NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 pharmacogenomics tests. On December
16, 2015, the Company sold 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.
As a result of the sale of the laboratory
business, the Company is now focusing on development of its pharmaceutical programs.
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 nine months ended September 30, 2016, the Company
recorded a net loss of approximately $3.8 million and used approximately $4.0 million of cash in operating activities. As of September
30, 2016, the Company had approximately $4.4 million in cash and cash equivalents and working capital of approximately $3.7 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 capital will be obtained on acceptable terms. If
the Company is unable to obtain adequate capital, it could be forced to cease operations or substantially curtail its 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 is as follows. 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 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.
Certain amounts from prior years have been reclassified to conform with the 2016 presentation.
On August 26,2016, the Company
completed a 1-for-15 reverse stock split of the shares of the Company’s common stock (the
“Reverse Stock Split”). As a result of the Reverse Stock Split, every 15 shares of issued and outstanding
common stock were combined into one issued and outstanding share of Common Stock, and the par value per share was changed to
$.015 per share. No fractional shares were issued because of the Reverse Stock Split and any fractional shares that
would otherwise have resulted from the Reverse Stock Split were paid in cash. As a result of the Reverse
Stock Split, as of November 11, 2016, there are 3,787,967 shares of common stock outstanding. The number of authorized
shares of common stock was not reduced as a result of the Reverse Stock Split. The Company’s common stock began trading
on a reverse stock split-adjusted basis on August 26, 2016. All share and per share data included in this report has
been retroactively restated to reflect the Reverse Stock Split.
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 2018 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. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial
statements.
In April 2016, the FASB issued ASU No. 2016-09,
Stock Compensation
Topic 718: Improvements to Employee Share-based Payment Accounting.
This ASU simplifies the accounting
for stock compensation on income tax accounting, classification of awards as either equity or liabilities, estimating forfeitures,
and cash flow presentation. Based on this ASU, an entity should recognize all excess tax benefits and tax deficiencies, including
tax benefits of dividends on share-based payment awards, as income tax expense or benefit in the income statement; they do not
need to include the effects of windfalls and shortfalls in the annual effective tax rate estimate from continuing operations used
for interim reporting purposes. As a result of including income tax effects from windfalls and shortfalls in income tax expense,
the calculation of both basic and diluted EPS will be affected. The ASU also provides an accounting policy election for awards
with service conditions to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP)
or account for forfeitures when they occur. The ASU increases the allowable statutory tax withholding threshold to qualify for
equity classification from the minimum statutory withholding requirements up to the maximum statutory tax rate in the applicable
jurisdiction(s). The ASU clarifies that cash paid to a taxing authority by an employer when directly withholding equivalent shares
for tax withholding purposes should be considered similar to a share repurchase, and thus classified as a financing activity. All
other employer withholding taxes on compensation transactions and other events that enter into the determination of net income
continue to be presented within operating activities. The new standard takes effect in 2017 for public business entities and 2018
for all other entities. The Company has not adopted the provisions of ASU No. 2016-09. The Company is currently evaluating the
impact of adopting ASU 2016-09 on its consolidated financial statements.
NOTE 4: PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Prepaid insurance
|
|
|
38,538
|
|
|
|
104,954
|
|
Retainer and security deposits
|
|
|
39,218
|
|
|
|
39,218
|
|
Other
|
|
|
42,995
|
|
|
|
49,121
|
|
Total prepaid expenses
|
|
$
|
120,751
|
|
|
$
|
193,293
|
|
NOTE 5: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the
following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Machinery and equipment
|
|
$
|
206,336
|
|
|
$
|
206,337
|
|
Leasehold improvements
|
|
|
84,539
|
|
|
|
79,518
|
|
Total furniture and equipment
|
|
|
290,875
|
|
|
|
285,855
|
|
Less: Accumulated depreciation
|
|
|
(206,338
|
)
|
|
|
(114,287
|
)
|
Total furniture and equipment, net
|
|
$
|
84,537
|
|
|
$
|
171,568
|
|
Depreciation expense for the three months
ended September 30, 2016 and 2015 was $29,698 and $32,620, respectively, and $92,054 and $97,059, for the nine months ended September
30, 2016 and 2015, respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Patents
|
|
$
|
1,630,000
|
|
|
$
|
1,630,000
|
|
Capitalized license costs
|
|
|
-
|
|
|
|
200,000
|
|
Software
|
|
|
113,540
|
|
|
|
113,540
|
|
Intangible assets
|
|
|
1,743,540
|
|
|
|
1,943,540
|
|
Less: Accumulated amortization
|
|
|
(341,641
|
)
|
|
|
(242,975
|
)
|
Total intangible assets, net
|
|
$
|
1,401,899
|
|
|
$
|
1,700,565
|
|
Intangible assets amounted to $1,401,899
and $1,700,565 as of September 30, 2016 and December 31, 2015, respectively, and consisted of patents, capitalized license costs
and software acquired. The amortization period for the purchased software is 3 years. Amortization expense related to software
for the three months ended September 30, 2016 and 2015 was $7,857 and $11,261, respectively and $23,572 and $34,090 for the nine
months ended September 30, 2016 and 2015, respectively.
Patents amounted to $1,630,000 as of September
30, 2016 and December 31, 2015, and mainly consisted of patents acquired from Acueity on September 30, 2012 in an asset purchase
transaction. Patent assets are amortized based on their determined useful life, and tested annually for impairment. The amortization
period was from 7 to 12 years. Amortization expense related to patents was $37,253 for the three months ended September 30, 2016
and 2015, respectively and $111,761 for each of the nine months ended September 30, 2016 and 2015, 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. As the Company shifted its focus to developing pharmaceutical products and discontinued
NextCYTE test development, the A5 agreement was terminated in February 2016 and the entire net assets of $163,333, including $36,666
in accumulated amortization was written off.
Future estimated amortization expenses as
of September 30, 2016 for the five succeeding years is as follows:
For the Year Ending December 31,
|
|
Amounts
|
|
2016 (includes the remainder of the year)
|
|
$
|
42,489
|
|
2017
|
|
|
169,576
|
|
2018
|
|
|
149,623
|
|
2019
|
|
|
149,015
|
|
2020
|
|
|
149,015
|
|
Thereafter
|
|
|
742,181
|
|
|
|
$
|
1,401,899
|
|
NOTE 7: PAYROLL LIABILITIES:
Payroll liabilities consisted of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Accrued bonus payable
|
|
$
|
438,098
|
|
|
$
|
555,345
|
|
Accrued payroll liabilities
|
|
|
96,248
|
|
|
|
510,179
|
|
Accrued vacation
|
|
|
100,701
|
|
|
|
93,811
|
|
Total payroll liabilities
|
|
$
|
635,047
|
|
|
$
|
1,159,335
|
|
NOTE 8: 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 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 the Company each calendar month commencing with December 2016 and are equal to 6% of NRLBH gross sales calculated
in accordance with U.S. Generally Accepted Accounting Principles. 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 business were eliminated from ongoing operations
of the Company and the Company has no significant involvement in the NRLBH’s operations after the disposal transaction.
The results of the NRLBH were segregated
from continuing operations and reflected as discontinued operations for the 2015 periods on the Company’s Consolidated Statements
of Operations and cash flow for the three and six months ended September 30, 2015. The loss from discontinued operations related
to the operations of the NRLBH for the three and nine months ended September 30, 2015 was as follows:
|
|
Three Months
Ended
September 30,
2015
|
|
|
Nine Months
Ended
September
30,
2015
|
|
Revenue
|
|
$
|
772,591
|
|
|
$
|
5,337,911
|
|
Cost of revenue
|
|
|
(311,074
|
)
|
|
|
(3,365,901
|
)
|
Gross profit
|
|
|
461,517
|
|
|
|
1,972,010
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
239,427
|
|
|
|
829,174
|
|
Research and development expenses
|
|
|
141,388
|
|
|
|
509,796
|
|
General and administrative expenses
|
|
|
625,499
|
|
|
|
1,213,795
|
|
Other expenses, net
|
|
|
5
|
|
|
|
49,559
|
|
Net loss from discontinued operations
|
|
$
|
(544,802
|
)
|
|
$
|
(630,314
|
)
|
NOTE 9: 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 $0.015 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 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.
2015 and 2016 Issuances of Additional
Shares to Aspire Capital
During the first quarter of 2015, we sold
a total of 176,880 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, which provided that, upon the terms and subject to the conditions and limitations
set forth therein, Aspire Capital was 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 Capital and entered into a new common stock 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
405,747 shares of our common stock.
During the first quarter of 2016, we sold a total of 405,747 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.
On May 25, 2016, we terminated the
November 11, 2015 stock purchase agreement with Aspire Capital and entered into a new common stock purchase agreement with Aspire
Capital which provided 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 $10.0 million of shares of our common stock over the 30-month term of the purchase
agreement, subject to the terms and conditions set forth therein. 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. As part of the stock purchase agreement we issued 49,736 common shares as a commitment fee. The value of the
common shares issued as a commitment fee of $198,523 have been reflected as an addition to common stock of $746 and $197,777 in
additional paid in capital which will be amortized over the life of the stock purchase agreement. As of the date of filing this
Quarterly Report with the SEC no shares of stock have been sold to Aspire Capital under the May 25, 2016 purchase agreement.
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 96,934 shares of common stock at the purchase price of $17.25 per
share and pre-funded warrants to purchase 240,733 shares of common stock (the “Pre-Funded Warrants”) at a purchase
price of $17.10 per share for net proceeds of $5.2 million after deducting $577,790 of offering expenses (the “2015 Offering”).
Each Pre-Funded Warrant was exercisable for $0.15 per share and all of these warrants had been exercised as of December 31, 2015.
2016 Public Offering of Common Stock
In August 2016, the Company completed an
underwritten public offering of 1,150,000 shares of Common Stock at a price per share of $2.50, with gross proceeds of $2,875,000
to the Company, or proceeds of $2,645,000 after deducting underwriter discounts, commissions, non accountable expense allowance
and expense reimbursement.
Outstanding Warrants
As of September 30, 2016, warrants to purchase
402,228 shares of common stock were outstanding including:
|
|
Outstanding
Warrants to
Purchase
Shares
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
2011 private placement
|
|
|
283,470
|
|
|
$
|
18.75 - 24.00
|
|
|
May 18, 2018
|
Acueity warrants
|
|
|
21,667
|
|
|
|
75.00
|
|
|
September 30, 2017
|
2014 public offering
|
|
|
77,790
|
|
|
|
45.00
|
|
|
January 29, 2019
|
Placement agent fees for Company’s offerings
|
|
|
16,135
|
|
|
|
31.80 – 186.45
|
|
|
March - November, 2018
|
Outside consulting
|
|
|
3,166
|
|
|
$
|
63.60
|
|
|
January 14, 2018
|
|
|
|
402,228
|
|
|
|
|
|
|
|
NOTE 10: NET LOSS PER SHARE
The Company accounts for and discloses net
loss per common share in accordance with FASB ASC Topic 260,
Earnings 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.
The following table sets forth the number
of potential common shares excluded from the calculation of net loss per diluted share for the three months and nine months ended
September 30, 2016 and 2015 because the effect of them would be anti-dilutive:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
414,177
|
|
|
|
287,494
|
|
|
|
414,177
|
|
|
|
287,494
|
|
Warrants to purchase common stock
|
|
|
402,228
|
|
|
|
642,962
|
|
|
|
402,228
|
|
|
|
642,962
|
|
Total
|
|
|
816,405
|
|
|
|
930,456
|
|
|
|
816,405
|
|
|
|
930,456
|
|
NOTE 11: INCOME TAXES
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.
As a result of the Company’s cumulative
losses, management has concluded that a full valuation allowance against the Company’s net deferred tax assets is appropriate.
No income tax liabilities existed as of September 30, 2016 and December 31, 2015 due to the Company’s continuing operating
losses.
NOTE 12: 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. At September 30, 2016 and December 31, 2015, the Company
had $4,138,177 and $3,465,895 in excess of the FDIC insured limit, respectively.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The future minimum lease payments due subsequent
to September 30, 2016 under all non-cancelable operating and capital leases for the next five years are as follows:
Year Ending December 31,
|
|
Operating Leases Amount
|
|
2016 (remainder of year)
|
|
$
|
87,812
|
|
2017
|
|
|
23,470
|
|
Total minimum lease payments
|
|
$
|
111,282
|
|
The total rent expense for the three months
ended September 30, 2016 and 2015 was $87,315 and $154,291, respectively and $238,565 and $469,748 for the nine months ended September
30, 2016 and 2015, respectively. Rent expense was included in general and administrative expenses for both years.
Purchase Commitments
Effective May 19, 2016 the Company entered
into a services agreement with KriSan Biotech Co. Ltd., a corporation organized under the laws of Taiwan, Republic of China (“KSB”).
The agreement directs KSB to research and develop for the Company processes for manufacturing endoxifen and to produce an initial
supply of endoxifen so that release and stability studies may be conducted. The Company has agreed to pay $136,000 to KSB when
certain benchmarks have been delivered by KSB under the services agreement.
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 September 30, 2016. 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 filed its response to the Company’s
complaint, generally denying liability for the Company’s claims and asserting counterclaims for breach of contract, fraud,
negligent misrepresentation, and declaratory judgment. Besins seeks unspecified money damages and preliminary and permanent injunctive
relief, among other forms of relief, for its counterclaims. The Company filed its answer to Besins’ counterclaims on March
31, 2016, in which the Company disputed Besins’ allegations and denied that Besins is entitled to relief on its counterclaims.
On August 4, 2016, the parties entered into a settlement agreement pursuant to which the parties dismissed this legal action and
have settled all claims and counterclaims. Pursuant to the settlement agreement, Besins assumed, and Atossa shall have no further
rights to, 4-hydroxy tamoxifen and AfTG in return for a termination payment to Atossa in the total amount of $1,762,931. The
termination payment was received in August 2016 and has been included in other income on the Condensed Consolidated Statement
of Operations for both the three and nine months ended September 30, 2016.
NOTE 14: 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 66,667 shares were initially reserved for issuance in connection
with awards granted under the 2010 Plan and on May 18, 2016, an additional 133,333 shares were reserved for issuance 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
|
|
|
30,018
|
|
2013
|
|
|
34,452
|
|
2014
|
|
|
49,532
|
|
2015
|
|
|
65,557
|
|
2016
|
|
|
220,419
|
|
Total additional shares
|
|
|
399,978
|
|
The Company granted 0 and 185,245 additional
options to purchase shares of common stock to employees and directors during the three and nine months ended September 30, 2016.
No options were exercised during the three and nine months ended September 30, 2016. There are 140,888 shares available for
grant under the 2010 Plan as of September 30, 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 $257,389 and $317,986 for the three months ended
September 30, 2016 and 2015, respectively and $650,053 and $703,726 ($633,962 from continuing operations and $69,764 from discontinued
operations) for the nine months ended September 30, 2016 and 2015, respectively.
Options issued and outstanding as of September
30, 2016 and their activities during the nine months 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, 2016
|
|
|
240,930
|
|
|
$
|
38.89
|
|
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
185,245
|
|
|
|
3.95
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
(35,751
|
)
|
|
|
28.90
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of September 30, 2016
|
|
|
390,424
|
|
|
|
25.81
|
|
|
|
7.36
|
|
|
$
|
6,451,077
|
|
Exercisable as of September 30, 2016
|
|
|
242,356
|
|
|
|
41.1
|
|
|
|
5.54
|
|
|
$
|
-
|
|
Vested and expected to vest
(1)
|
|
|
414,177
|
|
|
$
|
28.95
|
|
|
|
7.02
|
|
|
$
|
-
|
|
|
(1)
|
vested shares and unvested shares after a forfeiture rate is applied
|
At September 30, 2016, there were 237,192
unvested options outstanding and the related unrecognized total compensation cost associated with these options was approximately
$1.2 million. This expense is expected to be recognized over a weighted-average period of 2.09 years.
NOTE 15: RELATED PARTY TRANSACTIONS
Shu-Chih Chen, Ph.D., a member of the
Board of Directors and spouse of Steve C. Quay, Ph.D., M.D., the Company’s CEO, has provided consultancy services to the
Company. Those services primarily include providing scientific and technical expertise in Atossa’s negotiations and
ongoing arrangements with the manufacturer of endoxifen which is located in Taiwan. The cost of the services provided by
Dr. Chen are approximately $25,000 through September 30, 2016 and have been approved by Atossa’s audit committee.