ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ATOSSA GENETICS INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS (UNAUDITED)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,167,011
|
|
|
$
|
3,027,962
|
|
Restricted cash
|
|
|
55,000
|
|
|
|
55,000
|
|
Prepaid expense
|
|
|
294,831
|
|
|
|
171,601
|
|
Total current assets
|
|
|
1,516,842
|
|
|
|
3,254,563
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment, net
|
|
|
27,761
|
|
|
|
55,119
|
|
Intangible assets, net
|
|
|
610,013
|
|
|
|
640,440
|
|
Other assets
|
|
|
148,566
|
|
|
|
194,250
|
|
Total assets
|
|
$
|
2,303,182
|
|
|
$
|
4,144,372
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
386,877
|
|
|
$
|
254,320
|
|
Accrued expenses
|
|
|
34,610
|
|
|
|
16,964
|
|
Payroll liabilities
|
|
|
330,889
|
|
|
|
769,899
|
|
Other current liabilities
|
|
|
22,401
|
|
|
|
6,083
|
|
Total current liabilities
|
|
|
774,777
|
|
|
|
1,047,266
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock - $.001 par value; 10,000,000 shares authorized, 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock - $.015 par value; 75,000,000 shares authorized, 3,786,913 shares issued and outstanding
|
|
|
56,804
|
|
|
|
56,804
|
|
Additional paid-in capital
|
|
|
60,478,903
|
|
|
|
60,344,050
|
|
Accumulated deficit
|
|
|
(59,007,302
|
)
|
|
|
(57,303,748
|
)
|
Total stockholders’ equity
|
|
|
1,528,405
|
|
|
|
3,097,106
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
2,303,182
|
|
|
$
|
4,144,372
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ATOSSA GENETICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
|
|
For the Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
544,302
|
|
|
$
|
149,971
|
|
General and administrative
|
|
|
1,142,544
|
|
|
|
2,177,569
|
|
Total operating expenses
|
|
|
1,686,846
|
|
|
|
2,327,540
|
|
Operating loss
|
|
|
(1,686,846
|
)
|
|
|
(2,327,540
|
)
|
Other expense, net
|
|
|
(16,708
|
)
|
|
|
-
|
|
Loss before income taxes
|
|
|
(1,703,554
|
)
|
|
|
(2,327,540
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Loss from operations
|
|
|
(1,703,554
|
)
|
|
|
(2,327,540
|
)
|
Net loss
|
|
$
|
(1,703,554
|
)
|
|
$
|
(2,327,540
|
)
|
Loss per common share - basic and diluted
|
|
$
|
(0.45
|
)
|
|
$
|
(0.98
|
)
|
Weighted average shares outstanding, basic and diluted
|
|
|
3,786,913
|
|
|
|
2,382,757
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ATOSSA GENETICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
For the Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,703,554
|
)
|
|
$
|
(2,327,540
|
)
|
Compensation cost for stock options granted
|
|
|
154,707
|
|
|
|
192,457
|
|
Loss on disposal of assets
|
|
|
17,695
|
|
|
|
163,333
|
|
Depreciation and amortization
|
|
|
40,087
|
|
|
|
75,729
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(123,230
|
)
|
|
|
(34,643
|
)
|
Other assets
|
|
|
25,834
|
|
|
|
110,662
|
|
Accounts payable
|
|
|
132,557
|
|
|
|
(385,396
|
)
|
Payroll liabilities
|
|
|
(439,010
|
)
|
|
|
(434,401
|
)
|
Accrued expenses
|
|
|
17,646
|
|
|
|
(294,675
|
)
|
Other current liabilities
|
|
|
16,317
|
|
|
|
(60,281
|
)
|
Net cash used in operating activities
|
|
|
(1,860,951
|
)
|
|
|
(2,994,755
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of furniture and equipment
|
|
|
-
|
|
|
|
(5,020
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(5,020
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock and warrants
|
|
|
-
|
|
|
|
2,166,537
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
2,166,537
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,860,951
|
)
|
|
|
(833,238
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
3,027,962
|
|
|
|
3,715,895
|
|
CASH AND CASH EQUIVALENTS, ENDING BALANCE
|
|
$
|
1,167,011
|
|
|
$
|
2,882,657
|
|
|
|
|
|
|
|
|
|
|
NONCASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
$
|
19,852
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ATOSSA GENETICS INC.
NOTES TO CONDENSED 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. The Company
is focused 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 three months ended March 31 2017, the Company recorded a net loss of approximately $1.7 million and used approximately
$1.9 million of cash in operating activities. As of March 31, 2017, the Company had approximately $1.2 million in cash and cash
equivalents and working capital of approximately $0.7 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.
On March 28, 2017, the Company entered into
an underwriting agreement with Aegis Capital Corp. relating to a public offering which closed on April 3, 2017. The offering generated
gross proceeds to the Company of approximately $4.4 million and net proceeds of $3.9 million after deducting underwriting discounts
and commission and other estimated offering expenses payable by the Company. We expect that our existing resources will be sufficient
to fund our planned operations for at least the next six months; however, additional capital resources will be needed to fund operations
for the next twelve months.
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”).
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. 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 February 2016, Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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. The Company has 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,
Compensation - Stock Compensation
, simplifying
the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity
or liabilities and classification on the statements of cash flows. Under the new standard, all excess tax benefits and tax deficiencies
(including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit on the
statements of income. Management adopted ASU No. 2016-09 effective January 1, 2017. As a result of the adoption of this
guidance, management made an accounting policy election to recognize the effect of forfeitures in compensation cost when they occur.
There was an immaterial impact on results of operations and financial position and no impact on cash flows at adoption.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
, amending the presentation of restricted cash within the statement of cash flows. The new guidance
requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU is effective
retrospectively for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet
adopted the provisions of ASU No. 2016-18.
NOTE 4: PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
March
31,
2017
|
|
|
December 31,
2016
|
|
Prepaid insurance
|
|
|
140,222
|
|
|
|
121,333
|
|
Trade show
|
|
|
-
|
|
|
|
20,000
|
|
Retainer and security deposits
|
|
|
14,218
|
|
|
|
14,218
|
|
Financial exchange fees
|
|
|
31,500
|
|
|
|
-
|
|
Prepaid stock issuance costs
|
|
|
86,623
|
|
|
|
-
|
|
Other
|
|
|
22,268
|
|
|
|
16,050
|
|
Total prepaid expenses
|
|
$
|
294,831
|
|
|
$
|
171,601
|
|
NOTE 5: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the
following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
170,916
|
|
|
$
|
210,528
|
|
Less: Accumulated depreciation
|
|
|
(143,155
|
)
|
|
|
(155,409
|
)
|
Total furniture and equipment, net
|
|
$
|
27,761
|
|
|
$
|
55,119
|
|
Depreciation expense for the three months ended March 31, 2017
and 2016 was $9,662 and $26,619, respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Patents
|
|
$
|
639,000
|
|
|
$
|
639,000
|
|
Software
|
|
|
113,540
|
|
|
|
113,540
|
|
Total intangible assets
|
|
|
752,540
|
|
|
|
752,540
|
|
Less: Accumulated amortization
|
|
|
(142,527
|
)
|
|
|
(112,100
|
)
|
Total intangible assets, net
|
|
$
|
610,013
|
|
|
$
|
640,440
|
|
Software amounted to $113,540 as of March 31,
2017 and December 31, 2016. The amortization period for the purchased software is 3 years. Amortization expense related to software
for the three months ended March 31, 2017 and 2016 was $12,855 and $7,857, respectively.
Patents amounted to $639,000 as of March 31,
2017 and December 31, 2016, 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 $17,572 and $37,253 for the three months ended March 31, 2017
and 2016, respectively.
Future estimated amortization expenses
as of March 31, 2017 for the five succeeding years is as follows:
For the three months ending March 31,
2017,
|
|
Amounts
|
|
2017 (includes the remainder of the year)
|
|
$
|
72,612
|
|
2018
|
|
|
73,433
|
|
2019
|
|
|
70,285
|
|
2020
|
|
|
70,285
|
|
2021
|
|
|
70,285
|
|
Thereafter
|
|
|
253,113
|
|
|
|
$
|
610,013
|
|
NOTE 7: PAYROLL LIABILITIES
Payroll liabilities consisted of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Accrued bonus payable
|
|
$
|
136,008
|
|
|
$
|
609,337
|
|
Accrued vacation
|
|
|
130,906
|
|
|
|
94,514
|
|
Accrued payroll liabilities
|
|
|
63,975
|
|
|
|
66,048
|
|
Total payroll liabilities
|
|
$
|
330,889
|
|
|
$
|
769,899
|
|
NOTE 8: 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.
2016 Issuances of Additional Shares
to Aspire Capital
On November 11, 2015, we terminated the
prior agreement with Aspire Capital Fund, LLC (“Aspire Capital”) and entered into a new common stock purchase agreement.
Concurrently with entering into the new 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 $2,177,083, or net proceeds of $2,133,973 after deducting costs
of the offering.
On May 25, 2016, the Company 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, the Company
also entered into a registration rights agreement with Aspire Capital, in which the Company 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. In connection with our public offering that closed on April 3,
2017, we agreed not to utilize the financing arrangement with Aspire Capital until June 2, 2017.
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 $2,561,896 after deducting underwriter discounts, commissions, non-accountable expense allowance and expense reimbursement.
Outstanding Warrants
As of March 31, 2017, 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 8, 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 9: NET LOSS PER SHARE
The Company accounts for and discloses net
loss per common share in accordance with FASB Accounting Standards Codification (“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 for all
periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.
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 ended March 31, 2017
and 2016 because the effect of them would be anti-dilutive:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
361,676
|
|
|
|
213,448
|
|
Warrants to purchase common stock
|
|
|
402,228
|
|
|
|
402,228
|
|
Total
|
|
|
782,985
|
|
|
|
615,676
|
|
NOTE 10: 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 March 31, 2017 and December 31, 2016 due to the Company’s continuing operating losses.
NOTE 11: 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 March 31, 2017 and December 31, 2016, the
Company had $917,011 and $2,777,962 in excess of the FDIC insured limit, respectively.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The future minimum lease payments due subsequent
to March 31, 2017 under all non-cancelable operating and capital leases for the next five years are as follows:
Year Ending December 31,
|
|
Operating Leases
Amount
|
|
2017 (remainder of year)
|
|
$
|
12,325
|
|
Total minimum lease payments
|
|
$
|
12,325
|
|
The total rent expense for the three months
ended March 31, 2017 and 2016 was $12,314 and $78,600, 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. The appeal is
fully-briefed and oral argument is scheduled for May 18, 2017.
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 March 31, 2017. 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.
NOTE 13: 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
|
|
2017
|
|
|
151,477
|
|
Total additional shares
|
|
|
551,455
|
|
The Company granted 5,000 additional options
to purchase shares of common stock to a scientific advisor during the three months ended March 31, 2017. No options were exercised
during the three months ended March 31, 2017. There are 311,779 shares available for grant under the 2010 Plan as of
March 31, 2017.
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 $154,707 and $192,457 for the
three months ended March 31, 2017 and 2016, respectively.
Options issued and outstanding as of March
31, 2017 and their activities during the three 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, 2017
|
|
|
378,924
|
|
|
$
|
26.25
|
|
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
5,000
|
|
|
|
1.35
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
(3,167
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
-
|
|
Expired
|
|
|
(19,081
|
)
|
|
|
25.05
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2017
|
|
|
361,676
|
|
|
|
21.45
|
|
|
|
8.10
|
|
|
$
|
-
|
|
Exercisable as of March 31, 2017
|
|
|
200,371
|
|
|
|
31.65
|
|
|
|
7.52
|
|
|
$
|
-
|
|
Vested and expected to vest
|
|
|
361,676
|
|
|
$
|
21.45
|
|
|
|
8.10
|
|
|
$
|
-
|
|
At March 31, 2017, there were 161,305 unvested
options outstanding and the related unrecognized total compensation cost associated with these options was approximately $876,000.
This expense is expected to be recognized over a weighted-average period of 1.62 years.
NOTE 14: SUBSEQUENT EVENTS
On March 28, 2017, the Company entered
into an underwriting agreement with Aegis Capital Corp. relating to a public offering which closed on April 3, 2017. The offering
generated gross proceeds to the Company of approximately $4.4 million and net proceeds of $3.9 million after deducting underwriting
discounts and commission and other estimated offering expenses payable by the Company.
The offering included 664,000 Class A Units
at a public offering price of $0.75 per Class A Unit, which consisted of 664,000 shares of common stock and warrants to purchase
664,000 shares of common stock. The offering also included 3,502 Class B Units at a public offering price of $1,000 per Class B
Unit, which consisted of 3,502 shares of Series A convertible preferred stock convertible into a total of 4,669,333 shares of common
stock and warrants to purchase 4,669,333 shares of common stock. In addition, the underwriter exercised the over-allotment to purchase
an additional 530,000 shares of common stock and warrants to purchase 530,000 shares of common stock, which are included in the
estimated gross proceeds of $4.4 million. The warrants have a per share exercise price of $0.9375, are exercisable immediately
and will expire five years from the date of issuance.
On May 9, 2017, the stockholders approved
an additional 1,500,000 shares for issuance under the 2010 Plan.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial
condition and results of operations should be read in conjunction with the financial statements and the related notes included
elsewhere in this report. This discussion contains forward-looking statements, which are based on assumptions about the future
of the Company’s business. The actual results could differ materially from those contained in the forward-looking statements.
Please read “Forward-Looking Statements” included below for additional information regarding forward-looking statements.
Forward-Looking Statements
This report contains, in addition to historical
information, certain information, assumptions and discussions that may constitute 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:
|
·
|
whether we can obtain approval from the U.S. Food and Drug Administration,
or FDA, and foreign regulatory bodies, to sell, market and distribute our therapeutics and devices under development;
|
|
·
|
our ability to successfully complete clinical trials of our pharmaceutical candidates under
development, including endoxifen and our intraductal microcatheters to administer therapeutics, including our study using
fulvestrant;
|
|
|
|
|
·
|
the success, cost and timing of our product and drug development activities and clinical
trials, including whether the ongoing clinical study using our intraductal microcatheters to administer fulvestrant will enroll
a sufficient number of subjects or be completed in a timely fashion or at all;
|
|
|
|
|
·
|
our ability to contract with third-party suppliers, manufacturers and service providers,
including clinical research organizations, and their ability to perform adequately;
|
|
·
|
our ability to successfully develop and commercialize new therapeutics currently in development
or that we might identify in the future and in the time frames currently expected;
|
|
·
|
our ability to successfully defend ongoing litigation, including the November 3, 2014 appeal
of a dismissal of a securities class action law suit filed against us, and other similar complaints that may be brought in
the future, in a timely manner and within the coverage, scope and limits of our insurance policies;
|
|
·
|
our ability to establish and maintain intellectual property rights covering our products;
|
|
·
|
our expectations regarding, and our ability to satisfy, federal, state and foreign regulatory
requirements;
|
|
·
|
the accuracy of our estimates of the size and characteristics of the markets that our products
and services may address;
|
|
·
|
our expectations as to future financial performance, expense levels and capital sources;
|
|
·
|
our ability to attract and retain key personnel; and
|
|
·
|
our ability to raise capital, including our ability to sell shares of common stock to Aspire
Capital under the terms of the May 25, 2016 common stock purchase agreement with Aspire Capital.
|
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.
Company 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 Montefiore Medical Center.
Our second development program is for endoxifen,
which we believe could be a potential treatment for a variety of conditions, including for post-breast cancer therapy, preventive
therapy as well as a potential therapy for breast density and other breast health conditions. Endoxifen is an active metabolite
of tamoxifen, which is an FDA approved drug given to breast cancer patients to prevent recurrence as well as the occurrence of
new breast cancer. Within the endoxifen program, our initial pharmaceutical under development is oral endoxifen for breast cancer
patients who are refractory, or resistant, to tamoxifen. Certain research indicates that low endoxifen levels in breast cancer
patients taking oral tamoxifen may be correlated with a higher risk of recurrence as compared to patients with adequate endoxifen
levels. We estimate that up to 50% of the one million women eligible to take tamoxifen in the United States each year are refractory,
meaning that they have inadequate endoxifen levels (for any number of reasons including low levels of a liver enzyme) and they
have an increased risk for breast cancer recurrence.
On March 23, 2017, we opened
an endoxifen Phase 1 dose-escalation clinical study. We have received two positive interim safety determinations allowing us to
proceed with all three cohorts in the topical portion of the endoxifen study. We anticipate completing enrollment in the fulvestrant
microcatheter study by August 2017.
Our common stock is
currently quoted on The NASDAQ Capital Market under the symbol “ATOS.”
Summary of 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,
the site of the majority of early breast cancers. Doing so is intended to provide a therapeutic directly to the breast tissue while
at the same time reducing the delivery of the drug to healthy tissue. We must obtain FDA
or
other regulatory health authority 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 or other regulatory
health authority approval.
According to The American Cancer Society,
breast cancer is the most common cancer in American women, other than skin cancer. The American Cancer Society estimates that
in 2017 there will be 252,710 new cases of breast cancer in women in the United States, in addition to 63,410 cases of carcinoma
in situ. They also estimate that 40,610 women will die from breast cancer in the United States in 2017.
Breast cancers and precancerous lesions
are typically treated with systemically administered agents such as tamoxifen, Faslodex, Perjeta and Herceptin; however, these
drugs can cause serious side effects which may lead to poor patient compliance with the drug regimens. Providing drug directly
into the breast ducts targeting the site of the localized cancerous lesions could reduce the need for systemic anti-cancer drugs,
and potentially reduce or eliminate the systemic side effects of the drugs and morbidity in such patients, and ultimately improve
patient compliance and ultimately reduce mortality.
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 several pending
patent applications directed to the treatment of breast conditions, including cancer, by the intraductal administration of therapeutics
including fulvestrant, and one issued patent directed to the intraductal treatment of breast conditions following a diagnosis
of breast conditions using ductal fluid.
We do not yet have
the FDA’s input, but based on our preliminary analysis, subject to FDA feedback, we believe 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. As a result, the path to market could be both faster
and less expensive than a standard new drug application 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 (an “
IND
”) for the Phase
2 study and the institutional review board approval has also been received.
In March 2016, we opened
enrollment in the fulvestrant microcatheter study, which was initially being conducted by The Columbia University Medical Center
Breast Cancer Program. The principal investigator for this study transferred from Columbia to Montefiore Medical Center in January
2017, and as a result we have transferred the study to Montefiore Medical Center. We have received approval from the Institutional
Review Board associated with Montefiore and we expect to complete enrollment in the study by August 2017.
The study includes
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 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. Six study participants will receive the standard intramuscular fulvestrant
dose of 500 mg to establish the reference drug distribution, and 24 participants will receive fulvestrant by intraductal instillation
utilizing our microcatheter device. The total dose administered via our microcatheters will not exceed 500 mg.
The study was presented at the CTRC-AARC
San Antonio Breast Cancer Symposium, which was held December 6-10, 2016. The study was presented in the “Ongoing Clinical
Trials” category, which features studies that have not been completed and which does not permit the presentation of study
results.
Additional information about the study
can be found at:
https://clinicaltrials.gov/ct2/show/NCT02540330?term=atossa&rank=2
.
Endoxifen
Our second development
program involves the drug endoxifen, which is the most active metabolite of tamoxifen, and which we believe could be a potential
treatment for a variety of conditions, including for post-breast cancer therapy, preventive therapy as well as a potential therapy
for breast density and other breast health conditions.
Within the endoxifen
program, our initial pharmaceutical under development is oral endoxifen for breast cancer patients who are refractory to tamoxifen.
Endoxifen is an active metabolite of tamoxifen, which is an FDA approved drug used by breast cancer patients to prevent recurrence
as well as the occurrence of new breast cancer. Certain research indicates that low endoxifen levels in breast cancer patients
taking oral tamoxifen may be correlated with a higher risk of recurrence as compared to breast cancer patients with adequate endoxifen
levels. We believe that up to 50% of the one million women eligible to take tamoxifen in the United States each year are refractory,
meaning that they have inadequate endoxifen levels (for any number of reasons including low levels of a liver enzyme) and they
have an increased risk for breast cancer recurrence. We are also evaluating endoxifen as a potential preventive therapy for breast
cancer, a potential therapy to reduce mammographic density, and other breast health conditions. We have filed patent applications
covering endoxifen.
On March 23, 2017,
we opened a Phase 1 dose-escalation study of proprietary oral and topical formulations of endoxifen, which we are conducting through
a clinical research organization in Australia. We have received two positive interim safety determinations allowing us to proceed
with all three cohorts in the topical portion of the endoxifen study. The anticipated primary endpoint of this placebo-controlled,
repeat dose study of 48 healthy female volunteers is to assess the pharmacokinetics of both an oral and topical formulation of
endoxifen over 28 days. The secondary endpoint is to assess safety and tolerability.
Subject to successful
completion of the Phase 1 study and other regulatory requirements, we plan to initiate a Phase 2 study of endoxifen in the second
half of 2017.
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.
Our Medical Devices
Our medical devices include the ForeCYTE
Breast Aspirator and the FullCYTE Breast Aspirator, which collect specimens of nipple aspirate fluid (NAF) for cytological testing
at a laboratory, and a universal transport kit to assist with the packaging and transport of NAF samples to a laboratory. We also
own the exclusive rights to manufacture and sell various medical devices (although we do not currently maintain an inventory of
our devices) consisting primarily of tools to assist breast surgeons, which we acquired from Acueity Healthcare in 2012. We are
not currently commercializing our breast aspirator devices, transportation kits, tools for breast surgeons nor any NAF cytology
tests.
Our patented intraductal microcatheter
devices are being developed for the targeted delivery of potential pharmaceuticals, as described above.
Research and Development Phase
We are in the research and development
phase and are not currently marketing any products or services. We do not anticipate generating revenue unless and until we develop
and launch our pharmaceutical programs.
Critical Accounting Policies and Estimates
In our Annual Report on Form 10-K/A for
the year ended December 31, 2016, we disclosed our critical accounting policies and estimates upon which our financial statements
are derived. There have been no changes to these policies since December 31, 2016. Readers are encouraged to review these disclosures
in conjunction with the review of this report.
Results of Operations
Three Months Ended March 31, 2017 and 2016
Operating Expenses
: Total operating
expenses were approximately $1.7 million for the three months ended March 31, 2017, consisting of general and administrative (G&A)
expenses of approximately $1.1 million and R&D expenses of approximately $544,000.
Operating expenses for the three months ended March 31, 2017 decreased approximately $641,000, or 27.5%,
from approximately $2.3 million for the three months ended March 31, 2016, which consisted of G&A expenses of approximately
$2.2 million, and R&D expenses of approximately $150,000.
General and Administrative Expenses
:
G&A expenses for the three months ended March 31, 2017 were approximately $1.1 million, a decrease of approximately $1.0 million,
or 47.5%, from approximately $2.2 million, for the same period in 2016. G&A expenses consist primarily of personnel and
related benefit costs, facilities, professional services, insurance, and public company related expenses. The decrease in G&A
expenses is mainly attributed to a reduction in payroll expenses resulting from a decrease in headcount, rent, and exit costs
incurred in 2016 that were not incurred in 2017.
Research and Development Expenses
:
R&D expenses for the three months ended March 31, 2017 were approximately $544,000, an increase of approximately $394,000,
or 262.9%, from the three months ended March 31, 2016. The increase in R&D expenses is attributed to salaries, manufacturing
and clinical trial expenses associated with our endoxifen program which commenced in mid-2016. We expect our R&D expenses
to increase throughout 2017 as we continue the clinical trial of fulvestrant administered via our microcatheters and as we continue
the development of endoxifen and potentially other indications and pharmaceuticals.
Liquidity and Capital Resources
We have a history of operating losses as
we have focused our efforts on raising capital and building our products and services in our pipeline. 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 three months ended March 31, 2017,
the Company recorded a net loss of $1.7 million, and used $1.9 million of cash in operating activities. As of March 31, 2017,
the Company had approximately $1.2 million in cash and cash equivalents and working capital of approximately $0.7 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 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 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.
On March 28, 2017, the Company entered
into an underwriting agreement with Aegis Capital Corp. relating to a public offering which closed on April 3, 2017. The offering
generated gross proceeds to the Company of approximately $4.4 million and net proceeds of $3.9 million after deducting underwriting
discounts and commission and other estimated offering expenses payable by the Company. We expect that our existing resources will
be sufficient to fund our planned operations for at least the next six months, however, additional capital resources will be needed
to fund operations for the next twelve months.
The offering included 664,000 Class A Units
at a public offering price of $0.75 per Class A Unit, which consisted of 664,000 shares of common stock and warrants to purchase
664,000 shares of common stock. The offering also included 3,502 Class B Units at a public offering price of $1,000 per Class
B Unit, which consisted of 3,502 shares of Series A Convertible Preferred Stock convertible into a total of 4,669,333 shares of
common stock and warrants to purchase 4,669,333 shares of common stock. In addition, the underwriter exercised the over-allotment
to purchase an additional 530,000 shares of common stock and warrants to purchase 530,000 shares of common stock, which are included
in the estimated gross proceeds of $4.4 million. The warrants have a per share exercise price of $0.9375, are exercisable immediately
and will expire five years from the date of issuance.
Our ability to continue as a going concern
is dependent on our obtaining additional adequate capital to fund additional operating losses until we become profitable. If we
are unable to obtain adequate capital, we could be forced to cease operations.
Cash Flows
As of March 31, 2017, we had cash and cash
equivalents of $1.2 million.
Net Cash Flows from Operating Activities
:
Net cash used in operating activities was approximately $1.9 million for the three months ended March 31, 2017, compared
with approximately $3.0 million for the three months ended March 31, 2016. The decrease in the 2017 period as compared to 2016
results primarily from reductions in compensation from reduced headcount, reduced occupancy expenses, reduced consulting fees,
and from severance payments in 2016 that were not incurred in 2017.
Net Cash Flows from Investing Activities
:
There was no net cash used in investing activities for the three months ended March 31, 2017, compared with approximately $5,000
for the three months ended March 31, 2016. The decrease in 2017 was attributable to the reduction in purchases of fixed asset
equipment in 2017 as compared to 2016.
Net Cash Flows from Financing Activities:
There was no net cash provided by financing activities for the three months ended March 31, 2017, compared with approximately
$2.2 million for the three months ended March 31, 2016. The decrease is because there were no capital raising activities in the
first quarter of 2017 as compared to the same period in 2016.
Funding Requirements
We expect to incur ongoing operating losses
for the foreseeable future as we continue to develop our planned therapeutic programs including related clinical studies and other
programs in the pipeline. We expect that our existing resources will be sufficient to fund our planned operations for at least
the next six months. In addition to our cash and cash equivalents at March 31, 2017 of approximately $1.2 million, on March 28,
2017, the Company entered into an underwriting agreement with Aegis Capital Corp. relating to a public offering which closed on
April 3, 2017. The offering generated gross proceeds to the Company of approximately $4.4 million and net proceeds of $3.9 million
after deducting underwriting discounts and commission and other estimated offering expenses payable by the Company. We will be
seeking to raise capital through sales of securities to third parties and existing stockholders to fund operations later
in the year. If we are unable to raise additional capital when needed, however, we could be forced to curtail or cease operations.
Our future capital uses and requirements depend on the time and expenses needed to begin and continue clinical trials for our
new drug developments.
Additional funding may not be available
to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of
our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible,
further dilution to our existing stockholders would result. To the extent our capital resources are insufficient to meet our future
capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration
agreements, debt financings or licensing arrangements.
If adequate funds are not available, we
may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts,
or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that
we might otherwise seek to develop or commercialize independently. Further, we may elect to raise additional funds even before
we need them if we believe the conditions for raising capital are favorable.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever
had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Recent Accounting Pronouncements
In February 2016, Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Updated (“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. The Company has 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.
In April 2016, the FASB issued ASU
No. 2016-09,
Compensation - Stock Compensation
simplifying the accounting for share-based payment transactions including
the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of
cash flows. Under the new standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based
payment awards) should be recognized as income tax expense or benefit on the statements of income. We adopted ASU No. 2016-09 effective
January 1, 2017. As a result of the adoption of this guidance, we made an accounting policy election to recognize the effect of
forfeitures in compensation cost when they occur. There was an immaterial impact on results of operations and financial position
and no impact on cash flows at adoption.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
,
amending the presentation of restricted cash within the statement of cash flows. The new guidance requires that restricted cash
be included within cash and cash equivalents on the statement of cash flows. The ASU is effective retrospectively for reporting
periods beginning after December 15, 2017, with early adoption permitted. The Company has not yet adopted the provisions of ASU
No. 2016-18.