketed. One national competent authority selected
by the applicant, the Reference Member State, assesses the application for marketing authorization. Following a positive opinion
by the competent authority of the Reference Member State the competent authorities of the other E.U. Member States, Concerned Member
States are subsequently required to grant marketing authorization for their territory on the basis of this assessment except where
grounds of potential serious risk to public health require this authorization to be refused. The mutual recognition procedure is
similarly based on the acceptance by the competent authorities of the Concerned Member States of the marketing authorization of
a medicinal product by the competent authorities of other Reference Member States. The holder of a national marketing authorization
granted by a Reference Member State may submit an application to the competent authority of a Concerned Member State requesting
that this authority mutually recognize the marketing authorization delivered by the competent authority of the Reference Member
State.
Similar to accelerated approval regulations
in the U.S., conditional marketing authorizations can be granted in the E.U. by the European Commission in exceptional circumstances.
A conditional marketing authorization can be granted for medicinal products where a number of criteria are fulfilled; i) although
comprehensive clinical data referring to the safety and efficacy of the medicinal product have not been supplied, the benefit/risk
balance of the product is positive, ii) it is likely that the applicant will be in a position to provide the comprehensive clinical
data, iii) unmet medical needs will be fulfilled and iv) the benefit to public health of the immediate availability on the market
of the medicinal product concerned outweighs the risk inherent in the fact that additional data are still required. A conditional
marketing authorization must be renewed annually.
Even if a product receives authorization
in the E.U., there can be no assurance that reimbursement for such product will be secured on a timely basis or at all. Individual
countries comprising the EU member states, rather than the EU, have jurisdiction across the region over patient reimbursement or
pricing matters. Therefore, we will need to expend significant effort and expense to establish and maintain reimbursement arrangements
in the various countries comprising the E.U. and may never succeed in obtaining widespread reimbursement arrangements therein.
The national authorities of the individual
E.U. Member States are free to restrict the range of medicinal products for which their national health insurance systems provide
reimbursement and to control the prices and/or reimbursement of medicinal products for human use. Some E.U. Member States adopt
policies according to which a specific price or level of reimbursement is approved for the medicinal product. Other E.U. Member
States adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market,
including volume-based arrangements and reference pricing mechanisms.
Health Technology Assessment, or HTA, of
medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some E.U. Member States.
These E.U. Member States include the U.K, France, Germany and Sweden. The HTA process, which is governed by the national laws of
these countries, is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic
and societal impact of use of a given medicinal product in the national healthcare systems of the individual country is conducted.
The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product vary between
E.U. Member States.
Post-Approval Regulation
Similarly to the U.S., both marketing authorization
holders and manufacturers of medicinal products are subject to comprehensive regulatory oversight by the EMA and the competent
authorities of the individual E.U. Member States both before and after grant of the manufacturing and marketing authorizations.
Failure by us or by any of our third party partners, including suppliers, manufacturers and distributors to comply with E.U. laws
and the related national laws of individual E.U. Member States governing the conduct of clinical trials, manufacturing approval,
marketing authorization of medicinal products and marketing of such products, both before and after grant of marketing authorization,
may result in administrative, civil or criminal penalties. These penalties could include delays or refusal to authorize the conduct
of clinical trials or to grant marketing authorization, product withdrawals and recalls, product seizures, suspension, withdrawal
or variation of the marketing authorization, total or partial suspension of production, distribution, manufacturing or clinical
trials, operating restrictions, injunctions, suspension of licenses, fines and criminal penalties.
The holder of an E.U. marketing authorization
for a medicinal product must also comply with E.U. pharmacovigilance legislation and its related regulations and guidelines, which
entail many requirements for conducting pharmacovigilance, or the assessment and monitoring of the safety of medicinal products.
These rules can impose on central marketing authorization holders for medicinal products the obligation to conduct a labor intensive
collection of data regarding the risks and benefits of marketed products and to engage in ongoing assessments of those risks and
benefits, including the possible requirement to conduct additional clinical studies, which may be time consuming and expensive
and could impact our profitability. Non-compliance with such obligations can lead to the variation, suspension or withdrawal of
the marketing authorization for the product or imposition of financial penalties or other enforcement measures.
The manufacturing process for medicinal
products in the E.U. is highly regulated and regulators may shut down manufacturing facilities that they believe do not comply
with regulations. Manufacturing requires a manufacturing authorization, and the manufacturing authorization holder must comply
with various requirements set out in the applicable E.U. laws, regulations and guidance, including Directive 2001/83/EC, Directive
2003/94/EC, Regulation (EC) No 726/2004 and the European Commission Guidelines for Good Manufacturing Practice. These requirements
include compliance with E.U. cGMP standards when manufacturing medicinal products and active pharmaceutical ingredients, including
the manufacture of active pharmaceutical ingredients outside of the E.U. with the intention to import the active pharmaceutical
ingredients into the E.U. Similarly, the distribution of medicinal products into and within the E.U. is subject to compliance with
the applicable E.U. laws, regulations and guidelines, including the requirement to hold appropriate authorizations for distribution
granted by the competent authorities of the E.U. Member States.
We and our third party manufacturers are
subject to cGMP, which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality
standards as defined by the EMA, the competent authorities of E.U. Member States and other regulatory authorities. The EMA reviews
Periodic Safety Update Reports for medicinal products authorized in the E.U. If the EMA has concerns that the risk benefit profile
of a product has varied, it can adopt an opinion advising that the existing marketing authorization for the product be suspended
or varied and can advise that the marketing authorization holder be obliged to conduct post-authorization safety studies. The EMA
opinion is submitted for approval by the European Commission. Failure by the marketing authorization holder to fulfill the obligations
for which the approved opinion provides can undermine the on-going validity of the marketing authorization.
Sales and Marketing Regulations
In the E.U., the advertising and promotion
of our products are subject to E.U. Member States’ laws governing promotion of medicinal products, interactions with physicians,
misleading and comparative advertising and unfair commercial practices. In addition, other legislation adopted by individual E.U.
Member States may apply to the advertising and promotion of medicinal products. These laws require that promotional materials and
advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics, or SmPC, as approved
by the competent authorities. Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off-label
promotion. The off-label promotion of medicinal products is prohibited in the E.U. The applicable laws at E.U. level and in the
individual E.U. Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations
of the rules governing the promotion of medicinal products in the E.U. could be penalized by administrative measures, fines and
imprisonment. These laws may further limit or restrict the advertising and promotion of our products to the general public and
may also impose limitations on our promotional activities with health care professionals.
Anti-Corruption Legislation
Our business activities outside of the
U.S. are subject to anti-bribery or anti-corruption laws, regulations, industry self-regulation codes of conduct and physicians’
codes of professional conduct or rules of other countries in which we operate, including the U.K. Bribery Act of 2010.
Interactions between pharmaceutical companies
and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes
of professional conduct developed at both E.U. level and in the individual E.U. Member States. The provision of benefits or advantages
to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal
products is prohibited in the E.U. Violation of these laws could result in substantial fines and imprisonment. Payments made to
physicians in certain E.U. Member States also must be publicly disclosed. Moreover, agreements with physicians must often be the
subject of prior notification and approval by the physician’s employer, his/her competent professional organization, and/or
the competent authorities of the individual E.U. Member States. Failure to comply with these requirements could result in reputational
risk, public reprimands, administrative penalties, fines or imprisonment.
Data Privacy and Protection
Data protection laws and regulations have
been adopted at E.U. level with related implementing laws in individual E.U. Member States which impose significant compliance
obligations. For example, the E.U. Data Protection Directive, as implemented into national laws by the E.U. Member States, imposes
strict obligations and restrictions on the ability to collect, analyze and transfer personal data, including health data from clinical
trials and adverse event reporting. Furthermore, there is a growth towards the public disclosure of clinical trial data in the
E.U. which also adds to the complexity of processing health data from clinical trials. Such public disclosure obligations are provided
in the new E.U. Clinical Trials Regulation, EMA disclosure initiatives, and voluntary commitments by industry. Data protection
authorities from the different E.U. Member States may interpret the E.U. Data Protection Directive and national laws differently,
which adds to the complexity of processing personal data in the E.U., and guidance on implementation and compliance practices are
often updated or otherwise revised. Failing to comply with these laws could lead to government enforcement actions and significant
penalties against us, and adversely impact our operating results. Apart from exceptional circumstances, the E.U. Data Protection
Directive prohibits the transfer of personal data to countries outside of the European Economic Area that are not considered by
the European Commission to provide an adequate level of data protection including the U.S.
United States
Medical Device Regulation
The Federal Food,
Drug, and Cosmetic Act, or FDCA, and the FDA’s implementing regulations, govern registration and listing, manufacturing,
labeling, storage, advertising and promotion, sales and distribution, and postmarket surveillance. Medical devices and their manufacturers
are also subject to inspection by the FDA. The FDCA, supplemented by other federal and state laws, also provides civil and criminal
penalties for violations of its provisions. We manufacture and market a medical device that is regulated by the FDA, comparable
state agencies and regulatory bodies in other countries. The FDA classifies medical devices into one of three classes (Class I,
II or III) based on the degree of risk the FDA determines to be associated with a device and the extent of control deemed necessary
to ensure the device’s safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk
are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable
to all devices, such as requirements for device labeling, premarket notification, and adherence to the FDA’s current Good
Manufacturing Practice requirements, as reflected in its QSR. Most pathology staining kits, reagents, and routine antibody-based
immunohistochemistry protocols which we intend to use initially are Class I devices. Class II devices are intermediate risk devices
that are subject to general controls and may also be subject to special controls such as performance standards, product-specific
guidance documents, special labeling requirements, patient registries or post-market surveillance.
The FullCYTE Breast
Aspirator is a Class II device. Class III devices are those for which insufficient information exists to assure safety and effectiveness
solely through general or special controls, and include life-sustaining, life-supporting, or implantable devices, and devices not
“substantially equivalent” to a device that is already legally marketed. Most Class I devices, including the laboratory
staining kits and reagents we use, and some Class II devices are exempted by regulation from the 510(k) clearance requirement and
can be marketed without prior authorization from the FDA. Class I and Class II devices that have not been so exempted are eligible
for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require premarket approval,
or PMA, prior to commercial marketing. To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification
to the FDA demonstrating that the device is “substantially equivalent” to a predicate device legally marketed in the
United States. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and
(i) the same technological characteristics, or (ii) has different technological characteristics and the information submitted demonstrates
that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness.
A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process
can exceed 90 days and may extend to a year or more. After a device has received 510(k) clearance for a specific intended use,
any modification that could significantly affect its safety or effectiveness, such as a significant change in the design, materials,
method of manufacture or intended use, will require a new 510(k) clearance or (if the device as modified is not substantially equivalent
to a legally marketed predicate device) PMA approval. While the determination as to whether new authorization is needed is initially
left to the manufacturer, the FDA may review this determination and evaluate the regulatory status of the modified product at any
time and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or PMA approval
is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.
All clinical trials must be conducted in
accordance with regulations and requirements collectively known as Good Clinical Practice, or GCP. GCPs include the FDA’s
Investigational Device Exemption, or IDE, regulations, which describe the conduct of clinical trials with medical devices, including
the recordkeeping, reporting and monitoring responsibilities of sponsors and investigators, and labeling of investigation devices.
They also prohibit promotion, test marketing, or commercialization of an investigational device, and any representation that such
a device is safe or effective for the purposes being investigated. GCPs also include FDA’s regulations for institutional
review board approval and for protection of human subjects (informed consent), as well as disclosure of financial interests by
clinical investigators.
Required records and reports are subject
to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and effectiveness
success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product.
We expect that each of our devices under
development will require clinical trials to support a 510(k) or PMA submission, as the case may be. For example, we expect that
our intraductal microcatheters may be considered part of a “combination” product along with a drug and may require
a PMA prior to commercialization.
The commencement or completion of clinical
trials, if any, that we may sponsor, may be delayed or halted, or be inadequate to support approval of a PMA application or clearance
of a premarket notification for numerous reasons, including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial (or a change to a previously approved protocol or trial that requires approval), or place a clinical trial on hold;
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patients do not enroll in clinical trials or follow up at the rate expected;
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institutional review boards and third-party clinical investigators may delay or reject the Company’s trial protocol or changes to its trial protocol;
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third party clinical investigators decline to participate in a trial or do not perform a trial on the Company’s anticipated schedule or consistent with the clinical trial protocol, investigator agreements, Good Clinical Practices or other FDA requirements;
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third party organizations do not perform data collection and analysis in a timely or accurate manner;
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regulatory inspections of clinical trials or manufacturing facilities, which may, among other things, require the Company to undertake corrective action or suspend or terminate its clinical trials;
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changes in governmental regulations or administrative actions;
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the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness; and
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the FDA concludes that the Company’s trial design is inadequate to demonstrate safety and effectiveness.
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After a device is approved and placed in
commercial distribution, numerous regulatory requirements apply. These include:
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establishment registration and device listing;
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the Quality System Regulations (QSR), which requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures;
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labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;
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medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if malfunctions were to occur; and
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corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA caused by the device that may present a risk to health.
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The FDA enforces regulatory requirements
by conducting periodic, announced and unannounced inspections and market surveillance. Inspections may include the manufacturing
facilities of our subcontractors. Failure to comply with applicable regulatory requirements, including those applicable to the
conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:
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warning letters or untitled letters;
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fines and civil penalties;
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unanticipated expenditures;
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delays in clearing or approving or refusal to clear or approve products;
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withdrawal or suspension of FDA clearance;
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product recall or seizure;
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orders for physician notification or device repair, replacement, or refund;
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production interruptions;
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operating restrictions; and
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We and our contract manufacturers, specification
developers and suppliers are also required to manufacture our medical devices, including our intraductal microcatheters in compliance
with current Good Manufacturing Practice requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture,
packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect
to quality management and organization, device design, buildings, equipment, purchase and handling of components, production and
process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing
and recordkeeping. The FDA enforces the QSR through periodic announced and unannounced inspections that may include the manufacturing
facilities of our subcontractors. If the FDA believes we or any of our contract manufacturers or regulated suppliers is not in
compliance with these requirements, it can shut down our manufacturing operations, require recall of our devices, refuse to clear
or approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations, or assess
civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse
effect on our business.
Privacy and Security of Health Information
and Personal Information; Standard Transactions
We are subject to state and federal laws
and implementing regulations relating to the privacy and security of the medical information of the patients it treats. The principal
federal legislation is part of HIPAA. Pursuant to HIPAA, the Secretary of the Department of Health and Human Services, or HHS,
has issued final regulations designed to improve the efficiency and effectiveness of the healthcare system by facilitating the
electronic exchange of information in certain financial and administrative transactions, while protecting the privacy and security
of the patient information exchanged. These regulations also confer certain rights on patients regarding their access to and control
of their medical records in the hands of healthcare providers such as us.
Four principal regulations have been issued
in final form: privacy regulations, security regulations, standards for electronic transactions, and the National Provider Identifier
regulations. The HIPAA privacy regulations, which fully came into effect in April 2003, establish comprehensive federal standards
with respect to the uses and disclosures of an individual’s personal health information, referred to in the privacy regulations
as “protected health information,” by health plans, healthcare providers, and healthcare clearinghouses. We are a healthcare
provider within the meaning of HIPAA. The regulations establish a complex regulatory framework on a variety of subjects, including:
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the circumstances under which uses and disclosures of protected health information are permitted or required without a specific authorization by the patient, including but not limited to treatment purposes, activities to obtain payment for services, and healthcare operations activities;
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a patient’s rights to access, amend, and receive an accounting of certain disclosures of protected health information;
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the content of notices of privacy practices for protected health information; and
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administrative, technical and physical safeguards required of entities that use or receive protected health information.
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The federal privacy regulations, among other
things, restrict our ability to use or disclose protected health information in the form of patient-identifiable laboratory data,
without written patient authorization, for purposes other than payment, treatment, or healthcare operations (as defined by HIPAA)
except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The
privacy regulations provide for significant fines and other penalties for wrongful use or disclosure of protected health information,
including potential civil and criminal fines and penalties. Although the HIPAA statute and regulations do not expressly provide
for a private right of damages, we could incur damages under state laws to private parties for the wrongful use or disclosure of
confidential health information or other private personal information.
We have implemented policies and practices
that we believe brings us into compliance with the privacy regulations. However, the documentation and process requirements of
the privacy regulations are complex and subject to interpretation. Failure to comply with the privacy regulations could subject
us to sanctions or penalties, loss of business, and negative publicity.
The HIPAA privacy regulations establish
a “floor” of minimum protection for patients as to their medical information and do not supersede state laws that are
more stringent. Therefore, we are required to comply with both HIPAA privacy regulations and various state privacy laws. The failure
to do so could subject us to regulatory actions, including significant fines or penalties, and to private actions by patients,
as well as to adverse publicity and possible loss of business. In addition, federal and state laws and judicial decisions provide
individuals with various rights for violation of the privacy of their medical information by healthcare providers such as us. The
final HIPAA security regulations, which establish detailed requirements for physical, administrative, and technical measures for
safeguarding protected health information in electronic form, became effective on April 21, 2005. We have employed what we consider
to be a reasonable and appropriate level of physical, administrative and technical safeguards for patient information. Failure
to comply with the security regulations could subject us to sanctions or penalties and negative publicity.
The final HIPAA regulations for electronic
transactions, referred to as the transaction standards, establish uniform standards for certain specific electronic transactions
and code sets and mandatory requirements as to data form and data content to be used in connection with common electronic transactions,
such as billing claims, remittance advices, enrollment, and eligibility. We have outsourced to a third party vendor the handling
of our billing and collection transactions, to which the transaction standards apply. Failure of the vendor to properly conform
to the requirements of the transaction standards could, in addition to possible sanctions and penalties, result in payors not processing
transactions submitted on our behalf, including claims for payment.
The healthcare information of our patients
includes personal information that are not of an exclusively medical nature. The consumer protection laws of a majority of states
now require organizations that maintain such personal information to notify each individual if their personal information is accessed
by unauthorized persons or organizations, so that the individuals can, among other things, take steps to protect themselves from
identity theft. The costs of notification and the adverse publicity can both be significant. Failure to comply with these state
consumer protection laws can subject a company to penalties that vary from state to state, but may include significant civil monetary
penalties, as well as to private litigation and adverse publicity. California recently enacted legislation that expanded its version
of a notification law to cover improper access to medical information generally, and other states may follow suit.
Federal and State Fraud and Abuse Laws
The federal healthcare Anti-Kickback Statute
prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce referrals
or in return for purchasing, leasing, ordering, or arranging for the purchase, lease, or order of any healthcare item or service
reimbursable under a governmental payor program. The definition of “remuneration” has been broadly interpreted to include
anything of value, including gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash,
waivers of payments, ownership interests, opportunity to earn income, and providing anything at less than its fair market value.
The Anti-Kickback Statute is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the
healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial
arrangements within the healthcare industry, HHS has issued a series of regulatory “safe harbors.” These safe harbor
regulations set forth certain provisions that, if met, will provide healthcare providers and other parties with an affirmative
defense against prosecution under the federal Anti-Kickback Statute. Although full compliance with these provisions ensures against
prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe
harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback
Statute will be pursued.
From time to time, the Office of Inspector
General, or OIG, issues alerts and other guidance on certain practices in the healthcare industry. In October 1994, the OIG issued
a Special Fraud Alert on arrangements for the provision of clinical laboratory services. The Fraud Alert set forth a number of
practices allegedly engaged in by some clinical laboratories and healthcare providers that raise issues under the “fraud
and abuse” laws, including the Anti-Kickback Statute.
Physician Referral Prohibitions
Under a federal law directed at “self-referral,”
commonly known as the Stark Law, prohibitions exist, with certain exceptions, on Medicare and Medicaid payments for laboratory
tests referred by physicians who personally, or through a family member, have an investment interest in, or a compensation arrangement
with, the laboratory performing the tests. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition
may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented
a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to civil monetary penalties of up to $15,000
per bill submission, an assessment of up to three times the amount claimed, and possible exclusion from participation in federal
governmental payor programs. Bills submitted in violation of the Stark Law may not be paid by Medicare or Medicaid, and any person
collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts.
Any arrangement between a laboratory and
a physician’s or physicians’ practice that involves remuneration will prohibit the laboratory from obtaining payment
for services resulting from the physicians’ referrals, unless the arrangement is protected by an exception to the self-referral
prohibition or a provision stating that the particular arrangement would not result in remuneration. Among other things, a laboratory’s
provision of any item, device, or supply to a physician would result in a Stark Law violation unless it was used only to collect,
transport, process, or store specimens for the laboratory, or was used only to order tests or procedures or communicate related
results. This may preclude a laboratory’s provision of fax machines and computers that may be used for unrelated purposes.
Most arrangements involving physicians that would violate the Anti-Kickback Statute would also violate the Stark Law. Many states
also have “self-referral” and other laws that are not limited to Medicare and Medicaid referrals. These laws may prohibit
arrangements which are not prohibited by the Stark Law, such as a laboratory’s placement of a phlebotomist in a physician’s
office to collect specimens for the laboratory. Finally, recent amendments to these laws require self-disclosure of violations
by providers.
We estimate that the majority of our billings for our pharmacogenomics test that we began offering in
October 2014 is from Medicare billings.
Referrals after Becoming a Public Company
Now that our stock is publicly traded, we
are not able to accept referrals from physicians who own, directly or indirectly, shares of our stock unless we comply with the
Stark Law exception for publicly traded securities. This requires, among other things, $75 million in stockholders’ equity
(total assets minus total liabilities). The parallel safe harbor requires, among other things, $50 million in undepreciated net
tangible assets, in order for any distributions to such stockholders to be protected under the Anti-Kickback Statute.
Regulation of Medical Devices and Laboratory
Tests Outside the United States
In the EU and the European Free Trade Association
countries, the ForeCYTE Breast Aspirator has been marketed as a medical device.
The intended purpose for use of Atossa’s
ForeCYTE device is to collect NAF for cytological testing. The physician or researcher may choose to use the NAF and the resulting
analysis for any clinical process as they deem appropriate. Before we can market a medical device in the European Union and the
European Free Trade Association, we must comply with the Essential Requirements set forth in Annex I to the Directive 93/42/EEC
of 14 June 1993 concerning medical devices, commonly known as the Medical Devices Directive. The Essential Requirements relate
to the quality, safety and performance of the medical devices. Compliance with the Essential Requirements entitles a manufacturer
to affix the Conformité Européenne mark, or CE mark, without which the products cannot be placed on the market in
the European Union and the European Free Trade Association countries. To demonstrate compliance with the Essential Requirements
and obtain the right to affix the CE mark, medical device manufacturers must undergo a conformity assessment procedure, which varies
according to the type of medical device and its classification.
The Medical Devices Directive establishes
a classification system placing devices into Class I, IIa, IIb, or III, depending on the risks and characteristics of the medical
device. For certain types of low risk medical devices, the manufacturer may prepare a CE Declaration of Conformity based on a self-assessment
of the conformity of its products with the Essential Requirements set forth in Annex I to the Medical Devices Directive. Other
devices are subject to a conformity assessment procedure requiring the intervention of a “notified body,” which is
a private organization designated by the competent authorities of an EU Member State to conduct conformity assessments and verify
the conformity of manufacturers and their medical devices with the Essential Requirements. The notified body issues a CE Certificate
of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device
and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix
the CE mark to its medical devices after having prepared and signed a related Declaration of Conformity.
The ForeCYTE Breast Aspirator is classified as a Class II medical device. Although we received a CE mark
for this device in October 2014, we are not currently marketing and selling the device and we are therefore not planning on maintaining
the CE mark.
Compliance Program
Compliance with government rules and regulations
is a significant concern throughout the industry, in part due to evolving interpretations of these rules and regulations. We seek
to conduct our business in compliance with all statutes and regulations applicable to our operations. To this end, we have established
a compliance program that reviews for regulatory compliance procedures, policies, and facilities throughout our business. Failure
to comply with applicable requirements may subject us to administrative or judicial sanctions, such as clinical holds, refusal
of regulatory authorities to approve or authorize pending product applications, warning letters, product recalls, product seizures,
total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
Legal Proceedings
See “Part 1, Item 3. Legal Proceedings”
in this report which is incorporated into this Part 1, Item 1 by this reference.
Employees
As of the date of filing this report, we
employed two executive officers, six full-time employees and one part-time employee. We expect that we will hire more employees
as we expand.
Insurance
We currently maintain
director’s and officer’s insurance, key-man life insurance for our Chief Executive Officer, commercial general and
office premises liability insurance, and product errors and omissions liability insurance for our products and services.
ITEM 1A. RISK FACTORS
In addition to other information in this
report, the following factors should be considered carefully in evaluating an investment in our securities. If any of the following
risks actually occur, our business, financial condition and results of operations would likely suffer. In that case, the market
price of the common stock could decline, and you may lose part or all of your investment in our company.
Additional risks
of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations.
Risks Relating to our Business
We have only a limited operating
history, and, as such, an investor cannot assess our profitability or performance based on past results.
We began operations in December 2008 focused
on acquiring the Mammary Aspiration Specimen Cytology Test System (“MASCT”) patent rights and assignments and the FDA
clearance for marketing the MASCT System, which was completed in January 2009. We were incorporated in Delaware in April 2009 and
our operations to date have consisted primarily of securing manufacturing for the MASCT System (now called the ForeCYTE Breast
Aspirator), the FullCYTE Breast Aspirator and the intraductal microcatheter, establishing our CLIA-certified laboratory, validating
our laboratory developed tests, launching our aspirator devices and laboratory tests and conducting research and development of
locally-administered pharmaceuticals. We will require significant additional capital to achieve our business objectives, and the
inability to obtain such financing on acceptable terms or at all could lead to closure of the business.
Our revenue and income potential is uncertain.
Any evaluation of our business and prospects must be considered in light of these factors and the risks and uncertainties often
encountered by companies in the development stage. Some of these risks and uncertainties include our ability to:
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obtain successful results from our clinical studies;
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obtain regulatory approvals for our pharmaceuticals we are developing;
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work with contract manufacturers to produce our pharmaceuticals under development and our intra ductal microcatheter in clinical and commercial quantities on acceptable terms and in accordance with required standards;
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obtain a favorable resolution to our litigation with Besins;
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respond effectively to competition;
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manage growth in operations;
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respond to changes in applicable government regulations and legislation;
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access additional capital when required;
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sell our products and service at the prices currently expected; and
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attract and retain key personnel.
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We may not continue as a going concern.
We have not yet established an ongoing source
of revenue sufficient to cover operating costs and allow us to continue as a going concern. The report issued by our independent
auditors also emphasized our ability to continue as a going concern. Our ability to continue as a going concern is dependent on
obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we
may be unable to expand our product offerings or geographic reach and we could be forced to cease operations.
If we do not raise additional capital,
we anticipate liquidity issues in the next two to four months.
For the year ended December 31, 2015, we
incurred a net loss of $15,760,323 and we had an accumulated deficit of $50,934,863. As of the date of filing this report, we expect
that our existing resources will be sufficient to fund our planned operations for at least the next four to six months. We have
not yet established an ongoing source of revenue sufficient to cover our operating costs and allow us to continue as a going concern.
Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become
profitable. The revenue we have generated to date consisted of mainly laboratory services; however, we sold our laboratory business
on December 16, 2015 and we currently have no other products and services approved for commercialization while we develop our pharmaceutical
pipeline. We may not receive or maintain regulatory clearance for our products and services and other sources of capital may not
be available when we need them or on acceptable terms. If we are unable to raise in a timely fashion the amount of capital we anticipate
needing; we would be forced to curtail or cease operations.
We will need
to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed
and on acceptable terms.
When we elect to raise additional funds
or additional funds are required, we may raise such funds from time to time through public or private equity offerings, debt financings,
corporate collaboration and licensing arrangements or other financing alternatives, Additional equity or debt financing or corporate
collaboration and licensing arrangements may not be available on acceptable terms, if at all. If we are unable to raise additional
capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing acquisition, licensing, development
and commercialization efforts and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.
If we raise additional
funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased
fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional
equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders.
If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be
favorable to us. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, our business, operating results, financial condition and prospects could be materially and adversely affected
and we may be unable to continue our operations.
Failure to raise additional capital
as needed could adversely affect us and our ability to grow.
We expect to spend substantial amounts of
capital to:
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develop our pharmaceutical programs under development;
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perform clinical studies for the pharmaceuticals we are developing;
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continue our research and development activities to advance our product pipeline;
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obtain clinical supplies of the pharmaceuticals we are developing; and
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obtain a successful resolution of the legal actions we commenced against Besins, including successfully defending against the counterclaims Besins has asserted against us..
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We have not identified other sources for additional funding and cannot be certain that additional funding
will be available on acceptable terms, or at all. Historically, a significant amount of our capital needs have been provided by
Aspire Capital; however, in the first quarter of 2016 we sold all shares available for sale to Aspire under the November 2015 agreement
with Aspire and no shares remain available for sale to them. If we are unable to raise additional capital in sufficient amounts
or on acceptable terms, we may have to significantly delay, scale back or discontinue the commercialization of our products and
services or our research and development activities. Furthermore, such lack of funds may inhibit our ability to respond to competitive
pressures or unanticipated capital needs, or may force us to reduce operating expenses, which could significantly harm the business
and development of operations. Because our independent auditors have emphasized in their report on our financial statements doubt
as to our ability to continue as a “going concern,” our ability to raise capital may be severely hampered. Similarly,
our ability to borrow any such capital may be more expensive and difficult to obtain until this “going concern” issue
is eliminated.
We have a history of operating losses
and we expect to continue to incur losses in the future.
We have a limited operating history and
have incurred total net losses of $50,934,863 from our incorporation in April 2009 through December 31, 2015. We will continue
to incur further losses in connection with research and development costs for development of our pharmaceutical programs, including
ongoing and additional clinical studies.
Our business may be affected by legal
proceedings.
We have been in the past, and may become
in the future, involved in legal proceedings. For example, on October 10, 2013, a securities class action complaint was filed
against us, certain of our directors and officers and the underwriters from our initial public offering. This action was
purportedly brought on behalf of a class of persons and entities who purchased our common stock between November 8, 2012 and October
4, 2013, inclusive. The complaint alleges that the defendants made false or misleading statements. The Company and other
defendants filed motions to dismiss the amended complaint on May 30, 2014. The plaintiffs filed briefs in opposition to these
motions on July 11, 2014. The Company replied to the opposition briefs on August 11, 2014. On October 6, 2014 the Court granted
defendants’ motion dismissing all claims against Atossa and all other defendants. The Court’s order provided plaintiffs
with a deadline of October 26, 2014 to file a motion for leave to amend their complaint and the plaintiffs did not file such a
motion by that date. On October 30, 2014, the Court entered a final order of dismissal. On November 3, 2014, plaintiffs filed
a notice of appeal with the Court and have appealed the Court’s dismissal order to the U.S. Court of Appeals for the Ninth
Circuit. On February 11, 2015, plaintiffs filed their opening appellate brief. Defendants filed their answering brief on April
13, 2015, and plaintiffs filed their reply brief on May 18, 2015. A hearing for the appeal has not been set. Although we believe
this complaint is without merit and plan to defend it vigorously, the costs associated with defending and resolving the complaint
and ultimate outcome cannot be predicted.
On January 28, 2016, we filed a complaint
in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins Healthcare Luxembourg
SARL,
Case No. 1:16-cv-00045-UNA. The complaint asserts claims for breach of contract, breach of the implied covenant of good
faith and fair dealing, and for declaratory relief against Besins. Our Company's claims arise from Besins' breach of an Intellectual
Property License Agreement dated May 14, 2015 (the "License Agreement"), under which Besins licensed to the Company
the worldwide exclusive rights to develop and commercialize Afimoxifene Topical Gel, or AfTG, for the potential treatment and
prevention of hyperplasia of the breast. The complaint seeks compensatory damages, a declaration of the parties' rights and obligations
under the License Agreement, and injunctive relief. On March 7, 2016 Besins responded to our complaint by denying our claims and
asserting counterclaims including breach of contract, fraud and negligent misrepresentation, and seeking relief in the forms of
compensatory damages, injunctive relief, and declaratory relief. We believe that these counterclaims are without merit and plan
to defend our self vigorously; however, failure to obtain a favorable resolution of the counterclaims could have a material adverse
effect on our business, results of operations and financial condition.
You should carefully review and consider
the various disclosures we make in our reports filed with the SEC regarding legal matters that may affect our business. Civil and
criminal litigation is inherently unpredictable and outcomes can result in excessive verdicts, fines, penalties and/or injunctive
relief that affect how we operate our business. Monitoring and defending against legal actions, whether or not meritorious, and
considering stockholder demands, is time-consuming for our management and detracts from our ability to fully focus our internal
resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant.
We cannot predict with certainty the outcome of any legal proceedings in which we become involved, including our dispute with Besins,
and it is difficult to estimate the possible costs to us stemming from these matters. Settlements and decisions adverse to our
interests in legal actions could result in the payment of substantial amounts and could have a material adverse effect on our cash
flow, results of operations and financial position.
Raising funds by issuing equity or
debt securities could dilute the value of the common stock and impose restrictions on our working capital.
If we raise additional capital by issuing
equity securities, including sales of shares of common stock to Aspire, the value of the then outstanding common stock may be reduced.
If the additional equity securities were issued at a per share price less than the per share value of the outstanding shares, then
all of the outstanding shares would suffer a dilution in value with the issuance of such additional shares. Further, the issuance
of debt securities in order to obtain additional funds may impose restrictions on our operations and may impair our working capital
as we service any such debt obligations.
The products and services that we
have developed or may develop may never achieve significant commercial market acceptance.
We may not succeed in achieving commercial
market acceptance of any of our products and services. In order to gain market acceptance for the drugs underdevelopment, we will
need to demonstrate to physicians and other healthcare professionals the benefits of these therapies including the clinical and
economic application for their particular practice. Many physicians and healthcare professionals may be hesitant to introduce new
services, or techniques, into their practice for many reasons, including lack of time and resources to administer the test, the
learning curve associated with the adoption of such new services or techniques into already established procedures and the uncertainty
of the applicability or reliability of the results of a new product. In addition, the availability of full or even partial payment
for our products and tests, whether by third party payors (e.g., insurance companies), or the patients themselves, will likely
heavily influence physicians’ decisions to recommend or use our products and services.
The loss of the services of our Chief
Executive Officer could adversely affect our business.
Our success is dependent in large part upon
the ability to execute our business plan, manufacture our pharmaceutical drugs and medical devices, maintain our laboratory, and
attract and retain highly skilled professional, sales and marketing personnel. In particular, due to the relatively early stage
of our business, our future success is highly dependent on the services of Steven C. Quay, our Chief Executive Officer and founder,
who provides much of the necessary experience to execute our business plan.
We may experience difficulty in locating,
attracting, and retaining experienced and qualified personnel, which could adversely affect our business.
We will need to attract, retain, and motivate
experienced clinical development and other personnel, particularly in the greater Seattle area as we expand our pharmaceutical
development activities. These employees may not be available in this geographic region. In addition, competition for these employees
is intense and recruiting and retaining skilled employees is difficult, particularly for a development-stage organization such
as ours. If we are unable to attract and retain qualified personnel, our development activities may be adversely affected.
We use third party suppliers for
the production of the intraductal microcatheters, which are currently manufactured in small quantities. If such suppliers are not
capable of producing quantities of these systems sufficient for commercial sale when we are ready, we may not generate significant
revenue or become profitable.
We rely on third party suppliers for the
continued manufacture and supply of the intraductal microcatheters. If our third party suppliers cannot produce the microcatheter
in quantities sufficient for our commercial needs on acceptable terms when needed, we may be unable to commercialize our microcatheters
and generate revenue from their sales as planned. In addition, if at any time after commercialization of our products, we are unable
to secure essential equipment or supplies in a timely, reliable and cost-effective manner, we could experience disruptions in our
services that could adversely affect anticipated results.
Compounds that appear promising
in research and development may fail to reach later stages of development for a number of reasons, including, among others, that
clinical trials may take longer to complete than expected or may not be completed at all, and top-line or preliminary clinical
trial data reports may ultimately differ from actual results once existing data are more fully evaluated.
Successful development of anti-cancer and
other pharmaceutical products is highly uncertain, and obtaining regulatory approval to market drugs to treat cancer is expensive,
difficult and speculative. Compounds that appear promising in research and development may fail to reach later stages of development
for several reasons, including, but not limited to:
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delay or failure in obtaining necessary U.S. and international
regulatory approvals, or the imposition of a partial or full regulatory hold on a clinical trial;
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difficulties in formulating a compound, scaling the manufacturing
process, timely attaining process validation for particular drug products and obtaining manufacturing approval;
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pricing or reimbursement issues or other factors that may
make the product uneconomical to commercialize;
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production problems, such as the inability to obtain raw
materials or supplies satisfying acceptable standards for the manufacture of our products;
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equipment obsolescence, malfunctions or failures, product quality/contamination problems or changes in regulations requiring manufacturing modifications;
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inefficient cost structure of a compound compared to alternative
treatments;
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obstacles resulting from proprietary rights held by others
with respect to a compound, such as patent rights;
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lower than anticipated rates of patient enrollment as a
result of factors, such as the number of patients with the relevant conditions, the proximity of patients to clinical testing
centers, eligibility criteria for tests and competition with other clinical testing programs;
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preclinical or clinical testing requiring significantly
more time than expected, resources or expertise than originally expected and inadequate financing, which could cause clinical
trials to be delayed or terminated;
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failure of clinical testing to show potential products
to be safe and efficacious, and failure to demonstrate desired safety and efficacy characteristics in human clinical trials;
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suspension of a clinical trial at any time by us, an applicable
collaboration partner or a regulatory authority on the basis that the participants are being exposed to unacceptable health risks
or for other reasons;
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delays in reaching or failing to reach agreement on acceptable
terms with prospective clinical research organizations, or CROs, and trial sites; and
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failure of third parties, such as CROs, academic institutions,
collaborators, cooperative groups and/or investigator sponsors, to conduct, oversee and monitor clinical trials and results.
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In addition, from time to time we expect to report top-line data for clinical trials. Such data are based
on a preliminary analysis of then-available efficacy and safety data, and such findings and conclusions are subject to change following
a more comprehensive review of the data related to the particular study or trial. Top-line or preliminary data are based on important
assumptions, estimations, calculations and information then available to us to the extent we have had, at the time of such reporting,
an opportunity to fully and carefully evaluate such information in light of all surrounding facts, circumstances, recommendations
and analyses. As a result, top-line results may differ from future results, or different conclusions or considerations may qualify
such results once existing data have been more fully evaluated. In addition, third parties, including regulatory agencies, may
not accept or agree with our assumptions, estimations, calculations or analyses or may interpret or weigh the importance of data
differently, which could impact the value of the particular program, the approvability or commercialization of the particular compound
and our business in general.
If the development of our products is delayed
or fails, or if top-line or preliminary clinical trial data reported differ from actual results, our development costs may increase
and the ability to commercialize our products may be harmed, which could harm our business, financial condition, operating results
or prospects.
We may not obtain or maintain the
regulatory approvals required to develop or commercialize some or all of our products.
We are subject to rigorous and extensive
regulation by the FDA in the U.S. and by comparable agencies in other jurisdictions, including the EMA in the E.U.
Some of our product candidates are currently
in research or development and, we have not received marketing approval for our products. Our products may not be marketed in the
U.S. until they have been approved by the FDA and may not be marketed in other jurisdictions until they have received approval
from the appropriate foreign regulatory agencies. Each product candidate requires significant research, development and preclinical
testing and extensive clinical investigation before submission of any regulatory application for marketing approval. Our products
may be considered “combination” products in that they use both medical devices and drugs. For example, our intraductal
microcatheters utilize both a medical device and the drug they are intended to deliver. As a result, the regulatory pathway for
these products may be more complex and obtaining regulatory approvals may be more difficult.
Obtaining regulatory approval requires substantial
time, effort and financial resources, and we may not be able to obtain approval of any of our products on a timely basis, or at
all. The number, size, design and focus of preclinical and clinical trials that will be required for approval by the FDA, the EMA
or any other foreign regulatory agency varies depending on the compound, the disease or condition that the products is designed
to address and the regulations applicable to any particular products . Preclinical and clinical data can be interpreted in different
ways, which could delay, limit or preclude regulatory approval. The FDA, the EMA and other foreign regulatory agencies can delay,
limit or deny approval of a product for many reasons, including, but not limited to:
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a product may not be shown to be safe or effective;
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the clinical and other benefits of a product may not outweigh its safety risks;
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clinical trial results may be negative or inconclusive, or adverse medical events may occur during a clinical trial;
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the results of clinical trials may not meet the level of statistical significance required by regulatory agencies for approval;
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regulatory agencies may interpret data from pre-clinical and clinical trials in different ways than we do;
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regulatory agencies may not approve the manufacturing process of a compound or determine that a third party contract
manufacturers manufactures a compound in accordance with current good manufacturing practices, or cGMPs;
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a product may fail to comply with regulatory requirements; or
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regulatory agencies might change their approval policies or adopt new regulations.
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If our products are not approved at all
or quickly enough to provide net revenues to defray our operating expenses, our business, financial condition, operating results
and prospects could be harmed.
In the event that we seek and the
FDA does not grant accelerated approval or priority review for a drug candidate, we would experience a longer time to commercialization
in the U.S., if commercialized at all, our development costs may increase and our competitive position may be harmed.
We may in the future decide to seek accelerated approval pathway for our products. The FDA may grant accelerated
approval to a product designed to treat a serious or life-threatening condition that provides meaningful therapeutic benefit over
available therapies upon a determination that the product has an effect on a surrogate endpoint or intermediate clinical endpoint
that is reasonably likely to predict clinical benefit. A surrogate endpoint under an accelerated approval pathway may be used in
cases in which the advantage of a new drug over available therapy may not be a direct therapeutic advantage, but is a clinically
important improvement from a patient and public health perspective. There can be no assurance that the FDA will agree that any
endpoint we suggest with respect to any of our drug candidates is an appropriate surrogate endpoint. Furthermore, there can be
no assurance that any application will be accepted or that approval will be granted. Even if a product candidate is granted accelerated
approval, such accelerated approval is contingent on the sponsor’s agreement to conduct one or more post-approval confirmatory
trials. Such confirmatory trial(s) must be completed with due diligence and, in some cases, the FDA may require that the trial(s)
be designed and/or initiated prior to approval. Moreover, the FDA may withdraw approval of a product candidate or indication approved
under the accelerated approval pathway for a variety of reasons, including if the trial(s) required to verify the predicted clinical
benefit of a product candidate fail to verify such benefit or do not demonstrate sufficient clinical benefit to justify the risks
associated with the drug, or if the sponsor fails to conduct any required post-approval trial(s) with due diligence.
In the event of priority review, the FDA
has a goal to (but is not required to) take action on an application within a total of eight months (rather than a goal of twelve
months for a standard review). The FDA grants priority review only if it determines that a product treats a serious condition and,
if approved, would provide a significant improvement in safety or effectiveness when compared to a standard application. The FDA
has broad discretion whether to grant priority review, and, while the FDA has granted priority review to other oncology product
candidates, our drug candidates may not receive similar designation. Moreover, receiving priority review from the FDA does not
guarantee completion of review or approval within the targeted eight-month cycle or thereafter.
A failure to obtain accelerated approval
or priority review would result in a longer time to commercialization of the applicable compound in the U.S., if commercialized
at all, could increase the cost of development and could harm our competitive position in the marketplace.
Even if our products are successful
in clinical trials and receive regulatory approvals, we may not be able to successfully commercialize them.
The development and ongoing clinical trials for our drug candidates may not be successful and, even if
they are, the resulting products may never be successfully developed into commercial products. Even if we are successful in our
clinical trials and in obtaining other regulatory approvals, the respective products may not reach or remain in the market for
a number of reasons including:
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they may be found ineffective or cause harmful side effects;
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they may be difficult to manufacture on a scale necessary
for commercialization;
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they may experience excessive product loss due to contamination,
equipment failure, inadequate transportation or storage, improper installation or operation of equipment, vendor or operator error,
inconsistency in yields or variability in product characteristics;
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they may be uneconomical to produce;
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we may fail to obtain reimbursement approvals or pricing
that is cost effective for patients as compared to other available forms of treatment or that covers the cost of production and
other expenses;
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they may not compete effectively with existing or future
alternatives;
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we may be unable to develop commercial operations and to
sell marketing rights;
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they may fail to achieve market acceptance; or
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we may be precluded from commercialization of a product
due to proprietary rights of third parties.
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In particular, our ability to develop and
commercialize AfTG will be heavily dependent on a successful resolution of our dispute with our licensor Besins. The failure of
Besins to fulfill its respective manufacturing obligations with respect to AfTG, or the occurrence of any of the events in the
list above, could adversely affect the commercialization of AfTG and our other products. If we fail to commercialize products or
if our future products do not achieve significant market acceptance, we will not likely generate significant revenues or become
profitable.
The pharmaceutical business is subject
to increasing government price controls and other restrictions on pricing, reimbursement and access to drugs, which could adversely
affect our future revenues and profitability.
To the extent our products are developed,
commercialized and successfully introduced to market, they may not be considered cost-effective and third party or government reimbursement
might not be available or sufficient. Globally, governmental and other third party payors are becoming increasingly aggressive
in attempting to contain health care costs by strictly controlling, directly or indirectly, pricing and reimbursement and, in some
cases, limiting or denying coverage altogether on the basis of a variety of justifications, and we expect pressures on pricing
and reimbursement from both governments and private payors inside and outside the U.S. to continue. In the U.S., we are subject
to substantial pricing, reimbursement and access pressures from state Medicaid programs, private insurance programs and pharmacy
benefit managers, and implementation of U.S. health care reform legislation is increasing these pricing pressures. The Patient
Protection and Affordable Care Act instituted comprehensive health care reform, which includes provisions that, among other things,
reduce and/or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions) and impose
new and/or increased taxes. In almost all European markets, pricing and choice of prescription pharmaceuticals are subject to governmental
control. Therefore, the price of our products and their reimbursement in Europe is and will be determined by national regulatory
authorities. Reimbursement decisions from one or more of the European markets may impact reimbursement decisions in other European
markets. A variety of factors are considered in making reimbursement decisions, including whether there is sufficient evidence
to show that treatment with the product is more effective than current treatments, that the product represents good value for money
for the health service it provides and that treatment with the product works at least as well as currently available treatments.
The continuing efforts of government and insurance companies, health maintenance organizations and other payors of health care
costs to contain or reduce costs of health care may affect our future revenues and profitability or those of our potential customers,
suppliers and collaborative partners, as well as the availability of capital.
We are dependent on third party service
providers for a number of critical operational activities including, in particular, for the manufacture, testing and distribution
of our products and associated supply chain operations, as well as for clinical trial activities. Any failure or delay in these
undertakings by third parties could harm our business.
Our business is dependent on the performance by third parties of their responsibilities under contractual
relationships. In particular, heavily we rely on third parties for the manufacture and testing of our products. We do not have
internal analytical laboratory or manufacturing facilities to allow the testing or production of products in compliance with cGMP.
As a result, we rely on third parties to supply us in a timely manner with manufactured products/product candidates. We may not
be able to adequately manage and oversee the manufacturers we choose, they may not perform as agreed or they may terminate their
agreements with us. In particular, we depend on third party manufacturers to conduct their operations in compliance with GLP or
similar standards imposed by the U.S. and/or applicable foreign regulatory authorities, including the FDA and EMA. Any of these
regulatory authorities may take action against a contract manufacturer who violates cGMP. Failure of our manufacturers to comply
with FDA, EMA or other applicable regulations may cause us to curtail or stop the manufacture of such products until we obtain
regulatory compliance.
We may not be able to obtain sufficient
quantities of our products if we are unable to secure manufacturers when needed, or if our designated manufacturers do not have
the capacity or otherwise fail to manufacture compounds according to our schedule and specifications or fail to comply with cGMP
regulations. In particular, in connection with the transition of the manufacturing of AfTG drug supply to successor vendors, respectively,
we could face logistical, scaling or other challenges that may adversely affect supply. Furthermore, in order to ultimately obtain
and maintain applicable regulatory approvals, any manufacturers we utilize are required to consistently produce the respective
products in commercial quantities and of specified quality or execute fill-finish services on a repeated basis and document their
ability to do so, which is referred to as process validation. In order to obtain and maintain regulatory approval of a compound,
the applicable regulatory authority must consider the result of the applicable process validation to be satisfactory and must otherwise
approve of the manufacturing process. Even if our compound manufacturing processes obtain regulatory approval and sufficient supply
is available to complete clinical trials necessary for regulatory approval, there are no guarantees we will be able to supply the
quantities necessary to effect a commercial launch of the applicable drug, or once launched, to satisfy ongoing demand. Any product
shortage could also impair our ability to deliver contractually required supply quantities to applicable collaborators, as well
as to complete any additional planned clinical trials.
We also rely on third party service providers
for certain warehousing, transportation, sales, order processing, distribution and cash collection services. With regard to the
distribution of our compounds, we depend on third party distributors to act in accordance with GDP, and the distribution process
and facilities are subject to continuing regulation by applicable regulatory authorities with respect to the distribution and storage
of products.
In addition, we depend on medical institutions and CROs (together with their respective agents) to conduct
clinical trials and associated activities in compliance with GCP and in accordance with our timelines, expectations and requirements.
We are substantially dependent on Columbia University Medical Center Breast Cancer Program for the clinical study they are conducting
for us using our intraductal microcatheters. To the extent any such third parties are delayed in achieving or fail to meet our
clinical trial enrollment expectations, fail to conduct our trials in accordance with GCP or study protocol or otherwise take actions
outside of our control or without our consent, our business may be harmed. Furthermore, we conduct clinical trials in foreign countries,
subjecting us to additional risks and challenges, including, in particular, as a result of the engagement of foreign medical institutions
and foreign CROs, who may be less experienced with regard to regulatory matters applicable to us and may have different standards
of medical care.
With regard to certain of the foregoing
clinical trial operations and stages in the manufacturing and distribution chain of our compounds, we rely on single vendors. In
particular, our current business structure contemplates, at least in the foreseeable future, use of a single commercial supplier
for Afimoxifene drug substance. In addition, in the event AfTG is approved, we are initially preparing to have only one commercial
supplier for AfTG. The use of single vendors for core operational activities, such as clinical trial operations, manufacturing
and distribution, and the resulting lack of diversification, expose us to the risk of a material interruption in service related
to these single, outside vendors. As a result, our exposure to this concentration risk could harm our business.
Although we monitor the compliance of our
third party service providers performing the aforementioned services, we cannot be certain that such service providers will consistently
comply with applicable regulatory requirements or that they will otherwise timely satisfy their obligations to us. Any such failure
and/or any failure by us to monitor their services and to plan for and manage our short and long term requirements underlying such
services could result in shortage of the compound, delays in or cessation of clinical trials, failure to obtain or revocation of
product approvals or authorizations, product recalls, withdrawal or seizure of products, suspension of an applicable wholesale
distribution authorization and/or distribution of products, operating restrictions, injunctions, suspension of licenses, other
administrative or judicial sanctions (including civil penalties and/or criminal prosecution) and/or unanticipated related expenditures
to resolve shortcomings.
Such consequences could have a significant
impact on our business, financial condition, operating results or prospects.
We may encounter delays in our clinical
trials, or may not be able to conduct our trials timely.
Clinical trials are expensive and subject
to regulatory approvals. Potential trial delays may arise from, but are not limited to:
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U.S and international regulatory approval might not be obtained or may be delayed;
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lower than anticipated patient enrollment for reasons such as existing conditions and eligibility criteria;
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delays in reaching agreements on acceptable terms with prospective CRO’s; and
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failure of The Columbia University Medical Center and CRO’s or other third parties to effectively and timely monitor, oversee, and maintain the clinical trials.
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Our products and services may expose
us to possible litigation and product liability claims.
Our business may expose us to potential
product liability risks inherent in the testing, marketing and processing personalized medical products, particularly those products
and services we offered prior to shifting our focus on pharmaceutical development. Product liability risks may arise from, but
are not limited to:
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the inability of our microcatheters to inject sufficient amount of drug into the breast, which could lead
to an inaccurate treatment result;
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Adverse events related to the drugs;
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failure by healthcare professionals to properly safeguard NAF samples collected using our aspirators;
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improper fitting of the aspirator device to the breast; and
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cleaning of the breast prior to applying the aspirator.
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A successful product liability claim, or
the costs and time commitment involved in defending against a product liability claim, could have a material adverse effect on
our business. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the
future on commercially desirable or reasonable terms. An inability to obtain sufficient insurance coverage at an acceptable cost,
or otherwise, to protect against potential product liability claims could prevent or inhibit the commercialization of our products.
If we are not
able to protect our proprietary technology, others could compete against us more directly, which would harm our business.
Our commercial success will depend, in
part, on our ability to obtain additional patents and licenses and protect our existing patent position, both in the United States
and in other countries, for devices, kits, diagnostics tests, Therapeutics and related technologies, processes, methods, compositions
and other inventions that we believe are patentable. Our ability to preserve our trade secrets and other intellectual property
is also important to our long-term success. If we do not adequately protect our intellectual property, competitors may be able
to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to
maintain profitability. Patents may also issue to third parties which could interfere with our ability to bring our molecular
diagnostic tests or therapeutics to market. The laws of some foreign countries do not protect our proprietary rights to the same
extent as U.S. laws, and we may encounter significant problems in protecting our proprietary rights in these countries. The patent
positions of diagnostic companies and pharmaceutical and biotechnology companies, including our patent position, are generally
highly uncertain and particularly after the Supreme Court decisions,
Mayo Collaborative Services v. Prometheus Laboratories
, 132 S. Ct. 1289 (2012), Association for Molecular Pathology v. Myriad , 133 S. Ct. 2107 (2013), and Alice Corp. v. CLS Bank
Int’l , 134 S. Ct. 2347 (2014), and involve complex legal and factual questions, and, therefore, any patents issued to us
may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies and any future tests are covered by valid and enforceable
patents or are effectively maintained as trade secrets. Our patent applications may never issue as patents, and the claims of
any issued patents may not afford meaningful protection for our technology or tests. In addition, any patents issued to us or
our licensors may be challenged, and subsequently narrowed, invalidated or circumvented.
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the degree of future protection for our proprietary rights is uncertain, and we cannot ensure that;
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we or our licensors were the first to make the inventions covered by each of our patent applications;
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we or our licensors were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our technologies;
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any of our or our licensors’ patent applications will result in issued patents;
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any of our or our licensors’ patents will be valid or enforceable;
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any patents issued to us or our licensors and collaborators will provide a basis for commercially viable tests and/or Therapeutics, will provide us with any competitive advantages or will not be challenged by third parties;
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we will develop additional proprietary technologies or tests that are patentable;
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the patents of others will not have an adverse effect on our business; or
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our patents or patents that we license from others will survive legal challenges, and remain valid and enforceable.
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If a third party files a patent application with claims to a biomarker or a drug we have discovered or
developed, a derivation proceeding may be initiated regarding competing patent applications. If a derivation proceeding is initiated,
we may not prevail in the derivation proceeding. If the other party prevails in the derivation proceeding, we may be precluded
from commercializing services or tests based on the biomarker or the drug, or may be required to seek a license. A license may
not be available to us on commercially acceptable terms, if at all.
We also rely upon unpatented proprietary
technologies. Although we require employees, consultants and collaborators to sign confidentiality agreements, we may not be able
to adequately protect our rights in such unpatented proprietary technologies, which could have a material adverse effect on our
business. For example, others may independently develop substantially equivalent proprietary information or techniques or otherwise
gain access to our proprietary technologies or disclose our technologies to our competitors
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental
patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the
patent process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patents
and/or applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patents
and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside
counsel to pay these fees. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance
with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors
might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect
on our business.
Changes in U.S. patent law could
diminish the value of patents in general, thereby impairing our ability to protect our products and services.
As is the case with other diagnostic, medical
device and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing
patents. Obtaining and enforcing patents in the diagnostic, medical device and pharmaceutical industries involve both technological
and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently
enacted and is currently implementing wide-ranging patent reform legislation. Further, recent U.S. Supreme Court rulings have narrowed
the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations.
In particular, on March 20, 2012, the U.S. Supreme Court issued a decision in
Mayo Collaborative Services, DBA Mayo Medical
Laboratories, et al. v.
Prometheus Laboratories, Inc
., No. 10-1150, holding that several claims drawn to measuring
drug metabolite levels from patient samples were not patentable subject matter. The full impact of the
Prometheus
decision
on diagnostic claims is uncertain. In addition to increasing uncertainty with regard to our ability to obtain patents in the future,
this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on decisions by
the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable
ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in
the future.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting and defending patents
on our products and services in all countries throughout the world would be prohibitively expensive. In addition, the laws of some
foreign countries do not protect intellectual property rights in the same manner and to the same extent as laws in the United States.
Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products
and further, may export otherwise infringing products to territories where we have patent protection but enforcement of such patent
protection is not as strong as that in the United States. These products may compete with our products and services, and our patents
or other intellectual property rights may not be effective or sufficient to prevent them from competing with our products and services.
Many companies have encountered significant
problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property
protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement
of our patents or marketing of competing products and services in violation of our proprietary rights generally. Proceedings to
enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and could provoke third
parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded,
if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world
may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop.
Our current patent portfolio may
not include all patent rights needed for the full development and commercialization of our products and services. We cannot be
sure that patent rights we may need in the future will be available for license on commercially reasonable terms, or at all.
We may be unable to obtain any licenses
or other rights to patents, technology or know-how from third parties necessary to conduct our business as described in this report
and such licenses, if available at all, may not be available on commercially reasonable terms. Others may seek licenses from
us for other technology we use or intend to use. Any failure to obtain such licenses could delay or prevent us from developing
or commercializing our proposed products and services, which would harm our business. For example, we may seek to develop our intraductal
treatment program by licensing a pharmaceutical from a third party. We may not be able to secure such a license on acceptable terms.
Litigation or patent interference proceedings need to be brought against third parties, as discussed below, to enforce any of our
patents or other proprietary rights, or to determine the scope and validity or enforceability of the proprietary rights of such
third parties.
Third party claims alleging intellectual
property infringement may prevent or delay our drug discovery and development efforts.
Our commercial success depends in part on
our avoiding infringement of the patents and proprietary rights of third parties, including the intellectual property rights of
competitors. There is a substantial amount of litigation, both within and outside the United States, involving patents and other
intellectual property rights in the diagnostic, medical device and pharmaceutical fields, as well as administrative proceedings
for challenging patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable
proceedings in various foreign jurisdictions. Recently, the America Invents Act (AIA) introduced new procedures including inter
partes review and post grant review. The implementation of these procedures brings uncertainty to the possibility of challenges
to our patents in the future, including those patents perceived by our competitors as blocking entry into the market for their
products and services, and the outcome of such challenges. Numerous U.S. and foreign issued patents and pending patent applications,
which are owned by third parties, exist in the fields in which we are developing our products and services. As the diagnostic,
medical device and pharmaceutical industries expand and more patents are issued, the risk increases that our activities related
to our products may give rise to claims of infringement of the patent rights of others.
We cannot assure you that our current or
future products and services will not infringe on existing or future patents. We may not be aware of patents that have already
issued that a third party might assert are infringed by one of our current or future products or services. Nevertheless, we are
not aware of any issued patents that will prevent us from marketing our products and services.
Third parties may assert that we are employing
their proprietary technology without authorization. There may be third party patents of which we are currently unaware with claims
to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our products.
Because patent applications can take many years to issue and may be confidential for eighteen (18) months or more after filing,
there may be currently pending third party patent applications which may later result in issued patents that our products may infringe,
or which such third parties claim are infringed by our products and services.
Parties making claims against us for infringement
or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could
effectively block our ability to further develop and commercialize our products and services. Defense of these claims, regardless
of their merit, would involve substantial expenses and would be a substantial diversion of employee resources from our business.
In the event of a successful claim of infringement against us by a third party, we may have to (i) pay substantial damages, including
treble damages and attorneys’ fees if we are found to have willfully infringed the third party’s patents; (ii) obtain
one or more licenses from the third party; (iii) pay royalties to the third party; or (iv) redesign any infringing products. Redesigning
any infringing products may be impossible or require substantial time and monetary expenditure. Further, we cannot predict whether
any required license would be available at all or whether it would be available on commercially reasonable terms. In the event
that we could not obtain a license, we may be unable to further develop and commercialize our products, which could harm our business
significantly. Even if we were able to obtain a license, the rights may be nonexclusive, which may give our competitors access
to the same intellectual property.
In addition to infringement claims against
us, if third parties have prepared and filed patent applications in the United States that also claim technology related to our
products and services, we may have to participate in interference proceedings in the USPTO to determine the priority of invention.
Third parties may also attempt to initiate reexamination, post grant review or inter partes review of our patents in the USPTO.
We may also become involved in similar proceedings in the patent offices in other jurisdictions regarding our intellectual property
rights with respect to our products and technology.
We may be involved in proceedings
to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Third parties may infringe, misappropriate
or otherwise violate our patents, or patents that may be issued to us in the future. To counter infringement or unauthorized use,
we may be required to file infringement claims. Infringement claims can be expensive and time-consuming. Further, we may not be
able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where
the laws may not protect those rights as fully as in the United States.
In addition, if we initiated legal proceedings
against a third party to enforce a patent, the defendant could counterclaim that our patents are invalid and/or unenforceable.
In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace,
and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Such proceedings
could result in revocation or amendment to our patents in such a way that they no longer cover our products and services. The outcome
following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example,
we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution.
If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps
all, of the patent protection for our products and services. Such a loss of patent protection could have a material adverse impact
on our business.
Litigation proceedings may fail and, even
if successful, may result in substantial costs and distract our management and other employees. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive
these results to be negative, it could have a substantial adverse effect on the price of our common stock. Finally, we may not
be able to prevent, alone or with the support of our licensors, misappropriation of our trade secrets or confidential information,
particularly in countries where the laws may not protect those rights as fully as in the United States.
We may be subject to claims that
our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We have received confidential and proprietary
information from third parties. In addition, we employ individuals who were previously employed at other diagnostic, medical device
or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’
former employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations
of consultants or others who are involved in developing our products. We may also be subject to claims that former employees, consultants,
independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property.
Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary
information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such
an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation
could result in substantial cost and be a distraction to our management and employees.
We may be unable to adequately prevent
disclosure of trade secrets and other proprietary information.
We rely on trade secret protection and confidentiality
agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are
difficult to enforce, and any other elements of our discovery and development processes that involve proprietary know-how, information
or technology that is not covered by patents. However, trade secrets can be difficult to protect. We require all of our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, to enter into
confidentiality agreements. However, we cannot be certain that all such confidentiality agreements have been duly executed, that
our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain
access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized
disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally,
if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties
for misappropriating the trade secret.
Risks Related to our Industry
If our products, or malfunction of
our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which
can result in voluntary corrective actions or agency enforcement actions.
Under the FDA’s medical device reporting,
or MDR, regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a
death or serious injury or in which our product malfunctioned and, if the malfunction were to occur, would likely cause or contribute
to death or serious injury. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could
divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner,
and have an adverse effect on our reputation, results of operations and financial condition.
In the EU, we must comply with the EU Medical
Device Vigilance System (MEDDEV 2.12/1 rev.8) which is intended to protect the health and safety of patients, users and others
by establishing reporting procedures and reducing the likelihood of reoccurrence of incidents related to the use of a medical device.
Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of
a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, may lead to or may
have led to the death of a patient, or user or other persons or to a serious deterioration in such person’s state of health)
must be reported by manufacturers through a Manufacturer's Incident Reports to competent authorities within periods of time specified
in the MEDDEV 2.12/1 rev. 8. Such incidents are evaluated and, where appropriate, information is disseminated between the competent
authorities of the EU Member States. The MEDDEV 2.12/1 rev. 8 is also intended to facilitate a direct, early and harmonized establishment
of Field Safety Corrective Actions, or FSCAs, across the EU Member States in which the device is being marketed. A FSCA is an action
taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a
medical device that is already placed on the market. A FSCA may include device recall, modification, exchange, or destruction.
FSCAs must be reported by the manufacturer or the manufacturer's European Authorized Representative, to its customers and/or the
end users of the device through a Field Safety Notice. FSCAs must also be reported to the competent authorities of the EU Member
States. Failure to comply with any of these requirements could significantly and adversely affect our business.
Our inadvertent or unintentional
failure to comply with the complex government regulations concerning privacy of medical records could subject us to fines and adversely
affect our reputation.
The federal privacy regulations, among other
things, restrict our ability to use or disclose protected health information in the form of patient-identifiable laboratory data,
without written patient authorization, for purposes other than payment, treatment, or healthcare operations (as defined under the
Health Insurance Portability and Accountability Act, or HIPAA) except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. The privacy regulations provide for significant fines and other penalties
for wrongful use or disclosure of protected health information, including potential civil and criminal fines and penalties. Although
the HIPAA statute and regulations do not expressly provide for a private right of damages, we could incur damages under state laws
to private parties for the wrongful use or disclosure of confidential health information or other private personal information.
We intend to implement policies and practices
that we believe will make us compliant with the privacy regulations. However, the documentation and process requirements of the
privacy regulations are complex and subject to interpretation. Failure to comply with the privacy regulations could subject us
to sanctions or penalties, loss of business, and negative publicity.
The HIPAA privacy regulations establish
a “floor” of minimum protection for patients as to their medical information and do not supersede state laws that are
more stringent. Therefore, we are required to comply with both HIPAA privacy regulations and various state privacy laws. The failure
to do so could subject us to regulatory actions, including significant fines or penalties, and to private actions by patients,
as well as to adverse publicity and possible loss of business. In addition, federal and state laws and judicial decisions provide
individuals with various rights for violation of the privacy of their medical information by healthcare providers such as us.
The collection and use of personal health
data in the EU is governed by the provisions of Directive 95/46/EC of the European Parliament and of the Council of 24 October
1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly
known as the Data Protection Directive. The Directive imposes a number of requirements including an obligation to seek the consent
of individuals to whom the personal data relates, the information that must be provided to the individuals, notification of data
processing obligations to the competent national data protection authorities of individual EU Member States and the security and
confidentiality of the personal data. The Data Protection Directive also imposes strict rules on the transfer of personal data
out of the EU to the U.S. Failure to comply with the requirements of the Data Protection Directive and the related national data
protection laws of the EU Member States may result in fines and other administrative penalties and harm our business.
Legislative or regulatory reforms
may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market
and distribute our products after approval is obtained.
From time to time, legislation is drafted
and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture
and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or
reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions
or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition,
FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business
and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations
changed, and what the impact of such changes, if any, may be. Similar changes and revisions can also occur in foreign countries.
For example, the FDA may change its clearance
and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or
delay approval or clearance of our products under development or impact our ability to modify our currently cleared products on
a timely basis. For example, in 2011, the FDA initiated a review of the premarket clearance process in response to internal and
external concerns regarding the 510(k) program, announcing 25 action items designed to make the process more rigorous and transparent.
In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, or the FDASIA, Congress enacted several
reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect medical
device regulation both pre- and post-approval. The FDA has implemented, and continues to implement, these reforms, which could
impose additional regulatory requirements upon us and delay our ability to obtain new 510(k) clearances, increase the costs of
compliance or restrict our ability to maintain our current clearances. For example, the FDA recently issued guidance documents
intended to explain the procedures and criteria the FDA will use in assessing whether a 510(k) submission meets a minimum threshold
of acceptability and should be accepted for review. Under the “Refuse to Accept” guidance, the FDA conducts an early
review against specific acceptance criteria to inform 510(k) submitters if the submission is administratively complete, or if not,
to identify the missing element(s). Submitters are given the opportunity to provide the FDA with the identified information, but
if the information is not provided within a defined time, the submission will not be accepted for FDA review. Any change in the
laws or regulations that govern the clearance and approval processes relating to our current and future products could make it
more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute existing products.
Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our new products would
have an adverse effect on our ability to expand our business.
The failure to comply with complex
federal and state laws and regulations related to submission of claims for services could result in significant monetary damages
and penalties and exclusion from the Medicare and Medicaid programs.
We are subject to extensive federal and
state laws and regulations relating to the submission of claims for payment for services, including those that relate to coverage
of services under Medicare, Medicaid, and other governmental healthcare programs, the amounts that may be billed for services,
and to whom claims for services may be submitted, such as billing Medicare as the secondary, rather than the primary, payor. The
failure to comply with applicable laws and regulations, for example, enrollment in PECOS, the Medicare Provider Enrollment, Chain
and Ownership System, could result in our inability to receive payment for our services or attempts by third party payors, such
as Medicare and Medicaid, to recover payments from us that we have already received. Submission of claims in violation of certain
statutory or regulatory requirements can result in penalties, including civil money penalties of up to $10,000 for each item or
service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government
authorities may also assert that violations of laws and regulations related to submission of claims violate the federal False Claims
Act or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. The
Company will be generally dependent on independent physicians to determine when its services are medically necessary for a particular
patient. Nevertheless, we could be adversely affected if it was determined that the services we provided were not medically necessary
and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services.
It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted
by us if it were found that we knowingly participated in the arrangement that resulted in submission of the improper claims.
Healthcare policy changes, including
recently enacted legislation reforming the United States healthcare system, may have a material adverse effect on our financial
condition and results of operations
The Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, enacted in March 2010,
makes changes that are expected to significantly impact the pharmaceutical and medical device industries
Other significant measures contained in
the PPACA include coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures,
initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and
physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud
and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations
and increasing potential penalties for such violations. In addition, the PPACA establishes an Independent Payment Advisory Board,
or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce
health care expenditures, which may have a negative impact on payment rates for services, including our tests. The IPAB proposals
may impact payments for clinical laboratory services that our future diagnostics customers use our technology to deliver beginning
in 2016 and for hospital services beginning in 2020, and may indirectly reduce demand for our diagnostic products.
In addition to the PPACA, the effect of
which cannot presently be quantified, various healthcare reform proposals have also emerged from federal and state governments.
Changes in healthcare policy, such as the creation of broad test utilization limits for diagnostic products in general or requirements
that Medicare patients pay for portions of clinical laboratory tests or services received, could substantially impact the sales
of our tests, increase costs and divert management’s attention from our business. Such co-payments by Medicare beneficiaries
for laboratory services were discussed as possible cost savings for the Medicare program as part of the debt ceiling budget discussions
in mid-2011 and may be enacted in the future. In addition, sales of our tests outside of the United States will subject us to foreign
regulatory requirements, which may also change over time.
We cannot predict whether future healthcare
initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business,
or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation and the expansion
in government’s effect on the United States healthcare industry may result in decreased profits to us, lower reimbursements
by payors for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition
and results of operations.
Risks Related to
the Securities Markets and Investment in our Securities
Our shares of common stock are listed
on the NASDAQ Capital Market, but we cannot guarantee that we will be able to satisfy the continued listing standards going forward.
Although our shares of common stock are
listed on the NASDAQ Capital Market, we cannot ensure that we will be able to satisfy the continued listing standards of the NASDAQ
Capital Market going forward. If we cannot satisfy the continued listing standards going forward, NASDAQ may commence delisting
procedures against us, which could result in our stock being removed from listing on the NASDAQ Capital Market. On September 28,
2015, we received a letter from NASDAQ stating that the Company was not in compliance with NASDAQ Listing Rule 5550(a)(2), because
the Company's common stock failed to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business days.
We had until March 28, 2016 to either regain compliance, or request additional time to regain compliance. We had not regained compliance
as of March 28, 2016 so we requested an extension of the deadline to regain compliance and notified NASDAQ of our intention to
cure the deficiency during the extended compliance period, including by effecting a reverse stock split, if necessary. In response
to our request, on March 29, 2016, NASDAQ granted us a 180 day extension, until September 26, 2016, to regain compliance with the
$1.00 minimum bid price requirement.
If our stock price does not appreciate
above $1.00 per share for a minimum of 10 consecutive business days by September 26, 2016, and if we don’t otherwise meet
the other continued listing requirements, we may be delisted from NASDAQ which could adversely affect our stock price, liquidity
and our ability to raise funding.
The sale of a substantial number
of shares of our common stock into the market may cause substantial dilution to our existing stockholders and the sale, actual
or anticipated, of a substantial number of shares of common stock could cause the price of our common stock to decline.
Any actual or anticipated sales of shares
by us, Aspire or other stockholders may cause the trading price of our common stock to decline. Additional issuances of shares
by us may result in dilution to the interests of other holders of our common stock. The sale of a substantial number of shares
of our common stock by us, Aspire or other stockholders or anticipation of such sales, could make it more difficult for us to sell
equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
Additionally, sales of common stock by the
investors in our 2011 private placement, including shares of common stock issuable upon exercise of warrants that were issued to
them in 2011, as well as sales of common stock by investors upon exercise of warrants we issued in the public offering we completed
in January 2014, could cause the price of our common stock to decline.
The trading price of our common stock
has been, and is likely to continue to be volatile.
Since shares of our common stock were sold
in our IPO in November 2012 at a price of $5.00 per share, our stock price has ranged from $0.14 to $12.40 through March 28,
2016. In addition to the factors discussed in this report, the trading price of our common stock may fluctuate significantly in
response to numerous factors, many of which are beyond our control, including:
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results of clinical studies;
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litigation with Besins or others;
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regulatory and FDA actions, including inspections and warning letters;
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actions of securities analysts who initiate or maintain coverage of us, and changes in financial estimates by any securities
analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;
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any ongoing litigation that we are currently involved in or litigation that we may become involved in in the future;
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additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of
such sales; and
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media coverage of our business and financial performance.
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In addition, the stock markets have
experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities
of many healthcare companies. Stock prices of many healthcare companies have fluctuated in a manner unrelated or disproportionate
to the operating performance of those companies. As a result, an investment in our common stock may decrease in value.
If our common stock is delisted from
the NASDAQ Capital Market, we may be subject to the risks relating to penny stocks.
If our common stock were to be delisted from trading on the NASDAQ Capital Market and the trading price
of the common stock were below $5.00 per share on the date the common stock was delisted, trading in our common stock would also
be subject to the requirements of certain rules promulgated under the Exchange Act. These rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a “penny stock” and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors,
generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that
are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of
purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity
security that has a market price of less than $5.00 per share, subject to certain exceptions.
The ownership of our common stock
is concentrated among a small number of stockholders, and if our principal stockholders, directors and officers choose to act
together, they may be able to significantly influence management and operations, which may prevent us from taking actions that
may be favorable to you.
Our ownership is concentrated among a small
number of stockholders, including our founders, directors, officers and entities related to these persons. Our directors, officers
and entities affiliated with them beneficially own approximately 16% of our outstanding voting securities. Accordingly, these stockholders,
acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders,
including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our
assets. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of the Company
or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.
If we are unable to implement and
maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness
of our financial reports and the trading price of our common stock may be negatively affected.
We are required to maintain internal controls
over financial reporting and to report any material weaknesses in such internal controls. If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of the Sarbanes-Oxley Act
in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered
public accounting firm is unable to express, if required, an opinion as to the effectiveness of our internal control over financial
reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our
common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities
is listed, the Securities and Exchange Commission, or other regulatory authorities, which could require additional financial and
management resources.
The requirements of being a public
company may strain our resources and divert management’s attention.
We are subject to the reporting requirements
of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NASDAQ Capital Market, and other
applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial
compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources.
As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating
results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees in the
future, which will increase our costs and expenses.
In addition, complying with public disclosure
rules makes our business more visible, which we believe may result in threatened or actual litigation, including by competitors
and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims
do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could
divert the resources of our management and harm our business and operating results.
Our Stockholder Rights Agreement,
the Anti-Takeover provisions in our charter documents and Delaware law could delay or prevent a change in control which could limit
the market price of our common stock and could prevent or frustrate attempts by the our stockholders to replace or remove current
management and the current Board of Directors.
Our Stockholder Rights Agreement we adopted
in May 2014, our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could
delay or prevent a change in control or changes in our Board of Directors that our stockholders might consider favorable. These
provisions include the establishment of a staggered Board of Directors, which divides the board into three classes, with directors
in each class serving staggered three-year terms. The existence of a staggered board can make it more difficult for a third party
to effect a takeover of our Company if the incumbent board does not support the transaction. These and other provisions in our
corporate documents, our Shareholder Rights Plan and Delaware law might discourage, delay or prevent a change in control or changes
in the Board of Directors of the Company. These provisions could also discourage proxy contests and make it more difficult for
an investor and other stockholders to elect directors not nominated by our Board. Furthermore, the existence of these provisions,
together with certain provisions of Delaware law, might hinder or delay an attempted takeover other than through negotiations with
the Board of Directors.
We do not expect to pay dividends
in the future, which means that investors may not be able to realize the value of their shares except through a sale.
We have never, and do not anticipate
that we will, declare or pay a cash dividend. We expect to retain future earnings, if any, for our business and do not anticipate
paying dividends on common stock at any time in the foreseeable future. Because we do not anticipate paying dividends in the future,
the only opportunity for our stockholders to realize the creation of value in our common stock will likely be through a sale of
those shares.
We are an “emerging growth
company” and we cannot be certain if we will be able to maintain such status or if the reduced disclosure requirements applicable
to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,”
as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, and we intend to adopt certain exemptions from various
reporting requirements that are applicable to other public companies that are not “emerging growth companies” including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We may remain as an “emerging growth company” for up to five full fiscal years following
our initial public offering. We would cease to be an “emerging growth company,” and therefore not be able to rely upon
the above exemptions, if we have more than $1 billion in annual revenue in a fiscal year, we issue more than $1 billion of non-convertible
debt over a three-year period, or we have more than $700 million in market value of our common stock held by non-affiliates as
of any June 30 before the end of the five full fiscal years. Additionally, we cannot predict if investors will find our common
stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2015, we leased approximately
17,991 square feet of office and laboratory space in three locations in Seattle, Washington, which includes space rented from Sanders
Properties, LLC, Eastlake Properties LLC, and the Legacy Groups. We believe that our current facilities will be adequate to meet
our needs for the next 24 months. This information is incorporated in this report under “PART II, ITEM 7. MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Commercial Lease Arrangements”.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 2013, a putative securities
class action complaint, captioned
Cook v. Atossa Genetics, Inc.
, et al., No. 2:13-cv-01836-RSM, was filed in the United
States District Court for the Western District of Washington against us, certain of our directors and officers and the underwriters
of our November 2012 initial public offering. The complaint alleges that all defendants violated Sections 11 and 12(a)(2),
and that we and certain of our directors and officers violated Section 15, of the Securities Act by making material false and
misleading statements and omissions in the offering’s registration statement, and that we and certain of our directors and
officers violated Sections 10(b) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder by making false and misleading
statements and omissions in the registration statement and in certain of our subsequent press releases and SEC filings with respect
to our NAF specimen collection process, our ForeCYTE Breast Health Test and our MASCT device. This action seeks, on behalf
of persons who purchased our common stock between November 8, 2012 and October 4, 2013, inclusive, damages of an unspecific amount.
On February 14, 2014, the Court appointed
plaintiffs Miko Levi, Bandar Almosa and Gregory Harrison (collectively, the “Levi Group”) as lead plaintiffs, and approved
their selection of co-lead counsel and liaison counsel. The Court also amended the caption of the case to read In re Atossa
Genetics, Inc. Securities Litigation. No. 2:13-cv-01836-RSM. An amended complaint was filed on April 15, 2014. The Company
and other defendants filed motions to dismiss the amended complaint on May 30, 2014. The plaintiffs filed briefs in opposition
to these motions on July 11, 2014. The Company replied to the opposition briefs on August 11, 2014. On October 6, 2014 the Court
granted defendants’ motion dismissing all claims against Atossa and all other defendants. The Court’s order provided
plaintiffs with a deadline of October 26, 2014 to file a motion for leave to amend their complaint and the plaintiffs did not file
such a motion by that date. On October 30, 2014, the Court entered a final order of dismissal. On November 3, 2014, plaintiffs
filed a notice of appeal with the Court and have appealed the Court’s dismissal order to the U.S. Court of Appeals for the
Ninth Circuit. On February 11, 2015, plaintiffs filed their opening appellate brief. Defendants’ filed their answering brief
on April 13, 2015, and plaintiffs filed their reply brief on May 18, 2015. A hearing for the appeal has not been set.
The Company believes this complaint is without
merit and plans to defend itself vigorously; however failure to obtain a favorable resolution of the claims set forth in the
complaint could have a material adverse effect on the Company’s business, results of operations and financial condition.
Currently, the amount of such material adverse effect cannot be reasonably estimated, and no provision or liability has been recorded
for these claims as of December 31, 2015. The costs associated with defending and resolving the complaint and ultimate outcome
cannot be predicted. These matters are subject to inherent uncertainties and the actual cost, as well as the distraction from
the conduct of our business, will depend upon many unknown factors and management’s view of these may change in the future.
On January 28, 2016, the Company filed
a complaint in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins
Healthcare Luxembourg SARL
, Case No. 1:16-cv-00045-UNA. The complaint asserts claims for breach of contract, breach
of the implied covenant of good faith and fair dealing, and for declaratory relief against defendant Besins Healthcare Luxembourg
SARL. The Company’s claims arise from Besins’ breach of an Intellectual Property License Agreement dated May
14, 2015 (the “License Agreement”), under which Besins licensed to the Company the worldwide exclusive rights to develop
and commercialize Afimoxifene Topical Gel, or AfTG, for the potential treatment and prevention of hyperplasia of the breast.
The complaint seeks compensatory damages, a declaration of the parties’ rights and obligations under the License Agreement,
and injunctive relief. On March 7, 2016, Besins responded to our complaint by denying our claims and issuing counterclaims based
on breach of contract, fraud and negligent misrepresentation, and seeking relief in the forms of compensatory damages, injunctive
relief, and declaratory relief. We believe that these counterclaims are without merit and we plan to defend our self vigorously;
however, failure by us to obtain a favorable resolution of the counterclaims could have a material adverse effect on our business,
results of operations and financial condition.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS:
The Certificate of Incorporation of the Company
provides that the Board is to be divided into three classes as nearly equal in number as reasonably possible, with directors in
each class serving three-year terms. The total Board size is currently fixed at six directors. Currently, the Class I directors
(whose terms expire at the 2016 annual meeting of stockholders) are Steven C. Quay, M.D., Ph.D., and Gregory L. Weaver. The Class
II directors (whose terms expire at the 2017 annual meeting of stockholders) are Stephen J. Galli, M.D., and Richard I. Steinhart.
The Class III directors (whose terms expire at the 2018 annual meeting of stockholders) are Shu-Chih Chen, Ph.D., and H. Lawrence
Remmel, Esq. Directors elected at an annual meeting will hold office until the next annual meeting of stockholders and until their
successors are elected and qualified, unless they resign or their seats become vacant due to death, removal, or other cause in
accordance with the Bylaws of the Company.
The following table sets forth the following
information for the Company’s directors: the year each was first elected a director of the Company; their respective ages
as of the date of filing of this report; the positions currently held with the Company; the year their current term will expire
and their current class.
Nominee/Director Name
and Year First Became a Director
|
|
Age
|
|
Position(s) with the Company
|
|
Year Current
Term Expires
|
|
Current
Director Class
|
Steven C. Quay, M.D., Ph.D. (2009)
|
|
65
|
|
Chairman of the Board of Directors, President and Chief Executive Officer
|
|
2016
|
|
I
|
Gregory L. Weaver (2013)
|
|
59
|
|
Director
|
|
2016
|
|
I
|
|
|
|
|
|
|
|
|
|
Stephen J. Galli, M.D. (2011)
|
|
69
|
|
Director
|
|
2017
|
|
II
|
Richard I. Steinhart (2014)
|
|
58
|
|
Director
|
|
2017
|
|
II
|
|
|
|
|
|
|
|
|
|
Shu-Chih Chen, Ph.D. (2009)
|
|
54
|
|
Director
|
|
2018
|
|
III
|
H. Lawrence Remmel, Esq. (2012)
|
|
64
|
|
Director
|
|
2018
|
|
III
|
Steven C. Quay, M.D., Ph.D.
Dr.
Quay has served as Chief Executive Officer, President and Chairman of the Board of Directors of the Company since the Company
was incorporated in April 2009. Prior to his work at the Company, Dr. Quay served as Chairman of the Board, President and Chief
Executive Officer of MDRNA, Inc., a biotechnology company focused on the development and commercialization of RNAi-based therapeutic
products, from August 2000 to May 2008, and as its Chief Scientific Officer until November 30, 2008 (MDRNA, Inc. was formerly
known as Nastech Pharmaceutical Company Inc. and is currently known as Marina Biotech, Inc.). From December 2008 to April 2009,
Dr. Quay was involved in acquiring the Company’s assets and preparing the Company’s business plan. Dr. Quay is certified
in Anatomic Pathology with the American Board of Pathology, completed both an internship and residency in anatomic pathology at
Massachusetts General Hospital, a Harvard Medical School teaching hospital, is a former faculty member of the Department of Pathology,
Stanford University School of Medicine, and is a named inventor on 14 U.S. and foreign patents covering the ForeCYTE Breast Aspirator.
Including the patents for the ForeCYTE Breast Aspirator, Dr. Quay is a named inventor on 83 U.S. patents, 125 pending patent applications
and is a named inventor on patents covering five pharmaceutical products that have been approved by the U.S. Food and Drug Administration.
Dr. Quay received an M.D. in 1977 and a Ph.D. in 1975 from the University of Michigan Medical School. He also received his B.A.
degree in biology, chemistry and mathematics from Western Michigan University in 1971. He was selected to serve on the Company’s
Board of Directors because of his role as a founder of the Company and the inventor of the ForeCYTE Breast Aspirator, as well
as his qualifications as a physician and the principal researcher overseeing the clinical and regulatory development of the Company’s
pharmaceutical programs.
Gregory L. Weaver.
Mr.
Weaver has served as a director of the Company since October 2013. Mr. Weaver currently serves as Chief Financial Officer of ProMetic
Life Science, a publicly traded pharmaceutical company. From January to October 2015 he served as Global Chief Financial Officer
of Oryzon Genomics, an epigenetics company. From August 2013 to October 2014, Mr. Weaver served as Chief Financial Officer, Senior
Vice President, Treasurer and Corporate Secretary of Fibrocell Science, Inc., an autologous cellular therapeutic company. From
June 2011 to July 2013, Mr. Weaver served as Chief Financial Officer and Senior Vice President of Celsion Corp., an oncology drug
development company. From February 2009 to August 2010, Mr. Weaver served as Chief Financial Officer and Senior Vice President
of Poniard Pharmaceuticals, Inc., a drug development company. From April 2007 to December 2008, Mr. Weaver served as Chief Financial
Officer of Talyst, Inc., a healthcare technology services company. Mr. Weaver received his B.S. degree from Trinity University
and his M.B.A. degree from Boston College. Mr. Weaver has been selected to serve on the Company’s Board of Directors because
of his qualifications as a business executive and audit committee financial expert, and his current and prior experience as a Chief
Financial Officer, director and committee member of public companies
.
Stephen J. Galli, M.D.
Dr. Galli
has served as a director of the Company since July 2011. Dr. Galli is Chair of the Department of Pathology, Professor of Pathology
and of Microbiology & Immunology and the Mary Hewitt Loveless, M.D., Professor, Stanford University School of Medicine, Stanford,
California, and has served in these capacities since February 1999. Before joining Stanford, he was on the faculty of Harvard Medical
School. He holds 13 U.S. patents and has over 340 publications. He is past president of the American Society for Investigative
Pathology and was president of the Collegium Internationale Allergologicum from 2010 – 2014. In addition to receiving awards
for his research, he was recently recognized with the 2010 Stanford University President’s Award for Excellence through Diversity
for his recruitment and support of women and underrepresented minorities at Stanford University. He received his B.A. degree in
biology, magna cum laude, from Harvard College in 1968 and his M.D. degree from Harvard Medical School in 1973 and completed a
residency in anatomic pathology at the Massachusetts General Hospital in 1977. Dr. Galli has been selected to serve on the Company’s
Board of Directors because of his qualifications as a professor and physician, and his specialized expertise as a pathologist.
Richard I. Steinhart
. Mr. Steinhart
has served as a director of the Company since March 2014. From April 2006 to December 2013, Mr. Steinhart was an executive at MELA
Sciences, Inc., most recently serving as its Chief Financial Officer, Senior Vice President, Treasurer and Secretary. From 1992
to 2006, Mr. Steinhart was Managing Director at Forest St. Capital/SAE Ventures. Earlier, he served as Vice President and Chief
Financial Officer at Emisphere Technologies from 1991 to 1992 and as General Partner and Chief Financial Officer of CW Group Inc.
Mr. Steinhart is a member of the Board of Directors of Actinium Pharmaceuticals where he is Chairman of the Audit Committee and
a member of the Compensation Committee. From 2004 to 2012, Mr. Steinhart was a member of the Board of Directors of Manhattan Pharmaceuticals
and was Chairman of the Audit Committee. Mr. Steinhart received his B.B.A. and M.B.A. degrees from Pace University. Mr. Steinhart
has been selected to serve on the Company’s Board of Directors because of his qualifications as a business executive and
audit committee financial expert, and his prior experience as a Chief Financial Officer, director and committee member of public
companies.
Shu-Chih Chen, Ph.D.
Dr. Chen
served as Chief Scientific Officer of the Company since the Company was incorporated in April 2009 through August 2014. Dr. Chen
has served as a director of the Company since April 2009. Prior to joining the Company, Dr. Chen served as President of Ensisheim
beginning in 2008, was founder and President of SC2Q Consulting Company from 2006 to 2008, and served as Head, Cell Biology, Nastech
Pharmaceutical Company, Inc. from 2002 to 2006. During 1995 and 1996, she was an Associate Professor at National Yang Ming University,
Taipei, Taiwan, and served as the principal investigator of an NIH RO1 grant studying tumor suppression by gap junction protein
connexin 43 at the Department of Molecular Medicine at Northwest Hospital before working in the research department at Nastech
Pharmaceutical Company. She is named as an inventor on 18 patent applications related to cancer therapeutics. Dr. Chen received
her Ph.D. degree in microbiology and public health from Michigan State University in 1992 and has published extensively on Molecular
Oncology. She received her B.S. degree in medical technology from National Yang Ming University, Taipei, Taiwan in 1984. Dr. Chen
was selected to serve on the Company’s Board of Directors because of her role as a founder of the Company and her qualifications
in medical technology and as a professor and researcher in the field of cancer therapeutics.
H. Lawrence Remmel, Esq.
Mr. Remmel
has served as a director of the Company since February 2012. He is currently a partner of the law firm Pryor Cashman LLP, located
in New York City, where he chairs the Banking and Finance practice group. Mr. Remmel joined Pryor Cashman in 1988. His practice
includes corporate and banking financings, issues relating to the Investment Company Act of 1940, and intellectual property and
licensing issues, in particular in the biotechnology and biocosmeceutical areas. Mr. Remmel serves on the Board of Advisors of
CytoDel, LLC, an early stage bio-pharmaceutical company developing products for bio-defense, neuronal drug delivery, and musculoskeletal
and aesthetic medicine. He was an associate of the law firm Reboul, MacMurray, Hewitt, Maynard & Kristol from 1984 to 1988,
and began his legal career at Carter, Ledyard & Milburn, where he was an associate from 1979 to 1984. He was admitted to the
New York bar in 1980 and is a member of the New York State Bar Association. He received his J.D. from the Washington & Lee
University School of Law in 1979 and his B.A. from Princeton University in 1975. He currently is a doctoral candidate in the Graduate
School of Life Sciences of the University of Utrecht, in the Department of Clinical and Translational Oncology. Mr. Remmel has
been selected to serve on the Company’s Board of Directors because of his substantial experience as a corporate attorney
advising biotechnology companies and his familiarity with the fiduciary duties and the regulatory requirements affecting publicly
traded companies.
EXECUTIVE OFFICERS AND KEY EMPLOYEES:
The names of our executive officers and their
ages as of December 31, 2015 are as follows:
Name
|
|
Age
|
|
Position
|
Executive Officers:
|
|
|
|
|
Steven C. Quay, M.D., Ph.D.
|
|
65
|
|
Chairman of the Board, President and Chief Executive Officer
|
Kyle Guse, Esq., CPA
|
|
52
|
|
Chief Financial Officer, General Counsel and Secretary
|
Scott Youmans
|
|
49
|
|
Chief Operating Officer
|
|
|
|
|
|
Former Executive Officers :
|
|
|
|
|
John E. Sawyer
|
|
61
|
|
Senior Vice President, Global Regulatory Affairs and Quality Assurance
|
Christopher S. Destro
|
|
46
|
|
Senior Vice President, Sales and Marketing
|
Steven C. Quay, M.D.,
Ph.D.
Dr. Quay has served as Chief Executive Officer, President and Chairman of the Board of Directors of the Company since
the Company was incorporated in April 2009. Prior to his work at the Company, Dr. Quay served as Chairman of the Board, President
and Chief Executive Officer of MDRNA, Inc., a biotechnology company focused on the development and commercialization of RNAi-based
therapeutic products, from August 2000 to May 2008, and as its Chief Scientific Officer until November 30, 2008 (MDRNA, Inc. was
formerly known as Nastech Pharmaceutical Company Inc. and is currently known as Marina Biotech, Inc.). From December 2008 to April
2009, Dr. Quay was involved in acquiring the Company’s assets and preparing the Company’s business plan. Dr. Quay is
certified in Anatomic Pathology with the American Board of Pathology, completed both an internship and residency in anatomic pathology
at Massachusetts General Hospital, a Harvard Medical School teaching hospital, is a former faculty member of the Department of
Pathology, Stanford University School of Medicine, and is a named inventor on 14 U.S. and foreign patents covering the ForeCYTE
Breast Aspirator. Including the patents for the ForeCYTE Breast Aspirator, Dr. Quay is a named inventor on 83 U.S. patents, 125
pending patent applications and is a named inventor on patents covering five pharmaceutical products that have been approved by
the U.S. Food and Drug Administration. Dr. Quay received an M.D. in 1977 and a Ph.D. in 1975 from the University of Michigan Medical
School. He also received his B.A. degree in biology, chemistry and mathematics from Western Michigan University in 1971. Dr. Quay
is a member of the American Society of Investigative Pathology, the Association of Molecular Pathology, the Society for Laboratory
Automation and Screening and the Association of Pathology Informatics. He was selected to serve on the Company’s Board of
Directors because of his role as a founder of the Company and the inventor of the ForeCYTE Breast Aspirator, as well as his qualifications
as a physician and the principal researcher overseeing the clinical and regulatory development of the ForeCYTE Breast Aspirator.
Kyle Guse, Esq., CPA.
Mr.
Guse has served as Chief Financial Officer, General Counsel and Secretary since January 2013. His experience includes more than
20 years of counseling life sciences and other rapid growth companies through all aspects of finance, corporate governance, securities
laws and commercialization. Mr. Guse has practiced law at several of the largest international law firms, including from January
2012 through January 2013 as a partner at Baker Botts LLP and, prior to that, from October 2007 to January 2012, as a partner at
McDermott Will & Emery LLP. Before working at McDermott Will & Emery, Mr. Guse previously served as a partner at Heller
Ehrman LLP. Mr. Guse began his career as an accountant at Deloitte & Touche and he is a licensed Certified Public Accountant
in the State of California. Mr. Guse earned a B.S. in business administration and an M.B.A. from California State University, Sacramento,
and a J.D. from Santa Clara University School of Law.
Scott Youmans
Mr. Youmans
joined Atossa on September 1, 2014 and served as the Senior Vice President of Operations until September 1, 2015, when he was promoted
to the Chief Operating Officer. Mr. Youmans resigned on February 12, 2016 to pursue other career opportunities. Prior to joining
Atossa, Mr. Youmans was the Director of Engineering at Impel Neuropharma from February to September 2014. He consulted for Bayer
Interventional from December 2013 to February 2014. Before that he was VP of Engineering at Pathway Medical Technologies from September
2000 to November 2013 when Pathway was acquired by Bayer Interventional. Mr. Youmans brings 20 years of medical device development
and manufacturing experience in both U.S. and international markets. Throughout his 20 year career, he has focused on developing,
manufacturing and commercializing complex, innovative medical technologies in a wide variety of clinical applications including:
targeted drug delivery, peripheral vascular atherectomy, coronary atherectomy, thrombectomy, biopsy tools, and beating heart support.
He brings experience in rapid product iteration, design controls, continuous improvement, supply chain development and management,
product life-cycle management, project management, pre-clinical studies, clinical studies and clinical field support. Prior to
joining Atossa Genetics, Mr. Youmans directed the development of the Precision Olfactory Device at Impel Neuropharma from February
to September 2014. From 2000 to 2013, Mr. Youmans led the development of Pathway Medical’s Jetstream Atherectomy System and
held increasingly responsible roles, including VP of Engineering since 2003. Mr. Youmans holds a Bachelor of Science degree in
Manufacturing Engineering Technology from Western Washington University.
John E. Sawyer.
Mr. Sawyer served
the Company as Senior Vice President, Global Regulatory Affairs and Quality Assurance from June 2, 2014 through June 8, 2015. Prior
to joining Atossa Genetics, Mr. Sawyer owned his own consulting firm, Realistic Quality Solutions LLC, located in Snohomish, Washington
from June 2010 until present. From April 2009 to June 2010, he was the Vice-President of Quality Assurance & Regulatory Affairs
for Cardiac Science. He also served as the Vice-President, Quality Assurance & Regulatory Affairs for Welch-Allyn from May
2003 to April 2009. He has served in other leadership positions with Fujifilm Medical Systems and GE OEC Medical Systems. He is
also affiliated with the Association of the Advancement of Medical Instrumentation (AAMI) where he teaches various quality management
training courses, published articles and participated in various quality management webinars. Mr. Sawyer holds an MBA and a B.S.
in business administration from Tampa College in Tampa, Florida. Mr. Sawyer resigned on June 8, 2015 to pursue other career opportunities,
Christopher Destro.
Mr. Destro
served the Company as Vice President of Sales and Marketing from December 2012 through May 28, 2015. Prior to joining Atossa, Mr.
Destro served as Vice President of Sales at Magellan Biosciences from January 2011 to December 2014. Mr. Destro has over 18 years
of successful sales and client management expertise within the clinical sector of diagnostic biotechnology. From January 2007 to
July 2011, Mr. Destro served in increasingly responsible positions including Director of Sales, North America, for three divisions
of Magellan Biosciences, where he managed sales of automated blood culture and susceptibility instrumentation for Trek Diagnostics,
automated immunochemistry for Dynex and a blood-lead care platform for point of care testing. In July 2011, Magellan was acquired
by Thermo Fisher Scientific, where Mr. Destro became a commercial leader of the Microbiology Division. Prior to joining Magellan,
Mr. Destro served as Americas Sales Director for Biotrace International from 2000 to 2006, where he managed sales of core pathogen
diagnostic (ELISA) products while leading 17 distributors for the United States, Canada, Mexico and Latin America. Mr. Destro holds
a B.S. degree in microbiology from The Ohio State University. Mr. Destro resigned on May 28, 2015 to pursue other career opportunities.
CORPORATE GOVERNANCE
Director Independence
We believe that the Company benefits from having
a strong and independent Board. For a director to be considered independent, the Board must determine that the director does not
have any direct or indirect material relationship with the Company that would affect his or her exercise of independent judgment.
On an annual basis, the Board reviews the independence of all directors under guidelines established by NASDAQ and in light of
each director’s affiliations with the Company and members of management, as well as significant holdings of Company securities.
This review considers all known relevant facts and circumstances in making an independence determination. Based on this review,
the Board has made an affirmative determination that all directors, other than Drs. Quay and Chen, are independent. It was determined
that Dr. Quay lacks independence because of his status as the Company’s President and Chief Executive Officer and that Dr.
Chen lacks independence because of her marriage to Dr. Quay.
Corporate Code of Business Conduct and Ethics
We believe that our Board and committees, led
by a group of strong and independent directors, provide the necessary leadership, wisdom and experience that the Company needs
in making sound business decisions. We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and
employees, including our President and Chief Executive Officer, our Chief Financial Officer and other employees who perform financial
or accounting functions. The Code of Business Conduct and Ethics sets forth the basic principles that guide the business conduct
of our employees. Our Corporate Code of Business Conduct and Ethics helps clarify the operating standards and ethics that we expect
of all of our officers, directors and employees in making and implementing those decisions. Waivers of our Corporate Code of Business
Conduct and Ethics may only be granted by the Board or the Audit Committee and will be publicly announced promptly on our website.
In furthering our commitment to these principles, we invite you to review our Corporate Code of Business Conduct and Ethics located
on our website at
www.atossagenetics.com
.
Stockholder Communications
Generally, stockholders who have questions or
concerns regarding the Company should contact our Investor Relations representative at (800) 351-3902. However, any stockholders
who wish to address questions regarding the business or affairs of the Company directly with the Board, or any individual director,
should direct his or her questions in writing to the Chairman of the Board, Atossa Genetics Inc., 2300 Eastlake Ave. E, Suite 200,
Seattle, WA 98102. Upon receipt of any such communications, the correspondence will be directed to the appropriate person, including
individual directors.
Audit Committee
Our Board of Directors has appointed an Audit Committee, comprised of Messrs. Steinhart (Chairman), Weaver
and Remmel. The Audit Committee selects the Company’s independent registered public accounting firm, approves its compensation,
oversees and evaluates the performance of the independent registered public accounting firm, oversees the accounting and financial
reporting policies and internal control systems of the Company, reviews the Company’s interim and annual financial statements,
independent registered public accounting firm reports and management letters, and performs other duties, as specified in the Audit
Committee Charter, a copy of which is available on the Company’s website at
www.atossagenetics.com.
Additionally,
the Audit Committee is involved in the oversight of the Company’s risk management through its review of policies relating
to risk assessment and management. The Audit Committee met four times in fiscal 2015. All members of the Audit Committee satisfy
the current independence standards promulgated by NASDAQ and the SEC and the Board has determined that Richard Steinhart qualifies
as an “audit committee financial expert,” as the SEC has defined that term in Item 407 of Regulation S-K.
Equity Compensation Plan Information
The following table sets forth certain information,
as of December 31, 2015, regarding the Company’s 2010 Stock Option and Incentive Plan, as well as other stock options and
warrants previously issued by the Company as compensation for services.
Plan category
|
|
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
|
|
|
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
|
|
|
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in
First Column)
(1)
|
|
Equity compensation plans approved by security holders
|
|
|
2,583,944
|
|
|
$
|
2.71
|
|
|
|
1,109,440
|
|
Equity compensation plans not approved by security holders
|
|
|
1,030,000
|
(2)
|
|
$
|
2.19
|
|
|
|
—
|
|
Total
|
|
|
3,613,944
|
|
|
$
|
2.57
|
|
|
|
1,109,440
|
|
|
(1)
|
Excludes shares that may be added after December 31, 2015 pursuant to the “evergreen” feature under the 2010 Stock Option and Incentive Plan. For example, on January 1, 2016, 1,306,290 shares were automatically added to the 2010 Stock Option and Incentive Plan under the evergreen feature.
|
|
(2)
|
Represents options granted to new employees as inducements for employment which were not required to be approved by security holders. The options are subject to the 2010 Stock Option and Incentive Plan, but were granted outside of such plan. Excludes warrants granted and outstanding in connection with financing agreements.
|
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires
our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file
reports of beneficial ownership and changes in beneficial ownership with the SEC. Executive officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish us with copies of all reports filed under Section 16(a). To the Company’s
knowledge, based solely on the review of copies of the reports filed with the SEC, all reports required to be filed by our executive
officers, directors and greater-than-10% stockholders were timely filed in fiscal 2015, except that a Form 4 that was required
to be filed by Dr. Stephen J. Galli was required to be filed on May 14, 2015 but was not filed until May 18, 2015.
ITEM 11. EXECUTIVE
COMPENSATION
Remuneration of Officers
Our Compensation Committee is responsible for
reviewing and evaluating key executive employee base salaries, setting goals and objectives for executive bonuses and administering
benefit plans. The Compensation Committee provides advice and recommendations to our Board of Directors on such matters.
Summary Compensation Table
The following table sets forth the compensation
earned by our President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and former Senior Vice President
of Global Regulatory Affairs and Quality Assurance, and Senior Vice president of Sales and Marketing (collectively, the “
Named Executive Officers
”), for fiscal years 2014 and 2015:
Name and Position
|
|
Year
|
|
Salary
|
|
|
Option Award
(1)
|
|
|
Nonequity
Incentive Plan
Compensation
|
|
|
All Other
Compensation
(4)
|
|
|
Total
|
|
Steven C. Quay, M.D., Ph.D.
President and Chief Executive Officer
|
|
2015
|
|
$
|
520,000
|
|
|
$
|
437,577
|
|
|
$
|
208,000
|
|
|
$
|
10,600
|
|
|
$
|
1,176,177
|
|
|
|
2014
|
|
$
|
500,000
|
|
|
$
|
129,138
|
|
|
$
|
225,000
|
|
|
$
|
10,400
|
|
|
$
|
864,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kyle Guse
Chief Financial Officer, General Counsel and Secretary
|
|
2015
|
|
$
|
364,000
|
|
|
$
|
302,325
|
|
|
$
|
131,040
|
|
|
$
|
10,600
|
|
|
$
|
807,965
|
|
|
|
2014
|
|
$
|
350,000
|
|
|
$
|
236,190
|
|
|
$
|
149,625
|
|
|
$
|
10,400
|
|
|
$
|
746,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Youmans
(5)
Chief Operating Officer
|
|
2015
|
|
$
|
239,200
|
|
|
$
|
88,866
|
|
|
$
|
80,371
|
|
|
$
|
2,870
|
|
|
$
|
411,307
|
|
|
|
2014
|
|
$
|
67,110
|
|
|
$
|
156,643
|
|
|
$
|
31,730
|
|
|
$
|
-
|
|
|
$
|
255,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Sawyer
Senior Vice President of Regulatory Affairs and
Quality Assurance
(2)
|
|
2015
|
|
$
|
149,986
|
|
|
$
|
94,302
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
244,288
|
|
|
|
2014
|
|
$
|
163,334
|
|
|
$
|
119,259
|
|
|
$
|
43,288
|
|
|
$
|
-
|
|
|
$
|
325,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Destro
Senior Vice President of Sales and Marketing
(3)
|
|
2015
|
|
$
|
103,323
|
|
|
$
|
86,919
|
|
|
$
|
-
|
|
|
$
|
125,470
|
|
|
$
|
315,712
|
|
|
|
2014
|
|
$
|
205,000
|
|
|
$
|
70,702
|
|
|
$
|
46,638
|
|
|
$
|
10,400
|
|
|
$
|
332,740
|
|
(1)
|
The value of the option awards has been computed in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. Assumptions used in the calculations for these amounts are included in notes to our financial statements included in this report. Additional information about the terms of each option award is below under PART III Item 11 “Executive Compensation – Outstanding Equity Awards at Fiscal Year End.”
|
(2)
|
Mr. Sawyer was hired as our Senior Vice President of Global Regulatory Affairs and Quality Assurance in June 2014 and resigned in June 2015.
|
(3)
|
Mr. Destro resigned as our Senior Vice President of Sales and Marketing in May 2015. Based on the separation
agreement between the company and Mr. Destro, Mr. Destro received the following in connection with his departure from the company,
which is included in “All other compensation”: (i) $10,000, (ii) $87,689 based on sales performance
of the NRLBH, and (iii) continuation of salary and partial bonus payment in the amount of $25,000.
|
(4)
|
Amounts represent 401(k) match paid by the Company on behalf of the Named Executive Officer, except Mr. Destro’s 2015 balance, which includes $122,689 of severance compensation and $2,781 of 401(k) match paid by the Company.
|
(5)
|
Mr. Youmans resigned as the Chief Operating Officer of the Company on February 12, 2016. Based on the
employment separation agreement between the company and Mr. Youmans, Mr. Youmans received $23,920 in severance pay and received
one-half of his 2015 bonus of $40,186 in a lump sum payment in February 2016 and the other one-half bonus of $40,186 will be paid
in equal monthly payments over six months following his departure.
|
Outstanding Equity Awards at Fiscal Year-End
The following table shows information regarding
our outstanding equity awards at December 31, 2015 for the Named Executive Officers, all of which are subject to the terms and
conditions of the 2010 Stock Option and Incentive Plan which is described below:
Name
|
|
Grant Date
|
|
Number of Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
|
|
|
Option
Expiration
Date
|
Steven Quay
|
|
3/11/2013
|
|
|
44,194
|
(1)
|
|
|
—
|
|
|
$
|
6.57
|
|
|
3/11/2023
|
President and Chief Executive
|
|
5/6/2014
|
|
|
91,750
|
(2)
|
|
|
156,250
|
|
|
$
|
1.22
|
|
|
5/06/2024
|
Officer
|
|
3/16/2015
|
|
|
51,596
|
(2)
|
|
|
223,404
|
|
|
$
|
1.88
|
|
|
5/16/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kyle Guse
(1)
|
|
1/4/2013
|
|
|
343,749
|
(3)
|
|
|
156,251
|
|
|
$
|
4.11
|
|
|
1/04/2023
|
Chief Financial Officer, General
|
|
6/4/2013
|
|
|
60,000
|
(1)
|
|
|
—
|
|
|
$
|
4.31
|
|
|
6/04/2023
|
Counsel and Secretary
|
|
1/8/2014
|
|
|
61,250
|
(2)
|
|
|
78,750
|
|
|
$
|
2.20
|
|
|
1/08/2024
|
|
|
5/6/2014
|
|
|
75,000
|
(2)
|
|
|
125,000
|
|
|
$
|
1.22
|
|
|
5/06/2024
|
|
|
3/16/2015
|
|
|
35,625
|
(2)
|
|
|
154,375
|
|
|
|
1.88
|
|
|
3/16/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Youmans,
|
|
9/2/2014
|
|
|
62,500
|
(3)
|
|
|
137,500
|
|
|
$
|
1.86
|
|
|
9/02/2024
|
Chief Operating Officer
|
|
3/16/2015
|
|
|
6,798
|
(2)
|
|
|
29,419
|
|
|
$
|
1.88
|
|
|
3/16/2025
|
|
|
1/01/2016
|
|
|
3,125
|
|
|
|
46,875
|
|
|
|
.76
|
|
|
1/01/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Sawyer,
|
|
6/2/2014
|
|
|
—
|
|
|
|
200,000
|
|
|
$
|
1.41
|
|
|
6/02/2024
|
Senior Vice President of Regulatory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affairs and Quality Assurance
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Destro,
|
|
12/20/2012
|
|
|
100,000
|
(3)
|
|
|
100,000
|
|
|
$
|
4.11
|
|
|
12/20/2022
|
Senior Vice President of Sales and
|
|
1/8/2014
|
|
|
9,375
|
(2)
|
|
|
40,625
|
|
|
$
|
2.20
|
|
|
1/08/2024
|
Marketing
|
|
5/6/2014
|
|
|
5,632
|
(2)
|
|
|
39,368
|
|
|
$
|
1.22
|
|
|
5/06/2024
|
(1)
|
Option was granted in lieu of a cash bonus payable to the executive. The option was fully vested on the date of grant. See PART III Item 11 “Executive Compensation” above.
|
(2)
|
Option vests quarterly over four years from the date of grant.
|
(3)
|
One quarter of the shares of common stock underlying the option vested on the first anniversary of employment and the remaining 75% vest in equal quarterly installments over the next three years.
|
Employment Agreements
Employment Agreement with Steven Quay, M.D.,
Ph.D.
The Company has entered into an employment
agreement with Dr. Quay to act as the Company’s Chief Executive Officer. The agreement provides for an initial base salary
of $250,000, which was subsequently increased to $500,000 for 2014 and $520,000 for 2015, with an annual target bonus of up to
50% of Dr. Quay’s then-current base salary, payable upon the achievement of performance goals to be established annually
by the Compensation Committee.
The goals for fiscal 2015 included launching
the FullCYTE Breast Aspirator, launching the ForeCYTE Breast Aspirator, advancing the pharmaceutical programs, achieving revenues,
operating within budget, completing a capital raising transaction, relocating company offices and successfully selling the NRLBH.
In February 2016, the Compensation Committee reviewed the performance of Dr. Quay for 2015 against these goals and determined
that his bonus for 2015 would be 80% of potential, or $208,000. However, only 25% of this amount was paid to Dr. Quay and the
remaining 75% is payable contingent upon completion of an equity financing of the Company. On March 28, 2016, the Compensation
Committee concluded that such an equity financing had been completed and that the remaining 2015 bonus is payable.
Under his employment agreement, Dr. Quay
received an option to purchase up to 250,000 shares of common stock at an exercise price of $5.00 per share, the fair market value
of the common stock on the date of grant, as determined by the Board of Directors. One-quarter of the shares of common stock underlying
the option, or 62,500 shares, vested on December 31, 2010, and the remaining 75%, or 187,500 shares, vested in equal quarterly
installments over the next three years. The options were fully vested as of December 31, 2013 and subsequently expired unexercised
on July 22, 2015.
During the employment term, the Company will
make available to Dr. Quay employee benefits provided to other key employees and officers of the Company. To the extent these benefits
are based on length of service with the Company, Dr. Quay will receive full credit for prior service with the Company. Participation
in health, hospitalization, disability, dental and other insurance plans that the Company may have in effect for other executives,
all of which shall be paid for by the Company with contribution by Dr. Quay as set for the other executives, as and if appropriate.
Dr. Quay has also agreed that, for the period
commencing on the date of his employment agreement with the Company and during the term of his employment and for a period of 12
months following voluntary termination of his employment with the Company that he will not compete with the Company in the United
States. The employment agreement also contains provisions relating to confidential information and assignment of inventions, which
require Dr. Quay to refrain from disclosing any proprietary information and to assign to the Company any inventions which directly
concern the ForeCYTE Breast Aspirator, or future products, research, or development, or which result from work they perform for
the Company or using its facilities.
Employment Agreement with Kyle Guse
The Company has entered into an employment
agreement with Mr. Guse to act as the Company’s Chief Financial Officer, General Counsel and Secretary. The agreement provides
for an initial base salary of $225,000, which has been increased to $350,000 for 2014 and $364,000 for 2015 and an annual target
bonus of up to 45% of Mr. Guse’s then-current base salary, payable upon the achievement of performance goals to be established
annually by the Compensation Committee.
The goals for fiscal 2015 included launching
the FullCYTE Breast Aspirator, launching the ForeCYTE Breast Aspirator, advancing the pharmaceutical programs, achieving revenues,
operating within budget, completing a capital raising transaction, relocating company offices and successfully selling the NRLBH.
In February 2016, the Compensation Committee reviewed the performance of Mr. Guse for 2015 against these goals and determined
that his bonus for 2015 would be 80% of potential, or $131,040. However, only 25% of this amount was paid to Mr. Guse and the
remaining 75% is payable contingent upon completion of an equity financing of the Company. On March 28, 2016, the Compensation
Committee concluded that such an equity financing had been completed and that the remaining 2015 bonus is payable.
Under his employment agreement, on January 4,
2014, Mr. Guse received an option to purchase up to 500,000 shares of common stock at an exercise price of $4.11 per share, the
fair market value of the common stock on the date of grant, as determined by the Board of Directors. One-quarter of the shares
of common stock underlying the option, or 125,000 shares, vested on January 4, 2014, and the remaining 75%, or 375,000 shares,
vest in equal quarterly installments over the next three years, so long as Mr. Guse remains employed with the Company. In lieu
of a cash signing and relocation bonus payable to Mr. Guse under the terms of his employment agreement, on June 4, 2013 he received
a fully-vested option to purchase 60,000 shares of common stock exercisable at $4.31 per share, the fair value of the Company’s
common stock on the date of grant.
During the employment term, the Company will
make available to Mr. Guse employee benefits provided to other key employees and officers of the Company. To the extent these benefits
are based on length of service with the Company, Mr. Guse will receive full credit for prior service with the Company. Participation
in health, hospitalization, disability, dental and other insurance plans that the Company may have in effect for other executives,
all of which shall be paid for by the Company with contribution by Mr. Guse as set for the other executives, as and if appropriate.
Mr. Guse has also agreed that, for the period
commencing on the date of his employment agreement with the Company and during the term of his employment and for a period of six
months following voluntary termination of his employment with the Company that he will not compete with the Company in the United
States.
Employment Agreement with Scott Youmans
In connection with the hiring of Mr. Youmans,
the Company entered into an offer letter agreement which provides for an initial base salary of $230,000, which was increased
to $287,000 on September 1, 2015 when Mr. Youmans was promoted to the Chief Operating Officer with a bonus of up to 25%. Mr. Youmans
was also granted an option to purchase 200,000 shares of common stock at $1.86 per share upon joining Atossa and 50,000 at the
time of his promotion at market value of $0.76, the fair market value of the common stock on the date of grant, as determined
by the Board of Directors. The offer letter agreement provides that Mr. Youmans will be offered employment benefits similar to
other members of management and that he is terminable at will. His options will accelerate upon a change of control. Mr. Youmans
resigned as the Chief Operating Officer of the Company on February 12, 2016. Based on the employment separation agreement, Mr.
Youmans received $23,920 in severance pay and received one-half of his 2015 bonus of $40,186 in a lump sum payment in February
2016 and the other one-half bonus of $40,186 will be paid in equal monthly payments over six months following his departure and
an extension to one year of the time by which Mr. Youmans has the right to exercise stock options previously granted to him.
The goals for fiscal 2015 included launching
the FullCYTE Breast Aspirator, launching the ForeCYTE Breast Aspirator, advancing the pharmaceutical programs, achieving revenues,
operating within budget, completing a capital raising transaction, relocating company offices and successfully selling the NRLBH.
In February 2016, the Compensation Committee reviewed the performance of Mr. Youmans for 2015 against these goals and determined
that his bonus for 2015 would be 80% of potential, or $80,372.
Employment Agreement with Christopher Destro
In connection with the hiring of Mr. Destro,
the Company entered into an offer letter agreement which provides for an initial base salary of $180,000, which was increased to
$205,000 in 2014 and $209,100 in 2015 with a bonus of up to 35%. Mr. Destro was also granted an option to purchase 200,000 shares
of common stock at $4.10 per share, the fair market value of the common stock on the date of grant, as determined by the Board
of Directors. One-quarter of the shares of common stock underlying the option vest one year from commencement of employment and
the remaining 75% vest in equal quarterly installments over the next three years, so long as Mr. Destro remains employed with the
Company. The offer letter agreement provides that Mr. Destro will be offered employment benefits similar to other members of management
and that he is terminable at will. His options will accelerate upon a change of control. Mr. Destro resigned on May 28, 2015. His
severance benefits were (i) $10,000, (ii) $30,000 if Atossa’s subsidiary, The National Reference Laboratory for Breast Health,
Inc. (the “NRLBH”) reports at least the number of pharmacogenomics tests required by Atossa’s adjusted budget
for April 2015, (iii) $30,000 if the NRLBH reports at least the number of pharmacogenomics tests required by Atossa’s adjusted
budget for May 2015, and (iv) extension by 60 days of the time by which Mr. Destro has the right to exercise stock options previously
granted to him; with payments in clauses (ii) and (iii) subject to pro-rata upward adjustment for over achievement. Atossa and
Mr. Destro agreed to a mutual release and Mr. Destro agreed not to compete for one year.
Employment Agreement with John Sawyer
In connection with the hiring of Mr. Sawyer,
the Company entered into an offer letter agreement which provides for an initial base salary of $280,000, which was increased to
$291,200 in 2015 with a bonus of up to 30%. Mr. Sawyer was also granted an option to purchase 200,000 shares of common stock at
$1.41 per share exercisable, the fair market value of the common stock on the date of grant, as determined by the Board of Directors.
One-quarter of the shares of common stock underlying the option vest one year from commencement of employment and the remaining
75% vest in equal quarterly installments over the next three years, so long as Mr. Sawyer remains employed with the Company. Mr. Sawyer resigned on June 8, 2015.
Severance Benefits and Change in Control
Arrangements
The Company has agreed to provide the severance
benefits and change in control arrangements described below to its named executive officers.
Dr. Steven Quay
Pursuant to his employment agreement, if (i)
the Company terminates the employment of Dr. Quay without cause, or (ii) Dr. Quay terminates his employment for good reason, then
Dr. Quay will be entitled to receive all accrued but unpaid compensation, plus a severance payment equal to 12 months of base salary.
In addition, upon such event, the vesting of all shares of common stock underlying options then held by Dr. Quay will accelerate,
and the options will remain exercisable for the remainder of their terms. The cash severance payment is required to be paid in
substantially equal installments over a period of six months beginning on the Company’s first payroll date that occurs following
the 30
th
day after the effective date of termination of Dr. Quay’s employment, subject to certain conditions.
The Company will not be required, however, to pay any severance pay for any period following the termination date if Dr. Quay materially
violates certain provisions of his employment agreement and the violation is not cured within 30 days following receipt of written
notice from the Company containing a description of the violation and a demand for immediate cure.
In addition, under the terms of his employment
agreement, in the event of a “change in control” of the Company (as defined in the employment agreement) during Dr.
Quay’s employment term, Dr. Quay will be entitled to receive a one-time payment equal to 2.9 times his base salary, and the
vesting of all outstanding equity awards then held by Dr. Quay will accelerate such that they are fully vested as of the date of
the change in control.
Kyle Guse
Pursuant to his employment agreement, if (i)
the Company terminates the employment of Mr. Guse without cause, or (ii) Mr. Guse terminates his employment for good reason, then
Mr. Guse will be entitled to receive all accrued but unpaid compensation including pro-rated bonus, plus a severance payment equal
to 12 months of base salary. In addition, upon such event, the vesting of 50% of shares of common stock underlying unvested options
then held by Mr. Guse will accelerate, and the options will remain exercisable for the remainder of their terms. The cash severance
payment is required to be paid in substantially equal installments over a period of six months beginning on the Company’s
first payroll date that occurs following the 30
Th
day after the effective date of termination of Mr. Guse’s employment,
subject to certain conditions. The Company will not be required, however, to pay any severance pay for any period following the
termination date if Mr. Guse materially violates certain provisions of his employment agreement and the violation is not cured
within 30 days following receipt of written notice from the Company containing a description of the violation and a demand for
immediate cure.
In addition, under the terms of his employment
agreement, in the event of a “change in control termination” of the Company (as defined in the employment agreement)
during Mr. Guse’s employment term, Mr. Guse will be entitled to receive a one-time payment equal to two times his base salary,
and the vesting of all outstanding equity awards then held by Mr. Guse will accelerate such that they are fully vested as of the
date of the change in control.
Messrs. Sawyer, Destro
and
Youmans
The options granted to Messrs. Sawyer and
Destro generally accelerate and become exercisable upon a change of control. There are no options granted to Messrs. Sawyer and
Destro that are exercisable as of the filing of this report due to the time laps and expiration of their options after their termination.
The severance benefits provided to Messrs. Destro and Youmans are summarized above.
2010 Stock Option and Incentive Plan
The Company’s 2010 Stock Option and Incentive
Plan, or the 2010 Plan, provides for the grant of equity-based awards to employees, officers, non-employee directors and other
key persons providing services to the Company. Awards of incentive options may be granted under the 2010 Plan until September 2020.
No other awards may be granted under the 2010 Plan after the date that is 10 years from the date of stockholder approval.
Plan Administration
. The 2010
Plan may be administered by the full Board or the Compensation Committee. It is the current intention of the Company that the 2010
Plan be administered by the Compensation Committee. The Compensation Committee has full power to select, from among the individuals
eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to
determine the specific terms and conditions of each award, subject to the provisions of the 2010 Plan. The Compensation Committee
may delegate to our Chief Executive Officer the authority to grant stock options to employees who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act and not subject to Section 162(m) of the Code, subject to certain limitations
and guidelines.
Eligibility
. Persons eligible
to participate in the 2010 Plan will be those full or part-time officers, employees, non-employee directors and other key persons
(including consultants and prospective officers) of the Company and its subsidiaries as selected from time to time by the Compensation
Committee in its discretion.
Plan Limits
. Initially, the
total number of shares of common stock available for issuance under the 2010 Plan is 1,000,000 shares (or 2,263,320 shares prior
to the reverse stock-split on September 28, 2010). As of January 1, 2012 and each January 1 thereafter, the number of shares of
common stock reserved and available for issuance under the 2010 Plan will be cumulatively increased by 4% of the number of shares
of common stock issued and outstanding on the immediately preceding December 31. Subject to these overall limitations, the maximum
aggregate number of shares of stock that may be issued in the form of incentive stock options or stock appreciation rights to any
one individual will not exceed 50% of the initial 2010 Plan limit of 1,000,000, cumulatively increased on January 1, 2012 and each
January 1 thereafter by the lesser of (i) the 4% annual increase applicable to the 2010 Plan for such year or (ii) 500,000 shares.
Stock Options
. The 2010 Plan
permits the granting of (i) options to purchase common stock intended to qualify as incentive stock options under Section 422 of
the Code, and (ii) options that do not so qualify. Options granted under the 2010 Plan will be non-qualified options if they fail
to qualify as incentive options or exceed the annual limit on incentive stock options. Incentive stock options may only be granted
to employees of the Company and its subsidiaries. Non-qualified options may be granted to any persons eligible to receive incentive
options and to non-employee directors and key persons. The option exercise price of each option will be determined by the Compensation
Committee but may not be less than 100% of the fair market value of the common stock on the date of grant. Fair market value for
this purpose will be the last reported sale price of the shares of common stock on the NASDAQ Capital Market on the date of grant.
The exercise price of an option may not be reduced after the date of the option grant, other than to appropriately reflect changes
in our capital structure.
The term of each option will be fixed by the
Compensation Committee and may not exceed 10 years from the date of grant. The Compensation Committee will determine at what time
or times each option may be exercised. Options may be made exercisable in installments and the exercisability of options may be
accelerated by the Compensation Committee. In general, unless otherwise permitted by the Compensation Committee, no option granted
under the 2010 Plan is transferable by the optionee other than by will or by the laws of descent and distribution, and options
may be exercised during the optionee’s lifetime only by the optionee, or by the optionee’s legal representative or
guardian in the case of the optionee’s incapacity.
Upon exercise of options, the option exercise
price must be paid in full either in cash, by certified or bank check or other instrument acceptable to the Compensation Committee
or by delivery (or attestation to the ownership) of shares of common stock that are beneficially owned by the optionee for at least
six months or were purchased in the open market. Subject to applicable law, the exercise price may also be delivered to the Company
by a broker pursuant to irrevocable instructions to the broker from the optionee. In addition, the Compensation Committee may permit
non-qualified options to be exercised using a net exercise feature which reduces the number of shares issued to the optionee by
the number of shares with a fair market value equal to the exercise price.
To qualify as incentive options, options must
meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that first
become exercisable by a participant in any one calendar year.
Stock Appreciation Rights
. The
Compensation Committee may award stock appreciation rights subject to such conditions and restrictions as the Compensation Committee
may determine. Stock appreciation rights entitle the recipient to shares of common stock equal to the value of the appreciation
in the stock price over the exercise price. The exercise price is the fair market value of the common stock on the date of grant.
The term of a stock appreciation right will be fixed by the Compensation Committee and may not exceed 10 years.
Restricted Stock
. The Compensation
Committee may award shares of common stock to participants subject to such conditions and restrictions as the Compensation Committee
may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment
with us through a specified restricted period.
Restricted Stock Shares
. The
Compensation Committee may award restricted stock shares to any participants. Restricted stock shares are generally payable in
the form of shares of common stock, although restricted stock shares granted to the Chief Executive Officer may be settled in cash.
These shares may be subject to such conditions and restrictions as the Compensation Committee may determine. These conditions and
restrictions may include the achievement of certain performance goals (as summarized above) and/or continued employment with the
Company through a specified vesting period. In the Compensation Committee’s sole discretion, it may permit a participant
to make an advance election to receive a portion of his or her future cash compensation otherwise due in the form of a restricted
stock unit award, subject to the participant’s compliance with the procedures established by the Compensation Committee and
requirements of Section 409A of the Code. During the deferral period, the deferred stock awards may be credited with dividend equivalent
rights.
Adjustments for Stock Dividends, Stock Splits,
Etc.
The 2010 Plan requires the Compensation Committee to make appropriate adjustments to the number of shares of
common stock that are subject to the 2010 Plan, to certain limits in the 2010 Plan, and to any outstanding awards to reflect stock
dividends, stock splits, extraordinary cash dividends and similar events.
Tax Withholding
. Participants
in the 2010 Plan are responsible for the payment of any federal, state or local taxes that the Company is required by law to withhold
upon the exercise of options or stock appreciation rights or vesting of other awards. Subject to approval by the Compensation Committee,
participants may elect to have the minimum tax withholding obligations satisfied by authorizing the Company to withhold shares
of common stock to be issued pursuant to the exercise or vesting.
Amendments and Termination
. The
Board of Directors of the Company may at any time amend or discontinue the 2010 Plan and the Compensation Committee may at any
time amend or cancel any outstanding award for the purpose of satisfying changes in the law or for any other lawful purpose. However,
no such action may adversely affect any rights under any outstanding award without the holder’s consent. To the extent required
under the NASDAQ Capital Market rules, any amendments that materially change the terms of the 2010 Plan will be subject to approval
by our stockholders. Without approval by our stockholders, the Compensation Committee may not reduce the exercise price of options
or stock appreciation rights or effect repricing through cancellation or re-grants, including any cancellation in exchange for
cash. Amendments shall also be subject to approval by our stockholders if and to the extent determined by the Compensation Committee
to be required by the Code to preserve the qualified status of incentive options or to ensure that compensation earned under the
2010 Plan qualifies as performance-based compensation under Section 162(m) of the Code.
Other Benefits
The Company offers health, dental, disability,
401(k) matching up to 4% of salary (which became available in 2014) and life insurance to its full-time employees. Employees who
elect Company-offered coverage pay a portion of health and dental premiums, while the Company pays all disability and life insurance
premiums.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee evaluates auditor performance,
manages relations with the Company’s independent registered public accounting firm, and evaluates policies and procedures
relating to internal control systems. The Audit Committee operates under a written Audit Committee Charter that has been adopted
by the Board, a copy of which is available on the Company’s website at
www.atossagenetics.com
. All members of the
Audit Committee currently meet the independence and qualification standards for Audit Committee membership set forth in the listing
standards provided by NASDAQ and the SEC.
No member of the Audit Committee is a professional
accountant or auditor. The members’ functions are not intended to duplicate or to certify the activities of management and
the independent registered public accounting firm. The Audit Committee serves a board-level oversight role in which it provides
advice, counsel and direction to management and the auditors on the basis of the information it receives, discussions with management
and the auditors, and the experience of the Audit Committee’s members in business, financial and accounting matters. The
Audit Committee oversees the Company’s financial reporting process on behalf of the Board. The Company’s management
has the primary responsibility for the financial statements and reporting process, including the Company’s system of internal
controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed with management the audited financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015. This review included a discussion of the
quality and the acceptability of the Company’s financial reporting, including the nature and extent of disclosures in the
financial statements and the accompanying notes. The Audit Committee also reviewed the progress and results of the testing of
the design and effectiveness of its internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002. The Audit Committee also reviewed with the Company’s independent registered public accounting firm, which is responsible
for expressing an opinion on the conformity of the audited financial statements with accounting principles generally accepted
in the United States of America, their judgments as to the quality and the acceptability of the Company’s financial reporting
and discussed with the independent auditors matters required to be discussed under Public Company Accounting Oversight Board (PCAOB)
Auditing Standard No. 16.
Communication with Audit Committees
. The Audit Committee has received from the independent auditors
the written disclosures regarding the auditor’s independence required by the PCAOB Rule 3526,
Communications with Audit
Committees Concerning Independence
. The Audit Committee discussed with the independent registered public accounting firm their
independence from management and the Company, including the matters required by the applicable rules of the Public Company Accounting
Oversight Board.
In addition to the matters specified above,
the Audit Committee discussed with the Company’s independent registered public accounting firm the overall scope, plans and
estimated costs of their audit. The Committee met with the independent registered public accounting firm periodically, with and
without management present, to discuss the results of the independent registered public accounting firm’s examinations, the
overall quality of the Company’s financial reporting and the independent registered public accounting firm’s reviews
of the quarterly financial statements, and drafts of the quarterly and annual reports.
In reliance on the reviews and discussions referred
to above, the Audit Committee recommended to the Board of Directors that the Company’s audited financial statements should
be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Submitted by the Audit Committee of the Board of Directors
Richard I. Steinhart (Chairman)
Gregory L. Weaver
H. Lawrence Remmel, Esq.
DIRECTOR COMPENSATION
Non-employee director compensation is generally
reviewed and set annually at the Board meeting held in connection with the Annual Stockholder Meeting. The non-employee directors
of the Company received the following for service on the Board from May 2015 through May 2016:
|
•
|
upon joining the Board, an initial fee of $50,000 in cash;
|
|
•
|
an annual cash payment of $40,000 for each board member; and
|
|
•
|
an annual grant of an option for 40,000 shares for each member, vesting quarterly over one year.
|
In lieu of the above annual option grant, Dr.
Chen’s outstanding options granted to her during her service as Chief Scientific Officer continue to vest and be exercisable
during her services as a member of the Board.
In addition to the above, annual compensation
for service on the Audit Committee is $20,000 for the Chair and $15,000 for each member, paid in cash quarterly. Annual compensation
for service on the Compensation Committee and Nominating/Governance Committee is $15,000 for the Chair and $10,000 for each member,
paid in cash quarterly. The independent board members are also reimbursed on a case by case basis up to a pre-set amount for actual
out of pocket expenses for graduate level course work in fields related to the business of the Company.
The employee directors receive no compensation for their board service. Pursuant to the policies of Pryor
Cashman, the law firm of which Mr. Remmel is a partner, the compensation Mr. Remmel receives for his services as a director (other
than expense reimbursement) is paid to the firm directly, the cash portion of which was waived in 2015. All directors receive reimbursement
for reasonable travel expenses. The following table sets forth information regarding compensation earned by our non-employee directors
during the fiscal year ended December 31, 2015:
Name
|
|
Fees Earned or Paid
in Cash
|
|
|
Option Awards
(1)
|
|
|
Total
|
|
Shu-Chih Chen, Ph.D.
(2)
|
|
$
|
38,333
|
|
|
$
|
—
|
|
|
$
|
38,333
|
|
Stephen Galli, M.D.
|
|
$
|
60,000
|
|
|
$
|
43,688
|
|
|
$
|
103,688
|
|
H. Lawrence Remmel, Esq.
(3)
|
|
$
|
59,166
|
|
|
$
|
43,688
|
|
|
$
|
102,854
|
|
Gregory L. Weaver
|
|
$
|
64,167
|
|
|
$
|
43,688
|
|
|
$
|
107,855
|
|
Richard Steinhart
|
|
$
|
65,000
|
|
|
$
|
43,688
|
|
|
$
|
108,688
|
|
|
(1)
|
The value of the awards
has been computed in accordance with FASB ASC 718, excluding the effect of estimated forfeitures. Assumptions used in the calculations
for these amounts are included in notes to our financial statements included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2015.
|
|
|
Option awards consist of 2015 annual option grants, to purchase 40,000 shares of common stock with an exercise price of $1.37, which was the fair value of our common shares at the time of grant. Options vest quarterly over a year.
|
|
(2)
|
Dr. Chen retired as the
Chief Scientific Officer in August 2014. The options granted to her as an executive officer continue to vest and be exercisable
during her service as a member of the Board of Directors. See PART III Item 11 “Executive Compensation.”
|
|
(3)
|
The
compensation Mr. Remmel receives for his services as a director (other than expense reimbursement) is paid to the Pryor Cashman
law firm of which Mr. Remmel is a partner. In 2015, all cash fees outstanding for the last two years were waived and credited
back to the Company.
|
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
BENEFICIAL OWNERS AND MANAGEMENT
Based on information
available to us and filings with the SEC, the following table sets forth certain information regarding the beneficial ownership
(as defined by Rule 13d-3 under the Securities Exchange Act of 1934) of our outstanding common stock for (i) each of our directors,
(ii) each of our “named executive officers,” as defined in Executive Compensation below, (iii) all of our directors
and executive officers as a group, and (iv) persons known to us to beneficially hold more than 5% of our outstanding common stock.
The following information is presented as of March 28, 2016 or such other date as may be reflected below.
Beneficial ownership
and percentage ownership are determined in accordance with the rules of the SEC and include voting or investment power with respect
to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. Under these rules,
shares of common stock issuable under stock options or warrants that are exercisable within 60 days of March 28, 2016 are deemed
outstanding for the purpose of computing the percentage ownership of the person holding the options or warrant(s), but are not
deemed outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated
below, the address of each person listed on the table is c/o Atossa Genetics Inc., 2300 Eastlake Ave. East, Suite 200, Seattle,
Washington 98102.
|
|
Shares Beneficially Owned
|
|
Name of Beneficial Owner
|
|
Number
|
|
|
Percent of Class
(1)
|
|
Steven C. Quay, M.D., Ph.D.
(2)
|
|
|
5,064,808
|
|
|
|
13.0
|
%
|
Shu-Chih Chen, Ph.D.
(3)
|
|
|
4,437,335
|
|
|
|
11.4
|
|
Kyle Guse, Esq., CPA, Esq.
(8)
|
|
|
692,499
|
|
|
|
1.8
|
%
|
Stephen J. Galli, M.D.
(5)
|
|
|
198,661
|
|
|
|
*
|
|
Gregory L. Weaver
(4)
|
|
|
122,190
|
|
|
|
*
|
|
Scott Youmans
(9)
|
|
|
90,311
|
|
|
|
*
|
|
Richard I Steinhart
(6)
|
|
|
71,484
|
|
|
|
*
|
|
H. Lawrence Remmel, Esq.
(7)
|
|
|
4,000
|
|
|
|
*
|
|
Chris Destro
|
|
|
-
|
|
|
|
*
|
|
John Sawyer
|
|
|
-
|
|
|
|
*
|
|
All current executive officers and directors as a group (9 persons)
|
|
|
6,332,973
|
|
|
|
16.0
|
%
|
|
(1)
|
Based on 38,823,464 shares of common stock issued and outstanding as of March 28, 2016.
|
|
(2)
|
Consists of (i) 478,543 shares of common stock directly owned by Dr. Quay, (ii) 4,348,315 shares of common stock owned by Ensisheim, and (iii) 237,950 shares of common stock issuable upon the exercise of stock options held by Dr. Quay and exercisable within 60 days after March 28, 2016. Drs. Quay and Chen share voting and investment power over the securities held by Ensisheim. Ensisheim is solely owned and controlled by Drs. Quay and Chen, and, as a result, Drs. Quay and Chen are deemed to be beneficial owners of the shares held by this entity.
|
|
(3)
|
Consists of (i) 4,348,315 shares of common stock owned by Ensisheim, and (ii) 89,020 shares of common stock issuable upon the exercise of stock options held by Dr. Chen and exercisable within 60 days after March 28, 2016. Drs. Quay and Chen share voting and investment power over the securities held by Ensisheim. Ensisheim is solely owned and controlled by Drs. Quay and Chen, and, as a result, Drs. Quay and Chen are deemed to be beneficial owners of the shares held by this entity.
|
|
(4)
|
Consists of 112,190 shares of common stock issuable upon the exercise of stock options held by Mr. Weaver and exercisable within 60 days of March 28, 2016 and 10,000 shares of Common Stock held by Mr. Weaver.
|
|
(5)
|
Consists of (i) 17,674 shares of common stock held by Dr. Galli, and (ii) 180,987 shares of common stock issuable upon the exercise of stock options held by Dr. Galli and exercisable within 60 days of March 28, 2016.
|
|
(6)
|
Consists of 71,484 shares of common stock issuable upon the exercise of stock options held by Mr. Steinhart and exercisable within 60 days of March 28, 2016.
|
|
(7)
|
Consists of 2,000 shares of Common Stock held by Mr. Remmel and 2,000 shares of Common Stock held by Mr. Remmel’s spouse. Mr. Remmel disclaims beneficial ownership of the 2,000 shares of Common Stock held by his spouse.
|
|
(8)
|
Consists of 692,499 shares of common stock issuable upon the exercise of stock options held by Mr. Guse and exercisable within 60 days of March 28, 2016.
|
|
(9)
|
Consists of 90,311 shares of common stock issuable upon the exercise of stock options held by Mr. Youmans and exercisable within 60 days of March 28, 2016.
|
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Parties
Other than compensation
arrangements described the captions “Executive Compensation” and “Director Compensation,” we are not a
party to any transactions between us and certain “related parties,” which are generally considered to be our directors
and executive officers, nominees for director, holders of 5% or more of our outstanding common stock and members of their immediate
families.
Related-Party Transaction Review and
Approval
Related party transactions
that the Company is required to disclose publicly under the federal securities laws will require prior approval of the Company’s
independent directors without the participation of any director who may have a direct or indirect interest in the transaction in
question. Related parties include directors, nominees for director, principal stockholders, executive officers and members of their
immediate families. For these purposes, a “transaction” will include all financial transactions, arrangements or relationships,
ranging from extending credit to the provision of goods and services for value and will include any transaction with a company
in which a director, executive officer immediate family member of a director or executive officer, or principal stockholder (that
is, any person who beneficially owns five percent or more of any class of the Company’s voting securities) has an interest
by virtue of a 10% or greater equity interest. The Company’s policies and procedures regarding related party transactions
are not expected to be a part of a formal written policy, but rather, will represent a course of practice determined to be appropriate
by the Board of Directors of the Company.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
The following is
a summary of the fees billed to the Company by BDO for professional services rendered for fiscal years ended December 31, 2015
and 2014. These fees are for work invoiced in the fiscal years indicated.
|
|
2015
|
|
|
2014
|
|
Audit Fees:
|
|
|
|
|
|
|
|
|
Consists of fees billed for audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Form 10-Q, and services that are normally provided by BDO in connection with statutory and regulatory filings or engagements for that fiscal year.
|
|
$
|
218,796
|
|
|
|
128,600
|
|
Other Fees:
|
|
|
|
|
|
|
|
|
Audit-Related Fees
|
|
|
-
|
|
|
|
-
|
|
Total All Fees
|
|
$
|
218,796
|
|
|
$
|
128,600
|
|
NOTE 1: NATURE OF OPERATIONS
Atossa Genetics Inc. (the “Company”)
was incorporated on April 30, 2009 in the State of Delaware. The Company was formed to develop and market medical devices, laboratory
tests and therapeutics to address breast health conditions. The Company’s fiscal year ends on December 31.
In December 2011, the Company established
the National Reference Laboratory for Breast Health, Inc., or NRLBH, as a wholly-owned subsidiary. NRLBH was the Company’s
CLIA-certified laboratory which performed the Company’s nipple aspirate fluid, or NAF, cytology test on NAF specimens including
those collected with the Company’s Mammary Aspiration Specimen Cytology Test (MASCT) System. The current version of the MASCT
System is called the ForeCYTE Breast Aspirator. The NRLBH provides other test services, including the pharmacogenomics test. On
December 16, 2015 we announced the sale of approximately 81% of the capital stock of the NRLBH to the NRL Investment Group, LLC,
with the Company retaining a 19% ownership through preferred stock. The Company received $50,000 at the time of the sale and the
right to receive, commencing December 2016, monthly earn-out payments equal to 6% of gross revenue of NRLBH up to $10,000,000,
and the right to sell its preferred stock after four years for the greater of $4,000,000 or fair market value. The Company has
elected to recognize any subsequent gain from the earn-out payments as they are determined realizable. The Earn-out Payments are
payable to us each calendar month commencing with December 2016 and is 6% of NRL gross sales calculated in accordance with U.S.
Generally Accepted Accounting Principles.
As a result of the sale of our laboratory
business, we are now focusing our business on our pharmaceutical programs. Our key objective is to advance our pharmaceutical candidates
through Phase 2 trials and then evaluate further development through partners or independently. A Phase 2 study of fulvestrant
administered via our patented intraductal microcatheters was initiated in March 2016 and a Phase 2 study of AfTG is planned to
begin enrollment following resolution of our dispute with Besins Healthcare Luxembourg SARL (“Besins”).
NOTE 2: GOING CONCERN
The Company’s consolidated financial statements are prepared using generally accepted accounting
principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has incurred net losses and negative operating cash flows
since inception. For the year ended December 31, 2015, the Company recorded a net loss of approximately $15.8 million and used
approximately $12 million of cash in operating activities. As of December 31, 2015, the Company had approximately $3.7 million
in cash and cash equivalents and working capital of approximately $1.9 million. The Company has not yet established an ongoing
source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company
to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes
profitable. The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient
to meet its needs, or that any such financing will be obtainable on acceptable terms. If the Company is unable to obtain adequate
capital, it could be forced to cease operations or substantially curtail is commercial activities. These conditions raise substantial
doubt as to the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities
should the Company be unable to continue as a going concern.
Management’s Plan to Continue as a Going
Concern:
In order to continue as a going concern, the
Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the
Company include obtaining capital from the sale of its equity securities during 2016 and short-term borrowings from banks, stockholders
or other related party(ies), if needed. However, management cannot provide any assurance that the Company will be successful in
accomplishing any of its plans.
The ability of the Company to continue as a
going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually
to secure other sources of financing and attain profitable operations.
NOTE 3: SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial
statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC") and in accordance
with U.S. generally accepted accounting principles ("GAAP"). The accompanying consolidated financial statements include
the financial statements of Atossa Genetics Inc. and its formerly wholly-owned subsidiary, NRLBH. The Company sold a majority of
its interest in the NRLBH in December 2015 and all of its activities are reported as discontinued operations in the accompanying
consolidated financial statements. All significant intercompany account balances and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses
during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
In May 2014, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers: Topic 606
(“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under U.S.
GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in
an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five
step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within
the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 is effective for the Company in the first quarter of 2017 using either of two methods:
(i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within
ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application and providing certain additional disclosures as defined per ASU 2014-09. The Company is currently evaluating the impact
of its pending adoption of ASU 2014-09 on its consolidated financial statements.
In August 2014, FASB issued ASU 2014-15,
Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
This ASU requires the management to
determine whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to
an entity’s ability to meet its obligations as they become due. If substantial doubt exists but is not alleviated by
management’s plan, the footnotes must specifically state that “there is substantial doubt about the
entity’s ability to continue as a going concern within one year after the financial statements are issued.” In
addition, if substantial doubt exists, regardless of whether such doubt was alleviated, entities must disclose (a)
principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
(before consideration of management’s plans, if any); (b) management’s evaluation of the significance of those
conditions or events in relation to the entity’s ability to meet its obligations; and (c) management’s plans that
are intended to mitigate the conditions or events that raise substantial doubt, or that did alleviate substantial doubt,
about the entity’s ability to continue as a going concern. If substantial doubt has not been alleviated, these
disclosures should become more extensive in subsequent reporting periods as additional information becomes available. In the
period that substantial doubt no longer exists (before or after considering management’s plans), management should
disclose how the principal conditions and events that originally gave rise to substantial doubt have been resolved. The ASU
applies prospectively to all entities for annual periods ending after December 15, 2016, and to annual and interim periods
thereafter. Early adoption is permitted. The Company has not yet adopted the provisions of ASU 2014-15.
In February 2016, FASB issued ASU No. 2016-02,
Lease Accounting Topic 842.
This ASU requires a
lessee to recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months, The
new standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than
12 months, an asset representing its right to use the underlying asset for the lease term and a liability to make lease payments.
The lease term is the non-cancellable period of the lease, and includes both periods covered by an option to extend the lease,
if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease, if the lessee
is reasonably certain not to exercise that termination option. For leases with a lease term of 12 months or less, a practical expedient
is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. A lessee
making this accounting policy election would recognize lease expense over the term of the lease, generally in a straight-line pattern.
The Lessor accounting remains largely consistent with existing U.S. GAAP. The new standard takes effect in 2019 for public business
entities and 2020 for all other entities. We have not adopted the provisions of ASU No. 2016-02. We are currently evaluating the
impact of our pending adoption of ASU 2016-02 on our consolidated financial statements.
Revenue Recognition
The Company is not currently recognizing any revenue and all the revenue recognized in 2015 was from testing
services performed by the NRLBH. We sold approximately 81% of the capital stock in the NRLBH on December 16, 2015 and as a result
all of the revenue is disclosed as discontinued operations for both years ended 2014 and 2015.
The Company’s revenue recognition policy
is in accordance with GAAP when the following overall fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or the service has been performed, (iii) the Company’s price to the customer is fixed or determinable
and (iv) collection of the resulting accounts receivable is reasonably assured.
Cost of Revenue
Cost of revenue consists of the costs of laboratory
testing services and costs of product sales. Costs of testing services primarily include direct costs of material, direct labor,
equipment, and shipping to process the patient samples (including pathology, quality control analysis, and shipping charges to
transport tissue sample) in the NRLBH. Costs associated with performing the Company's tests are recorded as tests are processed.
Costs recorded for sample processing and shipping charges represent the cost of all the tests processed during the period regardless
of whether revenue was recognized with respect to that test. The cost of service from laboratory testing is disclosed as discontinued
operations for both years ended 2014 and 2015.
Cash and Cash Equivalents
Cash and cash equivalents include cash and
all highly liquid instruments with original maturities of three months or less.
Furniture and Equipment
Furniture and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When furniture and equipment
are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and
any gain or loss is included in operations.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
|
|
Useful Life
(in years)
|
|
Machinery and equipment
|
|
|
3 - 5
|
|
Leasehold improvements
|
|
|
2.083
|
|
The Company applies the provisions of FASB
ASC Topic 360 (ASC 360), “Property, Plant, and Equipment” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held
and used in accordance with ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which
the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined
in a similar manner, except that fair market values are reduced for the cost of disposal. For the years ended December 31, 2015
and 2014, no impairment of property and equipment were recorded.
Intangible Assets
Intangible assets consist of intellectual property
and software acquired. Intangibles are reviewed at least annually for impairment or whenever events or changes in circumstances
indicate that the carrying value of the assets might not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying
amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions. If our assumptions
are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change
in amortization expense.
We continuously evaluate and reprioritize
our research and development pipeline based on the most recent business strategies, and as a result have indefinitely delayed plans
to develop and invest further in Acueity patents and technologies for at least the next several years. Because of these changed
business plans related to the Acueity assets, we concluded that these assets were partially impaired in 2014 and recorded impairment
of $2,352,626. In 2015, we re-evaluated the Acueity assets and determined that the assets were not impaired for the year ended
December 31, 2015.
Amortization is computed using the straight-line
method over the estimate useful lives of the assets as follows:
|
|
Useful Life
(in years)
|
|
Patents
|
|
|
7 - 12
|
|
Software
|
|
|
3
|
|
Share-Based Payments
The Company follows the provisions of ASC Topic
718,
Compensation - Stock Compensation
(“ASC 718”), which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees, non-employee directors, and consultants, including employee stock
options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is
recognized as an expense over the requisite service period.
The fair value of each option grant is estimated
using the Black-Scholes option-pricing model, which requires assumptions regarding the expected volatility of the stock options,
the expected life of the options, an expectation regarding future dividends on the Company’s common stock, and estimation
of an appropriate risk-free interest rate. The Company’s expected common stock price volatility assumption is based upon
the historical volatility of our stock price. The expected life assumption for stock options grants was based upon the simplified
method provided for under ASC 718-10, which averages the contractual term of the options of ten years with the average vesting
term of four years. The dividend yield assumption of zero is based upon the fact that the Company has never paid cash dividends
and presently has no intention of paying cash dividends in the future. The risk-free interest rate used for each grant was based
upon prevailing short-term interest rates over the expected life of the options.
The Company has estimated an annualized forfeiture
rate of 10.0% for options granted. The Company will record additional expense if the actual forfeitures are lower than estimated
and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.
NOTE 4: RESTRICTED CASH
Our restricted cash balance of $275,000 as of
December 31, 2015, consists entirely of cash pledged as security for the Company’s newly issued commercial credit cards.
NOTE 5: PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Prepaid insurance
|
|
$
|
104,954
|
|
|
$
|
87,633
|
|
Tradeshows
|
|
|
-
|
|
|
|
50,000
|
|
Retainer and security deposits
|
|
|
39,218
|
|
|
|
25,000
|
|
Other
|
|
|
49,121
|
|
|
|
31,331
|
|
Total prepaid expenses
|
|
$
|
193,293
|
|
|
$
|
193,964
|
|
NOTE 6: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Machinery and equipment
|
|
$
|
206,337
|
|
|
$
|
363,053
|
|
Leasehold improvements
|
|
|
79,518
|
|
|
|
93,664
|
|
Furniture and equipment
|
|
|
285,855
|
|
|
|
456,717
|
|
Less: accumulated depreciation
|
|
|
(114,287
|
)
|
|
|
(320,024
|
)
|
Total furniture and equipment, net
|
|
$
|
171,568
|
|
|
$
|
136,693
|
|
Depreciation expense for the years ended December
31, 2015 and 2014 was $73,094 and $73,096, respectively.
NOTE 7: INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Patents
|
|
$
|
1,630,000
|
|
|
$
|
1,630,000
|
|
Capitalized license costs
|
|
|
200,000
|
|
|
|
200,000
|
|
Software
|
|
|
113,540
|
|
|
|
112,688
|
|
Intangible assets
|
|
|
1,943,540
|
|
|
|
1,942,688
|
|
Less: accumulated amortization
|
|
|
(242,975
|
)
|
|
|
(55,730
|
)
|
Total intangible assets, net
|
|
$
|
1,700,565
|
|
|
$
|
1,886,958
|
|
Intangible assets amounted to $1,700,565
and $1,886,958 as of December 31, 2015 and December 31, 2014, respectively, and consisted of patents, capitalized license costs
and software acquired. The acquired software mainly consisted of $31,500 in the Company website and $72,200 in internal use SAP
Business One ERP system. The amortization period for the purchased software is three years. Amortization expense related to software
for the years ended December 31, 2015 and 2014 was $30,820 and $11,189, respectively.
Patents amounted to $1,630,000 as of December 31, 2015 and 2014. Patent assets are amortized based on
their determined useful life, and tested annually for impairment. We continuously evaluate and reprioritize our research and development
pipeline based on the most recent business strategies, and as a result have delayed plans to develop and invest further in Acueity
patents and technologies. Because of these changed business plans related to the Acueity assets, we concluded that these assets
were partially impaired in 2014 and recorded impairment of $2,352,626. In 2015, we re-evaluated the Acueity assets and determined
that the assets were not impaired for the year ended December 31, 2015.
The amortization period of intangible assets
is from 7 to 12 years. Amortization expense related to intangible assets was $199,437 and $407,218 for the years ended December
31, 2015 and 2014, respectively.
Capitalized license costs consist of fees
paid to A5 Genetics KFT, Corporation, pursuant to which the Company received the world-wide (other than the European Union) exclusive
license to use the software in the NextCYTE test. Amortization expense related to license costs was $16,667 and $20,000 for the
year ended December 31, 2015 and 2014, respectively.
Future estimated amortization expenses as of
December 31, 2015 for the five succeeding years and thereafter is as follows:
Years Ending December 31,
|
|
Amounts
|
|
2016
|
|
$
|
216,110
|
|
2017
|
|
|
195,224
|
|
2018
|
|
|
169,623
|
|
2019
|
|
|
169,015
|
|
2020
|
|
|
169,015
|
|
Thereafter
|
|
|
781,578
|
|
|
|
$
|
1,700,565
|
|
NOTE 8: PAYROLL LIABILITIES:
Payroll liabilities consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accrued bonus payable
|
|
$
|
555,345
|
|
|
$
|
655,864
|
|
Accrued payroll liabilities
|
|
|
510,179
|
|
|
|
109,653
|
|
Accrued payroll tax liabilities
|
|
|
93,811
|
|
|
|
194,224
|
|
Total payroll liabilities
|
|
$
|
1,159,335
|
|
|
$
|
959,741
|
|
NOTE 9: DISCONTINUED OPERATIONS
On December 16, 2015, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”)
with the NRLBH and NRL Investment Group, LLC (the “NRL Group”) pursuant to which the Company sold to the NRL Group
all of its shares of common stock in the NRLBH as of that date. Under the terms of the Purchase Agreement, the Company retained
its ownership of the Preferred Stock of the NRLBH, which constitutes approximately 19% of the outstanding capital stock of the
NRLBH, and which the Company will have the right to sell to the NRL Group on or after the fourth anniversary of the Purchase Agreement
at the greater of $4,000,000 or fair market value. The Company has the right to receive earn-out payments from NRL Group starting
in December 2016 up to a total of $10,000,000. The Earn-out Payments are payable to us each calendar month commencing with December
2016 and are 6% of NRLBH gross sales calculated in accordance with U.S. Generally Accepted Accounting Principles. The Company concluded
that the operations of the NRLBH sold to the NRL Group were accounted for as discontinued operations as the operations and cash
flows of the discontinued company were eliminated from ongoing operations of the Company and there would not be significant involvement
in the NRLBH’s operations after the disposal transaction.
During the year ended December 31, 2015 the Company completed its obligations under the Purchase Agreement
with the NRL and recognized a loss on disposal of assets of $670,943 within discontinued operations as detailed below:
|
|
Year Ended
December 31, 2015
|
|
Proceeds recognized pursuant to Stock Purchase Agreement
|
|
$
|
50,000
|
|
Investment in NRL
|
|
|
11,728
|
|
Less carrying value of assets sold and liabilities assumed:
|
|
|
|
|
Accounts receivable
|
|
|
(923,266
|
)
|
Intangible assets
|
|
|
(20,949
|
)
|
Property and equipment
|
|
|
(314,628
|
)
|
Other assets
|
|
|
(62,854
|
)
|
Liabilities assumed by buyer
|
|
|
589,026
|
|
Net loss on disposal of assets
|
|
$
|
670,943
|
|
The results of the NRLBH are disclosed as discontinued
operations in the Company’s Consolidated Statements of Operations and Comprehensive Loss for all periods presented:
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
5,523,116
|
|
|
$
|
485,816
|
|
Cost of revenue
|
|
|
(3,539,134
|
)
|
|
|
(340,658
|
)
|
Gross profit
|
|
|
1,983,982
|
|
|
|
145,158
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(1,303,425
|
)
|
|
|
(575,775
|
)
|
Research and development expenses
|
|
|
(1,012,392
|
)
|
|
|
(1,467,136
|
)
|
General and administrative expenses
|
|
|
(1,665,840
|
)
|
|
|
(573,637
|
)
|
Loss on disposal
|
|
|
(670,943
|
)
|
|
|
-
|
|
Exit and disposal expenses
|
|
|
(399,399
|
)
|
|
|
-
|
|
Other (income) expense, net
|
|
|
65,881
|
|
|
|
(15,768
|
)
|
Net loss from discontinued operations
|
|
$
|
(3,002,136
|
)
|
|
$
|
(2,487,158
|
)
|
The assets and liabilities of the NRLBH are
presented as held for disposal in the Consolidated Balance Sheet as of December 31, 2014. There were no assets and liabilities
recorded in discontinued operations as of December 31, 2015. The carrying amount of assets and liabilities are as follows:
|
|
December 31, 2014
|
|
Accounts receivable
|
|
$
|
297,958
|
|
Prepaid expenses
|
|
|
53,243
|
|
Inventory
|
|
|
30,511
|
|
Property and equipment, net
|
|
|
220,839
|
|
Intangible assets, net
|
|
|
33,688
|
|
Assets of discontinued operations
|
|
$
|
636,239
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
81,312
|
|
Accrued expenses
|
|
|
190,735
|
|
Payroll liabilities
|
|
|
96,964
|
|
Lease obligations
|
|
|
125,241
|
|
Liabilities of discontinued operations
|
|
$
|
494,252
|
|
NOTE 10: STOCKHOLDERS’ EQUITY
The Company is authorized to issue a total
of 85,000,000 shares of stock consisting of 75,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares
of preferred stock, par value $0.001 per share. The Company has designated 750,000 shares of Series-A Junior Participating Preferred
Stock, par value $0.001 per share through the filing of a certificate of designation with the Delaware Secretary of State.
On May 19, 2014, the Company adopted a stockholder
rights agreement which provides that all stockholders of record on May 26, 2014 received a non-taxable distribution of one preferred
stock purchase right for each share of the Company’s common stock held by such stockholder. Each right is attached to and
trades with the associated share of common stock. The rights will become exercisable only if one of the following occurs: (1) a
person becomes an “Acquiring Person” by acquiring beneficial ownership of 15% or more of the Company’s common
stock (or, in the case of a person who beneficially owned 15% or more of the Company’s common stock on the date the stockholder
rights agreement was executed, by acquiring beneficial ownership of additional shares representing 2.0% of the Company’s
common stock then outstanding (excluding compensatory arrangements)), or (2) a person commences a tender offer that, if consummated,
would result in such person becoming an Acquiring Person. If a person becomes an Acquiring Person, each right will entitle the
holder, other than the Acquiring Person and certain related parties, to purchase a number of shares of the Company’s common
stock with a market value that equals twice the exercise price of the right. The initial exercise price of each right is $15.00,
so each holder (other than the Acquiring Person and certain related parties) exercising a right would be entitled to receive $30.00
worth of the Company’s common stock. If the Company is acquired in a merger or similar business combination transaction at
any time after a person has become an Acquiring Person, each holder of a right (other than the Acquiring Person and certain related
parties) will be entitled to purchase a similar amount of stock of the acquiring entity.
2014 Public Offering of Common Stock and
Warrants
On January 29, 2014, the Company closed a public
offering of 5,834,234 units at the price of $2.40 per unit for total gross proceeds of approximately $14.0 million (the “2014
Public Offering”). Each unit consists of one share of common stock and a warrant to purchase 0.20 of a share of common stock
(the “2014 Investor Warrants”). The 2014 Investor Warrants are exercisable at $3.00 per share and callable by the Company
if our stock trades above $6.00 per share if certain conditions are met.
Placement Agent Fees
In connection with the 2014 Public Offering,
the Company paid Dawson James Securities, Inc. (the “Placement Agent”), a cash fee equal to 7% of the gross proceeds
from sale of the units, which resulted in a payment to the Placement Agent of an aggregate of $980,151 (the “Placement Agent
Fee”). In addition, the Company entered into Warrant Agreements with the Placement Agent pursuant to which the Placement
Agent received a warrant to purchase 175,027 shares of common stock, or 3% of the aggregate number of shares sold in the offering
(the “2014 Placement Agent Warrants” and together with the 2014 Investor Warrants, the “2014 Warrants”).
The 2014 Placement Agent Warrant entitles the Placement Agent to purchase 175,027 shares of the Company’s common stock at
$3.00 per share. The cash payment of $980,151 for 2014 Placement Agent Fee and the $121,707 aggregated initial fair value of the
2014 Placement Agent Warrants (see
Fair Value Considerations
below) were directly attributable to an actual offering and
were charged through additional paid-in capital in accordance with the SEC Staff Accounting Bulletin (SAB) Topic 5A.
Warrants
The 2014 Warrants are exercisable at any time
commencing after January 29, 2014 (the “Initial Exercise Date”). Subject to the call right described above, the 2014
Warrants shall expire and no longer be exercisable on the fifth anniversary of the Initial Exercise Date (the “Expiration
Date”). The 2014 Warrants cannot be exercised on a cashless basis. There are no redemption features embodied in the 2014
Warrants and they have met the conditions for equity classification.
Fair Value Consideration
The Company’s accounting for the issuance
of the 2014 Warrants required the estimation of fair values of the financial instruments. The development of fair values of financial
instruments requires the selection of appropriate methodologies and the estimation of often subjective assumptions. The Company
selected the valuation techniques based upon consideration of the types of assumptions that market participants would likely consider
in exchanging the financial instruments in market transactions. The 2014 Warrants were valued using a Black-Scholes-Merton Valuation
Technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates)
necessary to assess the fair value of these instruments.
The 2014 Investor Warrants and the 2014 Placement
Agent Warrants were valued at $834,986 or $0.72 per warrant, and $121,707 or $0.70 per warrant, respectively. The following tables
reflect assumptions used to determine the fair value of the 2014 Warrants:
|
|
Fair
|
|
|
January 29, 2014
|
|
|
|
Value
Hierarchy
Level
|
|
|
2014 Investor
Warrants
|
|
|
Placement
Agent
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
Indexed shares
|
|
|
|
|
|
|
1,166,849
|
|
|
|
175,027
|
|
Exercise price
|
|
|
|
|
|
$
|
3.00
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
1
|
|
|
$
|
2.50
|
|
|
$
|
2.47
|
|
Remaining term
|
|
|
3
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Risk free rate
|
|
|
2
|
|
|
|
1.45
|
%
|
|
|
1.42
|
%
|
Expected volatility
|
|
|
3
|
|
|
|
37.96
|
%
|
|
|
37.95
|
%
|
2015 Issuance of Additional Shares to Aspire
Capital
During the first quarter
of 2015, we sold a total of 2,653,199 shares of common stock to Aspire Capital Fund, LLC (“Aspire Capital”) under the
stock purchase agreement dated November 8, 2013 with aggregate gross proceeds to us of $4,292,349. No shares remain available for
sale to Aspire Capital under the terms of the November 8, 2013 agreement with them.
On May 26, 2015, we entered
into a new common stock purchase agreement with Aspire Capital Fund, LLC, which provides that, upon the terms and subject to the
conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $25.0 million of shares
of our common stock over the 30-month term of the purchase agreement. Concurrently with entering into the purchase agreement, we
also entered into a registration rights agreement with Aspire Capital, in which we agreed to file one or more registration statements,
as permissible and necessary to register under the Securities Act of 1933, registering the sale of the shares of our common stock
that have been and may be issued to Aspire Capital under the purchase agreement.
On November 11, 2015, we
terminated the May 26, 2015 agreement with Aspire and entered into a new common stock purchase which provides that, upon the terms
and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of
$25.0 million of our shares of Common Stock over the approximately 30-month term of the Purchase Agreement. Concurrently with entering
into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital in which we agreed to register
6,086,207 shares of our common stock.
2015 Offering of Common Stock and Pre-Funded
Warrants
In June 2015, the Company
entered into a Placement Agent Agreement with Roth Capital Partners, LLC. and Dawson James Securities, Inc. (the “2015 Placement
Agents”), pursuant to which the Company issued and sold an aggregate of 1,454,003 shares of common stock at the purchase
price of $1.15 per share and pre-funded warrants to purchase 3,610,997 shares of common stock (the “Pre-Funded Warrants”)
at a purchase price of $1.14 per share for net proceeds of $5.2 million after deducting $577,790 of offering expenses (the “2015
Offering”). Each Pre-Funded Warrant is exercisable for $0.01 per share, subject to adjustments from time to time and certain
limits on each holder’s beneficial ownership of common stock of the Company. Each Pre-Funded Warrant is perpetual in duration.
As of December 31, 2015, all of the pre-funded warrants have been exercised.
Outstanding Warrants
As of December 31, 2015, warrants to purchase
6,033,426 shares of common stock were outstanding including:
|
|
Outstanding
Warrants to
Purchase Shares
|
|
|
Exercise
Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
2011 private placement
|
|
|
4,252,050
|
|
|
$
|
1.25 - 1.60
|
|
|
June 23, 2016
|
Acueity warrants
|
|
|
325,000
|
|
|
|
5.00
|
|
|
September 30, 2017
|
2014 public offering
|
|
|
1,166,849
|
|
|
|
3.00
|
|
|
January 29, 2019
|
Placement agent fees for Company’s offerings
|
|
|
242,027
|
|
|
|
2.12 – 12.43
|
|
|
March - November, 2018
|
Outside consulting
|
|
|
47,500
|
|
|
$
|
4.24
|
|
|
January 14, 2018
|
|
|
|
6,033,426
|
|
|
|
|
|
|
|
NOTE 11: NET LOSS PER SHARE
Basic net loss per common share is computed
by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net
loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common
shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common
shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. Because
the inclusion of potential common shares would be anti-dilutive for all periods presented, diluted net loss per common share is
the same as basic net loss per common share.
The following table presents the computation of net loss per share:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(12,758,187
|
)
|
|
$
|
(12,170,768
|
)
|
Net loss from discontinued operations
|
|
|
(3,002,136
|
)
|
|
|
(2,487,158
|
)
|
Net Loss
|
|
$
|
(15,760,323
|
)
|
|
$
|
(14,657,926
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common share outstanding used to compute net loss per share, basic and diluted
|
|
|
28,427,523
|
|
|
|
24,038,578
|
|
Net loss per share of common stock, basic and diluted:
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations
|
|
$
|
(0.45
|
)
|
|
$
|
(0.51
|
)
|
Net loss per share from discontinued operations
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
Net loss per share
|
|
$
|
(0.55
|
)
|
|
$
|
(0.61
|
)
|
The following table sets forth the number of
potential common shares excluded from the calculation of net loss per diluted share for the years ended December 31, 2015 and 2014:
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Options to purchase common stock
|
|
3,613,944
|
|
|
3,675,634
|
|
Warrants to purchase common stock
|
|
|
6,033,426
|
|
|
|
6,033,426
|
|
Total
|
|
|
9,647,370
|
|
|
|
9,709,060
|
|
NOTE 12: INCOME TAXES
The Company accounts for income taxes using
the asset and liability method, under which deferred income tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A
valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be
realized.
The Company did not record an income tax benefit
for its losses incurred in 2015 or 2014 due to uncertainty regarding utilization of its net operating loss carryforwards and due
to its history of losses. The benefit for income taxes differs from the benefit computed by applying the federal statutory rate
to loss before income taxes as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Expected federal income tax benefit
|
|
$
|
(6,015,321
|
)
|
|
$
|
(4,983,700
|
)
|
Share-based compensation
|
|
|
194,676
|
|
|
|
36,100
|
|
Other permanent items
|
|
|
17,947
|
|
|
|
9,000
|
|
Effect of change in valuation allowance
|
|
|
5,788,496
|
|
|
|
4,938,600
|
|
Other
|
|
|
14,202
|
|
|
|
-
|
|
Actual federal income tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
The components of net deferred tax assets are
as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets, current:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
-
|
|
|
$
|
191,900
|
|
Accrued bonuses
|
|
|
165,642
|
|
|
|
228,100
|
|
Obsolete inventory
|
|
|
35,426
|
|
|
|
48,400
|
|
Accrued vacation
|
|
|
31,896
|
|
|
|
30,400
|
|
Deferred rent
|
|
|
-
|
|
|
|
900
|
|
Valuation allowance, current
|
|
|
(232,964
|
)
|
|
|
(499,700
|
)
|
Net deferred tax asset, current
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, long term:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
15,840,922
|
|
|
|
9,772,300
|
|
Intangible assets, net
|
|
|
768,232
|
|
|
|
841,800
|
|
Share-based compensation
|
|
|
851,521
|
|
|
|
732,400
|
|
Allowance for loss on fixed assets
|
|
|
53,819
|
|
|
|
53,800
|
|
Contribution, carryforward
|
|
|
272
|
|
|
|
300
|
|
Valuation allowance, long term
|
|
|
(17,481,629
|
)
|
|
|
(11,397,400
|
)
|
Deferred tax asset, long term
|
|
|
33,137
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Other
|
|
|
(33,137
|
)
|
|
|
(3,200
|
)
|
Net deferred tax asset, long term
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has incurred net operating losses
from inception. At December 31, 2015, the Company had domestic federal net operating loss carryforwards of approximately $46,590,946
which are available to reduce future taxable income. These federal net operating loss carryforwards, expire at various dates beginning
in 2029 through 2035. The Company recorded a valuation allowance against all of its net deferred tax assets of $17,481,629 and
$11,397,400 as of December 31, 2015 and 2014, respectively.
Based on an assessment of all available evidence
including, but not limited to the Company’s limited operating history in its core business and lack of profitability, uncertainties
of the commercial viability of its technology, the impact of government regulation and healthcare reform initiatives, and other
risks normally associated with biotechnology companies, the Company has concluded that it is more likely than not that these net
operating loss carryforwards and credits will not be realized and, as a result, a full valuation allowance has been recorded against
the Company’s deferred income tax assets.
The Company files income tax returns in the
U.S. The Company is subject to tax examinations for the 2011 tax year and beyond. The Company has no unrecognized tax positions
and does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company
has not incurred any interest or penalties related to unrecognized tax positions. In the event that the Company is assessed interest
or penalties at some point in the future, they will be classified in the financial statements as general and administrative expense.
NOTE 13: CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000. As of December 31, 2015 and 2014, the Company had $
3,465,895 and $ 8,250,718 in excess of the FDIC insured limit, respectively.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The future minimum lease payments due subsequent
to December 31, 2015 under all non-cancelable operating and capital leases for the next five years are as follows:
|
|
Operating Leases
|
|
Year Ending December 31,
|
|
Amount
|
|
2016
|
|
$
|
250,000
|
|
2017
|
|
|
-
|
|
2018
|
|
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
250,000
|
|
The total rent expense for the years ending
December 31, 2015 and 2014 was $234,322 and $149,174, respectively. Rent expense was included in general and administrative expenses
for both years.
A5 Software Development Commitment
On June 10, 2013 the Company entered into an irrevocable license and service agreement with A5 Genetics KFT,
Corporation (“A5 Genetics”), pursuant to which the Company received the world-wide (other than the European Union)
exclusive license to the software used in the NextCYTE test. The Company has the right to prosecute patents related to this software,
two of which the Company has filed in the United States. The patent applications have been assigned to the Company. The Company
paid a one-time fee of $100,000 to A5 Genetics in 2013 and in March 2014 the Company completed software validation and paid an
additional $100,000 to A5 Genetics. The Company is obligated to pay up to an additional $1.2 million to A5 Genetics upon receiving
the regulatory clearance for NextCYTE test. The Company must also pay a royalty of $50 for each NextCYTE test performed and a service
fee of $65 for each NextCYTE test performed. The NextCYTE test is still in validation stage and no royalty or service fees have
been paid as of December 31, 2014. The agreement was terminated on February 23, 2016 with no further milestones due to A5 Genetics.
Besins Healthcare Luxembourg SARL Agreement
On May 14, 2015,
the Company entered into an Intellectual Property License Agreement with Besins Healthcare Luxembourg SARL.
The agreement provides the Company with an exclusive worldwide license to develop and commercialize Besins’ patented gel
formulation of 4-Hydroxytamoxifen, or Afimoxifene Gel, for the potential treatment and prevention of hyperplasia of the breast.
The agreement requires
that the Company pay a royalty of 8% to 9% of net sales for the first 15 years of commercialization. The Company has the non-exclusive
right to also develop Afimoxifene Gel for breast cancer and other breast diseases, subject to the payment of the following milestone
payments for these additional indications: (i) $5,000,000 for the exclusive right to review, access, and reference a Besins investigational
new drug application (IND) for each additional indication; and (ii) $20,000,000 when the Company commences a Phase III clinical
trial for each additional indication. If and when Atossa decides to sublicense its rights to commercialize the Afimoxifene Gel
in a country in the territory, Besins has the right of first refusal to commercialize the Afimoxifene Gel on a country-by-country
basis in countries where Besins has a marketing presence.
The agreement automatically
expires on a country-by-country basis fifteen years after the first commercial sale of Afimoxifene Gel in the particular country.
The Agreement may be terminated (i) by either party upon a material breach of the agreement that is not cured by the breaching
party, (ii) by mutual agreement of the parties, (iii) by the Company at its discretion if it elects to stop developing or commercializing
Afimoxifene Gel, (iv) by Besins on a country-by-country basis or indication-by-indication basis if the Company fails to commercialize
or commence commercial sales within a specified time, or (v) by Besins if Atossa fails to accomplish any aspect of the development
plan within six months of target date set forth in the development plan. The development plan covers an 18-month period and is
required to be updated by the Company every six months during the term of the agreement.
Cambridge Major Laboratories Agreement
On July 25, 2015, the Company entered into
a manufacturing and quality agreements with AAIPharma Services Corp/ Cambridge Major Laboratories, Inc. (AAI/CML) for the manufacturing
of a clinical supply for 4-Hydroxytamoxifen, the active pharmaceutical ingredient (API) in Atossa's leading drug candidate, Afimoxifene
Gel. As of December 31, 2015, we have incurred $375,000 in manufacturing costs for API.
Columbia University Agreement
On February 29, 2016, the Company entered
into a Company sponsored agreement with Columbia University Medical Center (CUMC) related to the ATOS-2015-007 clinical study of
intraductal administration of fulvestrant in patients with DCIS and invasive breast cancer, which CUMC is conducting with Dr. Sheldon
Feldman as the principal investigator. Under this agreement, the Company is obligated to pay to CUMC non-refundable start-up fees
of approximately $23,000, patient enrollment fees of approximately $15,000/patient for 30 patients, and other pass through costs
of approximately $30,000. The Company may be required to pay an additional fee up to $4,600 per patient who is screened but does
not meet the entry criteria for the trial (screen failure). The anticipated screen failure rate is about 25%. The agreement terminates
on completion of the clinical trial unless terminated earlier by Atossa for any reason or by either party for material breach or
reasons of patient safety.
Litigation and Contingencies
On October 10, 2013, a putative securities
class action complaint, captioned
Cook v. Atossa Genetics, Inc.
, et al., No. 2:13-cv-01836-RSM, was filed in the United
States District Court for the Western District of Washington against us, certain of the Company’s directors and officers
and the underwriters of the Company November 2012 initial public offering. The complaint alleges that all defendants violated
Sections 11 and 12(a)(2), and that the Company and certain of its directors and officers violated Section 15, of the Securities
Act by making material false and misleading statements and omissions in the offering’s registration statement, and that
we and certain of our directors and officers violated Sections 10(b) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated
thereunder by making false and misleading statements and omissions in the registration statement and in certain of our subsequent
press releases and SEC filings with respect to our NAF specimen collection process, our ForeCYTE Breast Health Test and our MASCT
device. This action seeks, on behalf of persons who purchased our common stock between November 8, 2012 and October 4, 2013,
inclusive, damages of an unspecific amount.
On February 14, 2014, the Court appointed
plaintiffs Miko Levi, Bandar Almosa and Gregory Harrison (collectively, the “Levi Group”) as lead plaintiffs, and approved
their selection of co-lead counsel and liaison counsel. The Court also amended the caption of the case to read In re Atossa Genetics,
Inc. Securities Litigation. No. 2:13-cv-01836-RSM. An amended complaint was filed on April 15, 2014. The Company and other
defendants filed motions to dismiss the amended complaint on May 30, 2014. The plaintiffs filed briefs in opposition to these motions
on July 11, 2014. The Company replied to the opposition brief on August 11, 2014. On October 6, 2014 the Court granted defendants’
motion dismissing all claims against Atossa and all other defendants. The Court’s order provided plaintiffs with a deadline
of October 26, 2014 to file a motion for leave to amend their complaint and the plaintiffs did not file such a motion by that date.
On October 30, 2014, the Court entered a final order of dismissal. On November 3, 2014, plaintiffs filed a notice of appeal with
the Court and have appealed the Court’s dismissal order to the U.S. Court of Appeals for the Ninth Circuit. On February 11,
2015, plaintiffs filed their opening appellate brief. Defendants’ filed their answering brief on April 13, 2015, and plaintiffs
filed their reply brief on May 18, 2015. A hearing for the appeal has not been set.
The Company believes this lawsuit is without
merit and plans to defend itself vigorously; however, failure by the Company to obtain a favorable resolution of the claims set
forth in the complaint could have a material adverse effect on the Company’s business, results of operations and financial
condition. Currently, the amount of such material adverse effect cannot be reasonably estimated, and no provision or liability
has been recorded for these claims as of December 31, 2015. The costs associated with defending and resolving the lawsuit and ultimate
outcome cannot be predicted. These matters are subject to inherent uncertainties and the actual cost, as well as the distraction
from the conduct of the Company’s business, will depend upon many unknown factors and management’s view of these may
change in the future.
On January 28, 2016, the Company filed a
complaint in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins Healthcare
Luxembourg SARL
, Case No. 1:16-cv-00045-UNA. The complaint asserts claims for breach of contract, breach of the implied
covenant of good faith and fair dealing, and for declaratory relief against Defendant Besins Healthcare Luxembourg SARL (“Besins”).
The complaint was served upon Besins on February 15, 2016. The Company’s claims arise from Besins’ breach of an Intellectual
Property License Agreement dated May 14, 2015 (the “License Agreement”), under which Besins licensed to the Company
the worldwide exclusive rights to develop and commercialize Afimoxifene Topical Gel, or AfTG, for the potential treatment and prevention
of hyperplasia of the breast. The complaint seeks compensatory damages, a declaration of the parties’ rights and obligations
under the License Agreement, and injunctive relief.
On March 7, 2016, Besins responded
to our complaint by denying our claims and issuing counterclaims based on breach of contract, fraud and negligent misrepresentation
,
and seeking relief in the forms of compensatory damages, injunctive relief, and declaratory relief
.
NOTE 15: STOCK BASED COMPENSATION
Stock Options and Incentive Plan
On September 28, 2010, the Board of Directors
approved the adoption of the 2010 Stock Option and Incentive Plan, or the 2010 Plan, to provide for the grant of equity-based awards
to employees, officers, non-employee directors and other key persons providing services to the Company. Awards of incentive options
may be granted under the 2010 Plan until September 2020. No other awards may be granted under the 2010 Plan after the date that
is 10 years from the date of stockholder approval. An aggregate of 1,000,000 shares were initially reserved for issuance in connection
with awards granted under the 2010 Plan. ,
The following table
presents the automatic additions to the 2010 Plan since inception pursuant to the “evergreen” terms of the 2010 Plan:
January 1,
|
|
Number of
shares
|
|
2012
|
|
|
450,275
|
|
2013
|
|
|
516,774
|
|
2014
|
|
|
742,973
|
|
2015
|
|
|
983,362
|
|
2016
|
|
|
1,306,290
|
|
Total additional shares
|
|
|
3,999,674
|
|
The Company granted options to purchase 1,885,822
shares of common stock to employees and directors and issued zero shares of common stock in connection with the exercise of directors
stock options during the year ended December 31, 2015. There are 1,049,440 options available for grant under the 2010 Plan
as of December 31, 2015, and as a result of the evergreen provision contained in the 2010 Plan, an additional 1,306,290 shares
were added to the 2010 Plan on January 1, 2016.
Compensation costs associated with the Company’s
stock options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting
period. Accordingly, the Company recognized stock based compensation expense of $840,103 and $556,288 for the years ended December
31, 2015 and 2014, respectively.
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
747,255
|
|
|
$
|
556,288
|
|
Research and development
|
|
|
67,475
|
|
|
|
-
|
|
Selling
|
|
|
25,373
|
|
|
|
-
|
|
Total stock compensation expense
|
|
$
|
840,103
|
|
|
$
|
556,288
|
|
The following table presents information concerning
stock option grants for the year ended December 31, 2015:
|
|
Employees
|
|
|
Executives &
Officers
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock on date of grant
|
|
$
|
0.79
– 1.59
|
|
|
$
|
0.62
– 1.59
|
|
|
|
$
0.66 – 1.25
|
|
Exercise price of the options
|
|
$
|
0.96
– 1.88
|
|
|
$
|
0.76
– 1.88
|
|
|
|
$
0.79 – 1.49
|
|
Expected life of the options (years)
|
|
|
5.31
– 6.13
|
|
|
|
6.06
|
|
|
|
6.06
– 6.11
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
107.78
– 115.00
|
%
|
|
|
107.57
– 113.56
|
%
|
|
|
105.69
– 111.28
|
%
|
Risk-free interest rate
|
|
|
1.64
– 1.81
|
%
|
|
|
1.70
– 1.74
|
%
|
|
|
1.72
– 1.81
|
%
|
Expected forfeiture per year (%)
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
Weighted average fair value of the options per unit
|
|
$
|
1.25
|
|
|
$
|
1.50
|
|
|
$
|
0.96
|
|
Options issued and outstanding as of December
31, 2015 and their activities during the year then ended are as follows:
|
|
Number of
Underlying
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Contractual
Life
Remaining
in
Years
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding as of January 1, 2015
|
|
|
3,675,634
|
|
|
$
|
2.86
|
|
|
|
|
|
|
$
|
344,000
|
|
Granted
|
|
|
1,845,822
|
|
|
|
1.43
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,557,512
|
)
|
|
|
1.78
|
|
|
|
|
|
|
|
63,223
|
|
Expired
|
|
|
(350,000
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of December 31, 2015
|
|
|
3,613,944
|
|
|
|
2.40
|
|
|
|
8.40
|
|
|
$
|
-
|
|
Exercisable as of December 31, 2015
|
|
|
1,726,781
|
|
|
|
3.14
|
|
|
|
7.80
|
|
|
$
|
-
|
|
Vested and expected to vest
(1)
|
|
|
3,391,660
|
|
|
$
|
2.45
|
|
|
|
8.34
|
|
|
$
|
-
|
|
(1)
vested shares and
unvested shares after a forfeiture rate is applied
At December 31, 2015, there were 1,907,163
unvested options outstanding and the related unrecognized total compensation cost associated with these options was $1,593,528.
This expense is expected to be recognized over a weighted-average period of 2.62 years.
Issuance of Restricted Common Stock and
Stock Options for Directors’ and Executives’ Compensation
On May 6, 2014, options to purchase a total
of 15,000 shares of common stock, with exercise prices of $1.22 per share, which was the fair market value on the date of grant,
were also granted under the 2010 Plan to each of our four non-employee directors for service on the Board during the year following
our 2014 annual meeting of stockholders. On that date, options to purchase 665,000 shares of stock, exercisable at $1.22 per share,
which was the fair market value on the date of grant, were granted to senior officers under the 2010 Plan. The options granted
to non- employee directors vest quarterly over one year and options granted to the senior officers vest quarterly over four years.
In May 2014, 200,000 stock options were granted
outside the 2010 Plan to the Vice President of Clinical Research and Development. The options have an exercise price of $1.25,
which was the fair market value on the date of grant, and vest 25% at the end of the first year and vest quarterly thereafter over
the following three years.
In June 2014, 200,000 stock options were granted
outside the 2010 Plan to the Senior Vice President of Global Regulatory Affairs and Quality Assurance. The options have an exercise
price of $1.41, which is the fair market value on the date of grant, and vest 25% at the end of the first year and vest quarterly
thereafter over the following three years.
In September 2014, 200,000 stock options were
granted outside the 2010 Plan to the Senior Vice President of Operations as an inducement grant material to hiring a new employee
in this position. The options have an exercise price of $1.86, which was the fair market value on the date of grant, and vest 25%
at the end of the first year and vest quarterly thereafter over the following three years.
In December 2014, 200,000 stock options were granted outside the 2010 Plan to the Vice President of European
Commercial Operations as an inducement grant material to hiring a new employee in this position. The options have an exercise price
of $0.96 per share, which was the fair market value on the date of grant, and vest 25% at the end of the first year and vest quarterly
thereafter over the following three years.
During the 2015 annual meeting, options to purchase 475,000 shares of stock (275,000 Dr. Quay and 200,000
Mr. Guse), exercisable at $1.88 per share, which was the fair market value on the date of grant, were granted to senior officers
under the 2010 Plan. The options granted vest quarterly over four years.
In May 2015, 200,000 stock options were granted
outside the 2010 Plan to the Vice President of Sales and Marketing. The options have an exercise price of $1.44, which is the fair
market value on the date of grant, and vest 25% at the end of the first year and vest quarterly thereafter over the following three
years.
In May 2015, 100,000 stock options were granted
outside the 2010 Plan to the Senior Director of Medical Affairs. The options have an exercise price of $1.49, which is the fair
market value on the date of grant, and vest 25% at the end of the first year and vest quarterly thereafter over the following three
years.
In October 2015, 200,000 stock options were
granted outside the 2010 Plan to the Senior Vice President of Global Regulatory Affairs and Quality Assurance. The options have
an exercise price of $0.79, which is the fair market value on the date of grant, and vest 25% at the end of the first year and
vest quarterly thereafter over the following three years.
In September, 2015, in connection with Mr.
Youmans’ promotion to the Chief Operating Officer, Mr. Youmans was awarded an option to purchase a total of 50,000 shares
of our common stock, pursuant to our 2010 Stock Option and Incentive Plan, as amended, with an exercise price of $0.76 per share
which was the
fair market value on the date of grant.
The option will vest quarterly over a four-year period and will expire one year after Mr. Youmans departure on February 2017.
NOTE 16: SUBSEQUENT EVENTS
All subsequent events requiring recognition
as of December 31, 2015 have been incorporated into these consolidated financial statements and there are no subsequent events
that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events”, except as follows:
Subsequent to January 1, 2016, and through
March 30, 2016 the Company has sold a total of 6,086,207 shares of Common Stock to Aspire Capital Fund LLC under the stock purchase
agreement dated November 11, 2015 with aggregate gross proceeds to the Company of $2,153,583. As a result, no shares remain available
for sale to Aspire under this agreement.