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
six months ended June 30 2017, the Company recorded a net loss of approximately $3.9 million and used approximately $3.2 million
of cash in operating activities. As of June 30, 2017, the Company had approximately $3.7 million in cash and cash equivalents
and working capital of approximately $2.1 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.
We expect
that our existing resources will be sufficient to fund our planned operations for the next four to 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 paragraphs and eventually to secure other sources of financing and attain profitable operations.
NOTE
3: SUMMARY OF ACCOUNTING POLICIES
Basis
of Presentation:
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by GAAP for
complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed
in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of the Company for the year ended December 31,
2016.
In the opinion of management, all adjustments (including normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six
months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31,
2017.
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.
Financial Instruments with Characteristics of Both Liabilities
and Equity:
During the three months ended June 30, 2017, the Company issued certain financial instruments, including warrants
to purchase common stock, which have characteristics of both liability and equity. Financial instruments such as warrants that
are classified as liabilities are fair valued upon issuance and are remeasured at fair value at subsequent reporting periods with
the resulting change in fair value recorded in “change in fair value of common stock warrants”. The fair value of warrants
is estimated using valuation models that require the input of subjective assumptions including stock price volatility, expected
life, and the probability of future equity issuances and their impact to the price protection feature.
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. 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.
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 and does not expect
it will have a material impact on the financial statements upon adoption
.
In
July 2017, the FASB issued ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features and Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
. Part I of this ASU addresses the complexity of accounting for
certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of future equity offerings. Current accounting
guidance requires financial instruments with down round features to be accounted for at fair value. Part II of the Update applies
only to nonpublic companies and is therefore not applicable to the Company. The amendments in Part I of the Update change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining
whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result,
a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative
liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments,
the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of
the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common
shareholders in basic EPS. This Update is effective for public entities for fiscal years beginning after December 15, 2018. Early
adoption is permitted. The Company has not yet determined when it will adopt the provisions of this Update and has not yet determined
the impact on its consolidated financial statements upon adoption.
NOTE
4: PREPAID EXPENSES
Prepaid
expenses consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Prepaid insurance
|
|
|
156,532
|
|
|
|
121,333
|
|
Trade show
|
|
|
|
|
|
|
20,000
|
|
Retainer and security deposits
|
|
|
29,968
|
|
|
|
14,218
|
|
Financial exchange fees
|
|
|
21,000
|
|
|
|
|
|
Other
|
|
|
20,870
|
|
|
|
16,050
|
|
Total prepaid expenses
|
|
$
|
228,370
|
|
|
$
|
171,601
|
|
NOTE
5: FURNITURE AND EQUIPMENT
Furniture
and equipment consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
170,916
|
|
|
$
|
210,528
|
|
Less: Accumulated depreciation
|
|
|
(151,927
|
)
|
|
|
(155,409
|
)
|
Total furniture and equipment, net
|
|
$
|
18,989
|
|
|
$
|
55,119
|
|
Depreciation
expense for the three months ended June 30, 2017 and 2016 was $8,773 and $32,734, respectively, and $18,434, and $62,353, for
the six months ended June 30, 2017 and 2016, respectively.
NOTE
6: INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Patents
|
|
$
|
639,000
|
|
|
$
|
639,000
|
|
Software
|
|
|
113,540
|
|
|
|
113,540
|
|
Total intangible assets
|
|
|
752,540
|
|
|
|
752,540
|
|
Less: Accumulated amortization
|
|
|
(166,857
|
)
|
|
|
(112,100
|
)
|
Total intangible assets, net
|
|
$
|
585,683
|
|
|
$
|
640,440
|
|
Software
amounted to $113,540 as of June 30, 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 June 30, 2017 and 2016 was $6,759 and $7,857, respectively,
and was $19,614 and $15,714, for the six months ended June 30 2017 and 2016, respectively.
Patents
amounted to $639,000 as of June 30, 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 is from 7 to 12 years. Amortization expense related to patents was
$17,571 and $37,254 for the three months ended June 30, 2017 and 2016, respectively and was $35,142 and $74,508 for the six
months ended June 30, 2017 and 2016, respectively.
Future
estimated amortization expenses as of June 30, 2017 for the five succeeding years is as follows:
For the years ending December 31,
|
|
Amounts
|
|
2017 (includes the remainder of the year)
|
|
$
|
48,282
|
|
2018
|
|
|
73,433
|
|
2019
|
|
|
70,285
|
|
2020
|
|
|
70,285
|
|
2021
|
|
|
70,285
|
|
Thereafter
|
|
|
253,113
|
|
|
|
$
|
585,683
|
|
NOTE
7: PAYROLL LIABILITIES
Payroll
liabilities consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Accrued bonus payable
|
|
$
|
280,008
|
|
|
$
|
609,337
|
|
Accrued vacation
|
|
|
134,865
|
|
|
|
94,514
|
|
Accrued payroll liabilities
|
|
|
67,547
|
|
|
|
66,048
|
|
Total payroll liabilities
|
|
$
|
482,420
|
|
|
$
|
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, and 4,000 shares of Series A Convertible Preferred
Stock, par value $0.001 per share through the filings of certificates 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 our 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 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 has 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 30, 2017 and on June 30, 2017 in connection with the temporary modification of our common stock warrants to allow for the
net exercise of those warrants we agreed to extend this stand still for an additional 45 days.
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 net proceeds of $2,561,896 after deducting underwriter
discounts, commissions, non-accountable expense allowance and expense reimbursement.
2017 Public Offering of Class A and
Class B Units Consisting of Common Stock, Series A Convertible Preferred Stock and Warrants
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 approximately $3.9 million after deducting
underwriting discounts and commissions and other offering expenses paid 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 gross proceeds of $4.4 million. The warrants had a per share exercise price
of $0.9375, are exercisable immediately and will expire five years from the date
of issuance.
Series
A Convertible Preferred Stock
The
terms and provisions of our Series A Convertible Preferred Stock (the “Series A Preferred”) are as follows:
Rank.
The
Series A Preferred ranks on parity to our Common Stock.
Conversion.
Each
share of the Series A Preferred is convertible into 1,333.33 shares of our Common Stock (subject to adjustment as provided in
the related certificate of designation of preferences, rights and limitations). Holders of Series A Preferred are prohibited from
converting Series A Preferred into shares of our common stock if, as a result of such conversion, the holder, together with its
affiliates, would own more than 4.99% of the total number of shares of our Common Stock then issued and outstanding. However,
any holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase
in such percentage shall not be effective until 61 days after such notice to us.
Liquidation
Preference.
In the event of our liquidation, dissolution or winding-up, holders of Series A Preferred will receive
the same amount that a holder of Common Stock would receive if the Series A Preferred were fully converted into shares of our
Common Stock at the conversion price (disregarding for such purposes any conversion limitations) which amounts shall be paid pari
passu with all holders of Common Stock.
Voting
Rights.
Shares of Series A Preferred will generally have no voting rights, except as required by law. However,
as long as any shares of Series A Preferred are outstanding, the Company shall not, without the affirmative vote of the holders
of a majority of the then outstanding shares of the Series A Preferred, (a) alter or change adversely the powers, preferences
or rights given to the Series A Preferred or alter or amend the Certificate of Designation, (b) amend its certificate of incorporation
or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized
shares of Series A Preferred, or (d) enter into any agreement with respect to any of the foregoing.
Dividends.
Shares
of Series A Preferred will not be entitled to receive any dividends, unless and until specifically declared by our board of directors.
The holders of the Series A Preferred will participate, on an as-if-converted-to-common stock basis, in any dividends to the holders
of common stock.
Redemption.
We
are not obligated to redeem or repurchase any shares of Series A Preferred. Shares of Series A Preferred are not otherwise entitled
to any redemption rights or mandatory sinking fund or analogous fund provisions.
2017
Warrants
The
terms and conditions of the warrants included in the 2017 public offering are as follows:
Exercisability
.
The warrants are exercisable at any time after April 3, 2017 and expire 5 years from issuance. The warrants are exercisable,
at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration
statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is effective
and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the
issuance of such shares, by payment in full in immediately available funds for the number of shares of Common Stock purchased
upon such exercise. If a registration statement registering the issuance of the shares of Common Stock underlying the warrants
under the Securities Act is not then effective or available, the holder may only exercise the Warrant through a cashless exercise,
in which case the holder would receive upon such exercise the net number of shares of Common Stock determined according to the
formula set forth in the Warrant. No fractional shares of common stock will be issued in connection with the exercise of a warrant.
In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise
price.
Exercise
Limitation
. A holder will not have the right to exercise any portion of the Warrant if the holder (together with its affiliates)
would beneficially own in excess of 4.99% of the number of shares of our stock outstanding immediately after giving effect to
the exercise, as such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may
increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice
from the holder to us.
Exercise
Price
. The exercise price of the warrants was initially $0.9375, which was reduced to $0.26 on June 30, 2017. The exercise
price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations,
reclassifications or similar events affecting our common stock. The exercise price may also be adjusted downwards if we issue
additional Common Stock (or equivalents) at a price below the exercise price of the Warrants while the Warrants remain outstanding.
Transferability
.
Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent. There is
currently no trading market for the warrants and a trading market may not develop.
Fundamental
Transactions
. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization,
recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all
of our properties or assets, our consolidation or merger with or into another person, the holders of the warrants will be entitled
to receive, upon any subsequent exercise of the warrants and for each share of our Common Stock that would have been issuable
upon such exercise immediately prior to the occurrence of a fundamental transaction, the number of shares of Common Stock of the
successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration receivable
as a result of such fundamental transaction by a holder of the number of shares of Common Stock for which the warrants are exercisable
immediately prior to such fundamental transaction. The holder of the Warrant may also require us or any successor entity to purchase
the Warrant from the holder by paying to the holder an amount of cash equal to the Black Scholes value of the remaining unexercised
portion of the Warrant on the date of or within 30 days after consummation of the fundamental transaction.
Rights
as a Stockholder
. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of
our Common Stock, the holder of a Warrant does not have the rights or privileges of a holder of our Common Stock, including any
voting rights, until the holder exercises the Warrant.
Accounting Treatment
The Company allocated the
proceeds from the sale of the Class A and Class B units to the separate securities issued. The Company determined that, on the
date of issuance, the warrants were not considered indexed to its own stock because the underlying instruments were not “fixed-for-fixed”
due to the price protection and fundamental transaction provisions and, therefore, the warrants should be accounted for as liabilities.
At the end of each reporting period, the changes in fair value of the warrants during the period are recorded in non-operating
income (expense) in the consolidated statement of operations.
The Company allocated the amount representing the fair value of the warrants at the date of issuance separately
to the warrant liability and recorded the remaining proceeds as common stock, in the case of the Class A units, or as Series A
convertible preferred stock, in the case of the Class B units. Due to the allocation of a portion of the proceeds to the warrants,
the Series A convertible preferred stock contained a beneficial conversion feature upon issuance, which was recorded in the amount
of $1,284,066 based on the intrinsic value of the beneficial conversion feature. The discount on the Series A convertible preferred
stock of $1,284,066 caused by allocation of the proceeds to the warrant was recorded as a deemed dividend upon issuance of the
Series A convertible preferred stock. As a result, total deemed dividends of $2,568,132 was recorded upon issuance of the Series
A convertible preferred stock, which is reflected as an addition to net loss in the consolidated statement of operations to arrive
at net loss applicable to common shareholders.
Net
Exercise of 2017 Warrants
On
June 29, 2017, the Company offered to modify the rights of the holders of the warrants issued in the public offering the Company
completed on April 3, 2017. The temporary modification included (a) lowering the exercise price of the warrants to $0.26 per share,
(b) setting the applicable volume-weighted average price (VWAP) at $0.52 per share, and (c) allowing for temporary cashless exercise of the warrants for all holders that
accepted the temporary modification before 8:00 a.m. Eastern daylight time on June 30, 2017. Holders of warrants to purchase a
total of approximately 3.0 million shares of Common Stock accepted the offer resulting in the cancellation of those warrants and
the issuance by the Company of a total of approximately1.5 million shares of Common Stock (including shares held in abeyance).
The shares of Common Stock are registered under the Securities Act of 1933, as amended. If delivery of the shares of Common Stock
pursuant to the foregoing would result in the holder exceeding the 4.99% “Beneficial Ownership Limitation” (as defined
in the warrant) then the shares in excess of such 4.99% will be held in abeyance by the Company pending further instruction from
the holder. In connection with the temporary modification, the Company agreed to extend the “Lock-up Period” of the
underwriting agreement between the Company and Aegis Capital Corp., dated March 28, 2017, by 45 days and the Company agreed not
to enter into any further amendments to the warrants during such extended Lock-up Period without the prior written consent of
each holder. Upon exercise of these warrants, the amount of the warrant liability at the date of exercise was reclassified
from warrant liability to additional paid-in capital.
The
following table summarizes the 2017 liability warrant activity:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding as of December 31, 2016
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
5,863,332
|
|
|
$
|
0.9375
|
|
Warrants exercised
|
|
|
(2,991,666
|
)
|
|
|
0.26
|
|
Warrants cancelled
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
|
2,871,666
|
|
|
$
|
0.26
|
|
The
Company estimated the fair value of the warrants using the Monte Carlo simulation (MCS) model, which is a type of income approach,
where the current value of an asset is expressed as the sum of probable future cash flows across various scenarios and time frames
discounted for risk and time. The significant assumptions include timing of future rounds of financing, timing and success rates
of oncology clinical trials, and the probability of a merger and acquisition adjusted for a lack of marketability discount. The
MCS model also includes a full term and an early conversion scenario that are each weighted at 50% in the final concluded fair
value.
Inputs
used in the valuation of the warrants at the issuance date of April 3, 2017 and June 30, 2017 were as follows:
Initial valuation
|
|
|
|
Common stock price
|
|
$
|
0.75
|
|
Exercise price
|
|
$
|
0.9375
|
|
Expected Volatility
|
|
|
50
|
%
|
Dividend Yield
|
|
|
0
|
%
|
Risk-Free Interest Rate
|
|
|
0.79% - 1.88
|
%
|
Expected Term (years)
|
|
|
0.24 - 5
|
|
|
|
|
|
|
June 30, 2017 valuation
|
|
|
|
|
Common stock price
|
|
$
|
0.50
|
|
Exercise price
|
|
$
|
0.26
|
|
Expected Volatility
|
|
|
50
|
%
|
Dividend Yield
|
|
|
0
|
%
|
Risk-Free Interest Rate
|
|
|
0.79% - 1.88
|
%
|
Expected Term (years)
|
|
|
0.08-4.76
|
|
Outstanding
Warrants
As
of June 30, 2017, warrants to purchase 3,273,894 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
|
2017 public offering
|
|
|
2,871,666
|
|
|
|
0.26
|
|
|
April
3, 2022
|
|
|
|
3,273,894
|
|
|
|
|
|
|
|
Conversion of Series A Convertible Preferred Stock
During the three months ended June 30, 2017, certain holders of the Series A Convertible Preferred Stock
exercised their conversion option and converted an aggregate of 2,663 shares of Series A Convertible Preferred Stock into 3,550,664
shares of the Company’s common stock based on the conversion ratio of 1,333.33 shares of Series A Convertible Preferred Stock
to common stock.
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to the accounting guidance for
fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the
measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use
of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market
participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect
the assumptions market participants would use in pricing the asset or liability based on the best information available in the
circumstances.
The fair value hierarchy is broken down into the three input
levels summarized below:
●
Level 1
—Valuations are based on quoted
prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets
and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices
on active markets.
●
Level 2
—Valuations based on inputs other
than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets
and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit
and over-the- counter derivatives.
●
Level 3
—Valuations based on unobservable
inputs in which there are little or no market data, which require the Company to develop its own assumptions.
The following tables present the Company’s fair value
hierarchy for all its financial assets, in thousands, by major security type measured at fair value on a recurring basis as of
June 30, 2017:
|
|
June, 30 2017
|
|
|
|
Estimated Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Warrant Liability
|
|
$
|
864,371
|
|
|
|
|
|
|
|
|
|
|
$
|
864,371
|
|
There were no financial assets outstanding that were required
to be measured at fair value at December 31, 2016.
Warrants containing provisions that could require the Company
to settle the warrants in cash in an event outside the Company’s control or that have price protection rights are accounted
for as liabilities, with changes in the fair values included in net loss for the respective periods. Because some of the inputs
to the valuation model are either not observable or are not derived principally from or corroborated by observable market data
by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy.
The following table summarizes the changes in the Company’s
Level 3 warrant liability for the six months ended June 30, 2017:
|
|
June 30, 2017
|
|
Warrant liability
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
Issuances of warrants
|
|
|
1,612,417
|
|
Warrant exercises
|
|
|
(900,493
|
)
|
Change in fair value
|
|
|
152,447
|
|
Ending balance
|
|
|
864,371
|
|
There were no transfers between Level 1, Level 2 or Level 3 for the three and six months ended June 30,
2017 and year ended December 31, 2016.
NOTE
10: 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. In addition, in computing the dilutive effect of convertible
securities, the numerator is adjusted to add back any convertible preferred dividends. 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 conversion of Series A preferred stock, and potential future exercises of outstanding stock options and common stock 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 summarizes the Company’s calculation of net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Loss Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
2,241,489
|
|
|
$
|
1,722,383
|
|
|
$
|
3,945,043
|
|
|
$
|
4,049,920
|
|
Deemed dividend attributable to preferred stock
|
|
$
|
2,568,132
|
|
|
|
|
|
|
$
|
2,568,132
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
4,809,621
|
|
|
$
|
1,722,383
|
|
|
$
|
6,513,175
|
|
|
$
|
4,049,920
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
7,476,046
|
|
|
|
2,587,871
|
|
|
|
5,641,671
|
|
|
|
2,485,853
|
|
Basic and diluted net loss per share
|
|
$
|
0.64
|
|
|
$
|
0.67
|
|
|
$
|
1.15
|
|
|
$
|
1.63
|
|
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 six months ended June 30, 2017 and 2016 because the effect of them would be anti-dilutive:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
1,121,567
|
|
|
|
394,090
|
|
|
|
754,093
|
|
|
|
394,090
|
|
Series A convertible preferred stock
|
|
|
2,184,356
|
|
|
|
|
|
|
|
1,098,212
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
6,139,797
|
|
|
|
402,228
|
|
|
|
3,286,862
|
|
|
|
402,228
|
|
Total
|
|
|
9,445,720
|
|
|
|
796,318
|
|
|
|
5,139,167
|
|
|
|
796,318
|
|
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 June 30, 2017 and December 31, 2016 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 June 30,
2017 and December 31, 2016, the Company had $3,440,023 and $2,777,962 in excess of the FDIC insured limit, respectively.
NOTE
13: COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
future minimum lease payments due subsequent to June 30, 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)
|
|
$
|
4,930
|
|
Total minimum lease payments
|
|
$
|
4,930
|
|
The
total rent expense for the three and six months ended June 30, 2017 and June 30, 2016 was $7,395 and $18,540, respectively and
$78,600 and $157,200, respectively. Rent expense was included in general and administrative expenses for both years.
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’s 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 was fully-briefed and oral arguments were held on May 18, 2017. We
are currently awaiting a decision from the Court.
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 June 30, 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
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. On May 9, 2017, the stockholders approved an additional 1,500,000
shares 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 1,716,323 options to purchase shares of common stock during the six months ended June 30, 2017. No options were
exercised during the three or six months ended June 30, 2017. There are 100,456 shares available for grant under the 2010 Plan
as of June 30, 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
$181,408 and $200,187 for the three months ended June 30, 2017 and 2016, respectively and $336,115 and $392,664 for the six months
ended June 30, 2017 and 2016, respectively. The fair value of stock options granted for the six months ended June 30, 2017 and
2016 was calculated using the Black-Scholes option-pricing model applying the following assumptions:
|
|
Period
ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.86%
- 2.04%
|
|
|
|
1.48%
- 1.55%
|
|
Expected term
|
|
|
5.32- 6.36 years
|
|
|
|
5.58 - 6.06 years
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
- %
|
|
|
|
- %
|
|
Expected volatility
|
|
|
112.86% - 114.19%
|
|
|
|
115.52% - 115.58%
|
|
Options
issued and outstanding as of June 30, 2017 and their activities during the six 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
|
|
|
1,716,323
|
|
|
|
.47
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,167
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(19,081
|
)
|
|
|
25.05
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
|
2,072,999
|
|
|
|
4.10
|
|
|
|
9.25
|
|
|
$
|
51,512
|
|
Exercisable as of June 30, 2017
|
|
|
229,158
|
|
|
|
31.65
|
|
|
|
7.44
|
|
|
$
|
|
|
Vested and expected to vest
|
|
|
2,072,999
|
|
|
$
|
4.10
|
|
|
|
9.26
|
|
|
$
|
51,512
|
|
At
June 30, 2017, there were 1,840,530 unvested options outstanding and the related unrecognized total compensation cost associated
with these options was approximately $1,427,000. This expense is expected to be recognized over a weighted-average period of 2.10
years.
NOTE
15: SUBSEQUENT EVENTS
Subsequent to June 30, 2017 and throughout August 11, 2017 an additional 1,656,666 common stock warrants have
been exercised at $0.26 per warrant for cash proceeds of $434,733. As of August 14, 2017 there are 1,215,000 common stock warrants
still outstanding.