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 and drug delivery programs.
NOTE
2: GOING CONCERN
The Company’s consolidated financial
statements are prepared using Generally Accepted Accounting Principles in the United States of America applicable to a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company
has incurred net losses and negative operating cash flows since inception. For the nine months ended September 30, 2017, the Company
recorded a net loss of approximately $6.1 million and used approximately $4.9 million of cash in operating activities. As of September
30, 2017, the Company had approximately $2.7 million in cash and cash equivalents and working capital of approximately $1.9 million.
The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue
as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it becomes profitable. The Company can give no assurances that any additional capital that it is
able to obtain, if any, will be sufficient to meet its needs, or that any such 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.
As of the date of filing this
quarterly report, we expect that our existing resources will be sufficient to fund our planned operations for the next 8-12
months; however, additional capital resources will be needed to fund operations longer-term.
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.
On October 26, 2017, the Company entered
into an underwriting agreement with Maxim Group LLC relating to a public offering of common stock which closed on October 30, 2017.
The offering generated gross proceeds to the Company of approximately $5.5 million and net proceeds of $5.1 million after deducting
underwriting discounts and commission.
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 nine months ended September 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 nine months ended September 30, 2017, the Company issued certain financial instruments, consisting of 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:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Prepaid insurance
|
|
$
|
39,132
|
|
|
$
|
121,333
|
|
Trade show
|
|
|
|
|
|
|
20,000
|
|
Retainer and security deposits
|
|
|
14,218
|
|
|
|
14,218
|
|
Professional services
|
|
|
81,250
|
|
|
|
|
|
Financial exchange fees
|
|
|
10,500
|
|
|
|
|
|
Other
|
|
|
12,306
|
|
|
|
16,050
|
|
Total prepaid expenses
|
|
$
|
157,406
|
|
|
$
|
171,601
|
|
NOTE
5: FURNITURE AND EQUIPMENT
Furniture
and equipment consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Furniture and equipment
|
|
$
|
170,917
|
|
|
$
|
210,528
|
|
Less: Accumulated depreciation
|
|
|
(156,482
|
)
|
|
|
(155,409
|
)
|
Total furniture and equipment, net
|
|
$
|
14,435
|
|
|
$
|
55,119
|
|
Depreciation expense for the three months
ended September 30, 2017 and 2016 was $4,554 and $29,698, respectively, and $22,988, and $92,054, for the nine months ended September
30, 2017 and 2016, respectively.
NOTE
6: INTANGIBLE ASSETS
Intangible
assets consisted of the following:
|
|
September 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
|
|
|
(191,186
|
)
|
|
|
(112,100
|
)
|
Total intangible assets, net
|
|
$
|
561,354
|
|
|
$
|
640,440
|
|
Software amounted to $113,540 as of September
30, 2017 and December 31, 2016. The amortization period for the purchased software is three years. Amortization expense related
to software for the three months ended September 30, 2017 and 2016 was $6,759 and $7,857, respectively, and was $26,373 and $23,572,
for the nine months ended September 30, 2017 and 2016, respectively.
Patents amounted to $639,000 as of September
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 $37,253 for the three months ended September
30, 2017 and 2016, respectively and was $52,713 and $111,761 for the nine months ended September 30, 2017 and 2016, respectively.
Future
estimated amortization expenses as of September 30, 2017 for the five succeeding years is as follows:
For
the years ending December 31,
|
|
Amounts
|
|
2017 (includes the remainder
of the year)
|
|
$
|
23,952
|
|
2018
|
|
|
73,433
|
|
2019
|
|
|
70,285
|
|
2020
|
|
|
70,285
|
|
2021
|
|
|
70,285
|
|
Thereafter
|
|
|
253,114
|
|
|
|
$
|
561,354
|
|
NOTE
7: PAYROLL LIABILITIES
Payroll
liabilities consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accrued bonus payable
|
|
$
|
423,000
|
|
|
$
|
609,337
|
|
Accrued vacation
|
|
|
140,384
|
|
|
|
94,514
|
|
Accrued payroll liabilities
|
|
|
64,203
|
|
|
|
66,048
|
|
Total payroll liabilities
|
|
$
|
627,587
|
|
|
$
|
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, none of which are issued and outstanding as of
September 30, 2017.
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 and additional paid in capital of $746 and $197,777, respectively, which is 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 for 90 days after that financing 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. As of September 30, 2017, 467,650 shares are available for sale to Aspire
Capital under the May 25, 2016 purchase agreement.
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 4,669,329 shares of common
stock and warrants to purchase 4,669,329 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, were exercisable immediately and were scheduled
to expire five years from the date of issuance.
As of September 30, 2017, all of the warrants
issued in the April 3, 2017 offering have been exercised and are no longer outstanding and all of the shares of Series A convertible
preferred stock have been converted into shares of common stock.
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.
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 approximately 1.5 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. During the three months ended
September 30, 2017, all remaining warrants were exercised for cash so that no warrants issued in the April 3, 2017 financing
remain outstanding. 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
|
|
|
(5,863,332
|
)
|
|
|
0.26
|
|
Outstanding as of September 30, 2017
|
|
|
|
|
|
$
|
|
|
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 are
set forth below. All remaining warrants were exercised during the quarter and no warrants issued in the April 2017 financing remain
outstanding at September 30, 2017.
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 September 30, 2017, warrants to purchase 380,561 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
|
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
|
|
|
|
380,561
|
|
|
|
|
|
|
|
Conversion
of Series A Convertible Preferred Stock
During the three months ended September
30, 2017, certain holders of the Series A convertible preferred stock exercised their conversion option and converted an aggregate
of 839 shares of Series A convertible preferred stock into 1,118,665 shares of the Company’s common stock based on the conversion
ratio of 1,333.33 shares of common stock for each share of Series A convertible preferred stock. During the nine months ended September
30, 2017, certain holders of the Series A convertible preferred stock exercised their conversion option and converted an aggregate
of 3,502 shares of Series A convertible preferred stock into 4,669,329 shares of the Company’s common stock. As of September
30, 2017, no shares of Series A convertible preferred stock are outstanding.
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.
There
were no financial assets outstanding that were required to be measured at fair value at September 30, 2017 or December 31, 2016.
Warrants issued in the April 3, 2017 offering
contained provisions that could have required the Company to settle the warrants in cash in an event outside the Company’s
control or had price protection rights and were therefore accounted for as liabilities while they were outstanding, with changes
in the fair values included in net loss for the respective periods. Because some of the inputs to the valuation model were either
not observable or were not derived principally from or corroborated by observable market data by correlation or other means, the
warrant liability was 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 nine months ended September 30,
2017:
Warrant
liability
|
|
|
|
|
Beginning
balance
|
|
$
|
|
|
Issuances
of warrants
|
|
|
1,612,413
|
|
Warrant
exercises
|
|
|
(1,893,160
|
)
|
Change
in fair value
|
|
|
280,747
|
|
Ending
balance
|
|
|
|
|
There were no transfers between Level 1,
Level 2 or Level 3 for the three and nine months ended September 30, 2017 or the year ended December 31, 2016.
NOTE 10: NET INCOME (LOSS) PER SHARE
The Company accounts for and discloses net
income (loss) per common share in accordance with FASB Accounting Standards Codification (“ASC”) Topic 260,
Earnings
Per Share
. Basic net income (loss) per common share is computed by dividing net income (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 income (loss) per common share is computed
by dividing net income (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 convertible 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 except for the three months ended September 30, 2016, diluted net loss per common share is the same as
basic net loss per common share for those periods. Diluted net income per share was the same as basic net income per share for
the three months end September 30, 2016 as the impact of potential common shares included in earnings per share was insignificant.
The following table summarizes the Company’s
calculation of net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss) Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,184,510
|
)
|
|
$
|
204,689
|
|
|
$
|
(6,129,553
|
)
|
|
$
|
(3,845,235
|
)
|
Deemed dividend attributable to preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,568,132
|
)
|
|
|
|
|
Net income (loss) attributable
to common shareholders
|
|
$
|
(2,184,510
|
)
|
|
$
|
204,689
|
|
|
$
|
(8,697,685
|
)
|
|
$
|
(3,845,235
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,411,145
|
|
|
|
3,024,393
|
|
|
|
7,886,210
|
|
|
|
2,665,904
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.18
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.10
|
)
|
|
$
|
(1.44
|
)
|
The following table sets forth the number
of potential common shares excluded from the calculation of net income (loss) per diluted share for the three months and nine months
ended September 30, 2017 and 2016 because the effect of them would be anti-dilutive:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options
to purchase common stock
|
|
|
2,118,021
|
|
|
|
390,424
|
|
|
|
1,206,057
|
|
|
|
390,424
|
|
Series
A convertible preferred stock
|
|
|
509,762
|
|
|
|
|
|
|
|
895,809
|
|
|
|
|
|
Warrants
to purchase common stock
|
|
|
1,660,379
|
|
|
|
402,228
|
|
|
|
2,726,751
|
|
|
|
402,228
|
|
Total
|
|
|
4,288,162
|
|
|
|
792,652
|
|
|
|
4,828,617
|
|
|
|
792,652
|
|
NOTE
11: INCOME TAXES
Deferred
income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount
of deferred tax assets that, based on available evidence, are not expected to be realized.
As
a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s
net deferred tax assets is appropriate. No income tax liabilities existed as of September 30, 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 September
30, 2017 and December 31, 2016, the Company had $2,483,663 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 September 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)
|
|
$
|
7,395
|
|
2018
|
|
|
22,185
|
|
Total
minimum lease payments
|
|
$
|
29,580
|
|
The total rent expense for the three months
ended September 30, 2017 and 2016 was $7,395 and $87,315, respectively, and $25,775 and $238,565 for the nine months ended September
30, 2017 and 2016, 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 our directors and
officers and the underwriters of our November 2012 initial public offering. The complaint alleged that all defendants violated
Sections 11 and 12(a)(2), and that we and certain of our directors and officers violated Section 15, of the Securities Act by
making material false and misleading statements and omissions in the offering’s registration statement, and that we and
certain of our directors and officers violated Sections 10(b) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder
by making false and misleading statements and omissions in the registration statement and in certain of our subsequent press releases
and SEC filings with respect to our NAF specimen collection process, our ForeCYTE Breast Health Test and our MASCT device. The
complaint sought, 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 district 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.
On October 6, 2014 the Court granted defendants’ motion dismissing all claims against Atossa and all other defendants. 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 appealed the Court’s dismissal order to the U.S. Court of Appeals for the Ninth Circuit. On August 18, 2017,
the Ninth Circuit affirmed in part and reversed in part the district court’s judgment.
On
September 11, 2017, the Ninth Circuit entered an order and mandate remanding the case to the United States District Court for
the Western District of Washington. On October 19, 2017, plaintiffs filed an amended complaint that conforms to the ruling by
the Ninth Circuit. Defendants’ answer to the amended complaint is due December 8, 2017. Since the claims under Sections
11, 12(a)(2) and 15 were dismissed by the district court and not appealed, the amended complaint only alleges violations of Section
10(b) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder against the company and one officer. All other claims
and defendants have been dismissed. The alleged class period in the amended complaint is December 20, 2012 through October 4,
2013.
The
Company believes this lawsuit is without merit and plans to defend itself vigorously; however, failure by the Company to obtain
a favorable resolution of the claims set forth in the complaint could have a material adverse effect on the Company’s business,
results of operations and financial condition. Currently, the amount of such material adverse effect cannot be reasonably estimated,
and no provision or liability has been recorded for these claims as of September 30, 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 (“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 0 and 1,716,323 options to purchase shares of common stock during the three and nine months ended September 30,
2017. No options were exercised during the three or nine months ended September 30, 2017. There are 100,456 shares available for
grant under the 2010 Plan as of September 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 $224,254 and $257,389 for the three months ended
September 30, 2017 and 2016, respectively, and $560,369 and $650,053 for the nine months ended September 30, 2017 and 2016, respectively.
The fair value of stock options granted for the nine months ended September 30, 2017 and 2016 was calculated using the Black-Scholes
option-pricing model applying the following assumptions:
|
|
Period
ended September 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 September 30, 2017 and their activities during the nine months then ended are as follows:
|
|
Number
of
Underlying
Shares
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Weighted-
Average
Contractual
Life Remaining
in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of January 1, 2017
|
|
|
378,924
|
|
|
$
|
26.25
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
1,716,323
|
|
|
|
0
.47
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,167
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(19,081
|
)
|
|
|
25.05
|
|
|
|
|
|
|
|
|
|
Outstanding
as of September 30, 2017
|
|
|
2,072,999
|
|
|
|
4.10
|
|
|
|
9.29
|
|
|
$
|
102,679
|
|
Exercisable
as of September 30, 2017
|
|
|
418,636
|
|
|
|
16.39
|
|
|
|
8.44
|
|
|
$
|
9,645
|
|
Vested
and expected to vest
|
|
|
2,072,999
|
|
|
$
|
4.10
|
|
|
|
9.29
|
|
|
$
|
102,679
|
|
At
September 30, 2017, there were 1,651,052 unvested options outstanding and the related unrecognized total compensation cost associated
with these options was approximately $1,203,000. This expense is expected to be recognized over a weighted-average period of 2.0
years.
NOTE
15: SUBSEQUENT EVENTS
On October 26, 2017, the Company entered
into an underwriting agreement with Maxim Group LLC relating to a public offering of common stock which closed on October 30, 2017.
The offering generated gross proceeds to the Company of approximately $5.5 million and net proceeds of $5.1 million after deducting
underwriting discounts and commission.
The offering included 11,500,000 shares
of common stock at a public offering price of $0.44 per share. In addition, the underwriter exercised the over-allotment to purchase
an additional 1,000,000 shares of common stock, which are included in the estimated gross proceeds of $5.5 million.