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 six months ended June 30, 2018, the Company
recorded a net loss of approximately $6.0 million and used approximately $4.2 million of cash in operating activities. As of June
30, 2018 the Company had approximately $15.2 million in cash and cash equivalents and working capital of approximately $13.4 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 includes obtaining additional capital resources. Management’s plans to obtain such resources for the Company
include obtaining capital from the sale of its equity securities, potential exercise of outstanding warrants, and short-term borrowings
from banks, stockholders or other related parties, 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 report, we
expect that our existing resources will be sufficient to fund our planned operations for the next 12 to 18 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.
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, 2017.
In the opinion of management, all adjustments
(including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December
31, 2018.
On April 20, 2018, the Company completed
a 1-for-12 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 12 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 $0.18 per share. 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 April 20, 2018. All share and per share data included in this report has been retroactively
restated to reflect the Reverse Stock Split.
Use of Estimates:
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses
during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
In February 2016, Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02,
Lease Accounting Topic
842.
This ASU requires a lessee to recognize lease assets and liabilities on the balance sheet for all arrangements with terms
longer than 12 months. The new standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with
a lease term of more than 12 months, an asset representing its right to use the underlying asset for the lease term and a liability
to make lease payments. The lease term is the non-cancellable period of the lease, and includes both periods covered by an option
to extend the lease, if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate
the lease, if the lessee is reasonably certain not to exercise that termination option. For leases with a lease term of 12 months
or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU
asset or lease liability. A lessee making this accounting policy election would recognize lease expense over the term of the lease,
generally in a straight-line pattern. The lessor accounting remains largely consistent with existing GAAP. The new standard takes
effect in 2019 for public business entities. The Company has not adopted the provisions of ASU No. 2016-02 and is currently evaluating
the impact of adopting ASU 2016-02 on its consolidated financial statements.
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 Company
adopted the provisions of ASU No. 2016-18 as of January 1, 2018 and has included restricted cash with cash and cash equivalents
on the accompanying statement of cash flows, including reclassifying 2017 balances. For the three and six months ended June 30,
2018 and June 30, 2017, we included $55,000 of restricted cash in cash and cash equivalents on the statement of cash flows. The
restricted cash represents a required deposit for the Company credit card and is restricted until the Company no longer has the
credit card or the limit changes on the credit card.
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
early adopted the provisions of ASU No. 2017-11 as of January 1, 2018. As the Company does not have any financial instruments
with down round features outstanding as of June 30, 2018, this ASU did not have a material impact on the financial statements
upon adoption.
In June 2018, The FASB issued ASU 2018-07,
Compensation-Stock Compensation Improvements to Nonemployee Share Based Payment Accounting.
This ASU simplifies several
aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Topic 718 to
include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements
of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost.
The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide financing to the
issuer or was granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic
606,
Revenue from Contracts with Customers
. This update is effective for public entities for fiscal years beginning after
December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company early adopted the
provisions of ASU No. 2018-17 as of April 1, 2018 and it did not have a material impact on the financial statements upon adoption.
NOTE 4: PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Prepaid insurance
|
|
$
|
148,284
|
|
|
$
|
125,056
|
|
Retainer and security deposits
|
|
|
16,718
|
|
|
|
14,218
|
|
Professional services
|
|
|
110,094
|
|
|
|
97,788
|
|
Prepaid research and development
|
|
|
115,014
|
|
|
|
|
|
Financial exchange fees
|
|
|
27,500
|
|
|
|
|
|
Other
|
|
|
22,779
|
|
|
|
13,882
|
|
Total prepaid expenses
|
|
$
|
440,389
|
|
|
$
|
250,944
|
|
NOTE 5: RESEARCH AND DEVELOPMENT TAX REBATE RECEIVABLE
On May 23, 2017 Atossa formed a wholly-owned
subsidiary in Australia called Atossa Genetics AUS Pty Ltd. The purpose of this subsidiary is to perform research and development
activities (“R&D”) including our Phase 1 and Phase 2 endoxifen clinical trials. Australia offers an R&D cash
rebate of $0.435 per dollar spent on qualified R&D activities incurred in the country. For the six months ended June 30, 2018,
the Company incurred qualified R&D expenses of approximately $616,000, resulting in an increase to the R&D rebate receivable
of approximately $268,000 from the year ended December 31, 2017 balance, and a corresponding offset to R&D expenses in the
same amount. At June 30, 2018, we had a total R&D rebate receivable of approximately $626,000.
NOTE 6: PAYROLL LIABILITIES
Payroll liabilities consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Accrued bonus payable
|
|
$
|
662,512
|
|
|
$
|
566,000
|
|
Accrued vacation
|
|
|
167,174
|
|
|
|
147,861
|
|
Accrued payroll liabilities
|
|
|
122,971
|
|
|
|
71,006
|
|
Total payroll liabilities
|
|
$
|
952,657
|
|
|
$
|
784,867
|
|
NOTE 7: STOCKHOLDERS’ EQUITY
The Company is authorized to issue a total
of 185,000,000 shares of stock consisting of 175,000,000 shares of common stock, par value $0.18 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, 4,000 shares of Series A convertible preferred stock, par value $0.001 per share, and 25,000
shares of Series B convertible preferred stock through the filings of certificates of designation with the Delaware Secretary
of State. No shares of Series A junior participating preferred stock and no shares of Series A convertible preferred stock are
issued and outstanding as of June 30, 2018.
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.
2018 Subscription Rights Offering of
Units Consisting of Series B Convertible Preferred Stock and Warrants
On May 9, 2018, the Company’s Registration
Statement on Form S-1 with the Securities and Exchange Commission was declared effective to offer subscription rights to purchase
up to 25,000 units at $1,000 per unit with each unit consisting of one share of Series B convertible preferred stock and warrants
to purchase 284 shares of common stock.
On May 29, 2018, the Company filed a Certificate
of Designation of Preferences, Rights and Limitations of Series B convertible preferred stock with the Delaware Secretary of State
creating a new series of its authorized preferred stock, par value $0.001 per share, designated as the Series B convertible preferred
stock. The number of shares initially constituting the Series B preferred stock was set at 25,000 shares.
On May 30, 2018, the Company completed
its previously announced rights offering pursuant to which the Company sold an aggregate of 13,624 units consisting of an aggregate
of 13,624 shares of Series B convertible preferred stock and 3,869,216 warrants, with each warrant exercisable for one share of
common stock at an exercise price of $4.048 per share (the “2018 Warrants”), resulting in net proceeds to the Company
of approximately $12.3 million, after deducting expenses relating to the rights offering, including dealer-manager fees and expenses,
and excluding any proceeds received upon exercise of any warrants.
Series B Convertible Preferred Stock
.
The terms and provisions of our Series
B convertible preferred stock are:
Conversion.
Each share of Series
B convertible preferred stock is convertible at our option at any time on or after the first anniversary of the closing of the
rights offering or at the option of the holder at any time, into the number of shares of our common stock determined by dividing
the $1,000 stated value per share of the Series B convertible preferred stock by a conversion price of $3.52 per share. In addition,
the conversion price per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations or reclassifications.
Subject to limited exceptions, a holder of the Series B convertible preferred stock will not have the right to convert any portion
of the Series B convertible preferred stock to the extent that, after giving effect to the conversion, the holder, together with
its affiliates, would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately
after giving effect to its conversion.
Fundamental Transactions.
In the
event we effect certain mergers, consolidations, sales of substantially all of our assets, tender or exchange offers, reclassifications
or share exchanges in which our common stock is effectively converted into or exchanged for other securities, cash or property,
we consummate a business combination in which another person acquires 50% of the outstanding shares of our common stock, or any
person or group becomes the beneficial owner of 50% of the aggregate ordinary voting power represented by our issued and outstanding
common stock, then, upon any subsequent conversion of the Series B convertible preferred stock, the holders of the Series B convertible
preferred stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been
entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the
Series B convertible preferred stock.
Dividends.
Holders of Series B convertible
preferred stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends
actually paid on shares of the common stock when, as and if such dividends are paid on shares of common stock.
Voting Rights.
Except as otherwise
provided in the certificate of designation or as otherwise required by law, the Series B convertible preferred stock has no voting
rights.
Liquidation Preference
.
Upon
our liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series B convertible preferred stock
will be entitled to receive out of our assets, whether capital or surplus, the same amount that a holder of common stock would
receive if the Series B convertible preferred stock were fully converted (disregarding for such purpose any conversion limitations
under the certificate of designation) to common stock, which amounts shall be paid pari passu with all holders of common stock.
Redemption Rights.
We are not obligated
to redeem or repurchase any shares of Series B convertible preferred stock. Shares of Series B convertible preferred stock are
not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous provisions.
2018 Warrants
The terms and conditions of the warrants
included in the 2018 rights offering are as follows:
Exercisability
. Each warrant is
exercisable at any time and will expire four years from the date of is 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 payment in full for the number of shares
of our common stock purchased upon such exercise, except in the case of a cashless exercise as discussed below.
The number of shares of common stock issuable
upon exercise of the warrants is subject to adjustment in certain circumstances, including a stock split of, stock dividend on,
or a subdivision, combination or recapitalization of the common stock. Upon the merger, consolidation, sale of substantially all
of our assets, or other similar transaction, the holders of warrants shall, at the option of the company, be required to exercise
the warrants immediately prior to the closing of the transaction, or such warrants shall automatically expire. Upon such exercise,
the holders of warrants shall participate on the same basis as the holders of common stock in connection with the transaction.
Cashless Exercise
. If at any time
there is no effective registration statement registering, or the prospectus contained therein is not available for issuance of,
the shares issuable upon exercise of the warrant, the holder may exercise the warrant on a cashless basis. When exercised on a
cashless basis, a portion of the warrant is cancelled in payment of the purchase price payable in respect of the number of shares
of our common stock purchasable upon such exercise.
Exercise Price
. Each warrant represents
the right to purchase one share of common stock at an exercise price of $4.048 per share. In addition, the exercise price per
share is subject to adjustment for stock dividends, distributions, subdivisions, combinations, or reclassifications, and for certain
dilutive issuances. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of the
warrant to the extent that, after giving effect to the exercise, the holder, together with its affiliates, and any other person
acting as a group together with the holder or any of its affiliates, would beneficially own in excess of 4.99% of the number of
shares of our common stock outstanding immediately after giving effect to its exercise. The holder, upon notice to the Company,
may increase or decrease the beneficial ownership limitation provisions of the warrant, provided that in no event shall the limitation
exceed 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise of the warrant.
Transferability
. Subject to applicable
laws and restrictions, a holder may transfer a warrant upon surrender of the warrant to us with a completed and signed assignment
in the form attached to the warrant. The transferring holder will be responsible for any tax that liability that may arise as
a result of the transfer.
Exchange Listing
. We do not intend
to apply to list the warrants on any securities exchange or recognized trading system.
Rights as Stockholder
. Except as
set forth in the warrant, the holder of a warrant, solely in such holder’s capacity as a holder of a warrant, will not be
entitled to vote, to receive dividends, or to any of the other rights of our stockholders.
Redemption Rights
. We may redeem
the warrants for $0.18 per warrant if the volume-weighted-average-price of our common stock equals or exceeds $10.56 per share
for ten consecutive trading days, provided that we may not do so prior to the first anniversary of closing of the rights offering.
Accounting Treatment - Restated
The Company allocated the proceeds from the sale of the Series B convertible preferred stock and the warrants
to purchase common stock to the separate securities issued. The Company allocated the amount representing the fair value of the
warrants at the date of issuance to common stock based on the relative warrant fair value in the amount of $5,363,759, which is
net of issuance costs allocated to the warrants. Due to the allocation of a portion of the proceeds to the warrants, the convertible
preferred stock contained a beneficial conversion feature upon issuance, which was recorded in the amount of $4,782,100 based on
the relative fair value of the beneficial conversion feature. The discount on the convertible preferred stock was $11,479,308,
which consists of the beneficial conversion feature of $4,782,100, the allocation of a portion of the proceeds to the warrants
in the amount of $5,363,759, and the total issuance costs related to the financing of $1,333,449. The discount on the convertible
preferred stock of $11,479,308 was recorded as a deemed dividend upon issuance of the convertible preferred stock. The deemed dividend
is reflected as an addition to net loss in the condensed consolidated statements of operations to arrive at net loss applicable
to common shareholders. The Company has made an accounting policy election to record the deemed dividend related to discounts on
convertible instruments at the time of issuance of the convertible instruments.
Outstanding Warrants
As of June 30, 2018, warrants to purchase
4,760,270 shares of common stock were outstanding including:
|
|
Outstanding
Warrants to
Purchase
Shares
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
2014 public offering
|
|
|
6,483
|
|
|
|
$540.00
|
|
|
January 29, 2019
|
Placement agent fees for Company’s offerings
|
|
|
1,231
|
|
|
|
381.60 – 1,044.00
|
|
|
August - November, 2018
|
2017 Warrant A private placement
|
|
|
441,670
|
|
|
|
3.78
|
|
|
August 22, 2018
|
2017 Warrant B private placement
|
|
|
441,670
|
|
|
|
3.78
|
|
|
December 22, 2018
|
2018 Warrants
|
|
|
3,869,216
|
|
|
|
4.05
|
|
|
May 30, 2022
|
|
|
|
4,760,270
|
|
|
|
|
|
|
|
Conversion of Series B Convertible Preferred
Stock
During the three months ended June 30,
2018, certain holders of the Series B convertible preferred stock exercised their conversion option and converted an aggregate
of 7,822 shares of Series B convertible preferred stock into 2,222,147 shares of the Company's common stock based on the conversion
ratio of approximately 284 shares of common stock for each share of Series B convertible preferred stock.
NOTE 8: NET LOSS PER SHARE (RESTATED)
The Company accounts for and discloses
net income (loss) per common share in accordance with 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 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 they have been excluded from the calculation.
The following table summarizes the Company’s
calculation of net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018 (as restated)
|
|
|
2017
|
|
|
2018 (as restated)
|
|
|
2017
|
|
Net Loss Per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,142,577
|
)
|
|
$
|
(2,241,489
|
)
|
|
$
|
(6,016,959
|
)
|
|
$
|
(3,945,043
|
)
|
Deemed dividend attributable to preferred stock
|
|
|
(11,479,308
|
)
|
|
|
(2,568,132
|
)
|
|
|
(11,479,308
|
)
|
|
|
(2,568,132
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(15,621,885
|
)
|
|
$
|
(4,809,621
|
)
|
|
$
|
(17,496,267
|
)
|
|
$
|
(6,513,175
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,073,803
|
|
|
|
623,004
|
|
|
|
2,864,033
|
|
|
|
470,139
|
|
Basic and diluted net loss per share
|
|
$
|
(5.08
|
)
|
|
$
|
(7.72
|
)
|
|
$
|
(6.11
|
)
|
|
$
|
(13.85
|
)
|
The following table sets forth the number
of potential common shares excluded from the calculation of net loss per diluted share for the three and six months ended June
30, 2018 and 2017 because including them would be anti-dilutive:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Options to purchase common stock
|
|
|
200,954
|
|
|
|
93,464
|
|
|
|
187,391
|
|
|
|
62,841
|
|
Series A convertible preferred stock
|
|
|
|
|
|
|
182,030
|
|
|
|
|
|
|
|
91,518
|
|
Series B convertible preferred stock
|
|
|
900,367
|
|
|
|
|
|
|
|
452,671
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
2,275,808
|
|
|
|
511,650
|
|
|
|
1,599,074
|
|
|
|
273,905
|
|
Total
|
|
|
3,377,129
|
|
|
|
787,144
|
|
|
|
2,239,136
|
|
|
|
428,264
|
|
For the three and
six months ended June 30, 2018 and 2017, the average price of our common stock was less than the exercise price of the vested
stock options and exercisable warrants.
NOTE 9: 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, 2018 and December 31, 2017 due to the Company’s continuing operating losses.
NOTE 10: 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, 2018 and December 31, 2017, the
Company had $14,986,736 and $6,967,469 in excess of the FDIC insured limit, respectively.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has a commitment under an operating
lease to pay future minimum lease payments of $4,930, all of which is due in the year ending December 31, 2018.
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 March 23, 2018, the parties filed a
stipulation of settlement with the court to settle the matter for $3.5 million, completely funded by defendants’ insurers,
and on July 20, 2018 the Court approved the settlement.
We are subject to other legal proceedings
and claims that arise in the normal course of business. We believe these matters are either without merit or of a kind that should
not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows.
NOTE 12: STOCK BASED COMPENSATION
Stock Option and Incentive Plan
On September 28, 2010,
the Board of Directors approved the adoption of the 2010 Stock Option and Incentive Plan 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 stock-holder approval. An aggregate of 5,556 shares were
initially reserved for issuance in connection with awards granted under the 2010 Plan and on May 18, 2016, an additional 11,111
shares were reserved for issuance under the 2010 Plan. On May 9, 2017, the stockholders approved an additional 125,000 shares
for issuance under the 2010 Plan. On April 12, 2018, the stockholders approved an additional 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
|
|
|
|
2,502
|
|
2013
|
|
|
|
2,871
|
|
2014
|
|
|
|
4,128
|
|
2015
|
|
|
|
5,463
|
|
2016
|
|
|
|
18,368
|
|
2017
|
|
|
|
12,623
|
|
2018
|
|
|
|
106,076
|
|
Total additional shares
|
|
|
|
152,031
|
|
The Company granted 611,668 options to
purchase shares of common stock under the 2010 Plan during the six months ended June 30, 2018. No options were exercised during
the three or six months ended June 30, 2018. There are 3,118 shares available for grant under the 2010 Plan as of June 30, 2018.
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 $179,050 and $181,408 for the
three months ended June 30, 2018 and 2017, respectively and $394,189 and $336,116 for the six months ended June 30, 2018 and 2017,
respectively (excluding the liability options discussed below). The fair value of stock options granted for the six months ended
June 30, 2018 and 2017 was calculated using the Black-Scholes option-pricing model applying the following assumptions:
|
|
Period
ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.47% - 2.71%
|
|
|
|
1.86% - 2.04%
|
|
Expected term
|
|
|
5.24- 5.57 years
|
|
|
|
5.32- 6.36 years
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
- %
|
|
|
|
- %
|
|
Expected volatility
|
|
|
108.81% - 126.43%
|
|
|
|
112.86% - 114.19%
|
|
Options issued and outstanding as of June
30, 2018 under the 2010 Plan 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, 2018
|
|
|
172,510
|
|
|
$
|
49.27
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
611,668
|
|
|
|
2.39
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(338
|
)
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2018
|
|
|
783,840
|
|
|
|
12.70
|
|
|
|
9.67
|
|
|
$
|
|
|
Exercisable as of June 30, 2018
|
|
|
82,536
|
|
|
|
93.84
|
|
|
|
8.19
|
|
|
$
|
|
|
Vested and expected to vest
|
|
|
783,840
|
|
|
|
12.70
|
|
|
|
9.67
|
|
|
$
|
|
|
At June 30, 2018,
there were 701,304 unvested options outstanding and the related unrecognized total compensation cost associated with these options
was approximately $1,810,227. This expense is expected to be recognized over a weighted-average period of 1.71 years.
Option Grants Classified as Liabilities (“Liability
Grants”)
On June 27, 2018, the Company issued option
awards to Dr. Steven C. Quay, Chairman of the Board, President and Chief Executive Officer and Kyle Guse, Chief Financial Officer,
General Counsel and Secretary. The Company granted Dr. Quay 2,300,000 options and granted Mr. Guse 700,000 options, each exercisable
for an equivalent number of shares of Company common stock. The options were granted pursuant to an option award agreement and
were granted outside the Company’s 2010 Plan; however, they are subject to the terms and conditions of the 2010 Plan.
The Liability Grants are exercisable for
shares of common stock at an exercise price of $2.38 per share, which was the fair market value on the date of grant. The options
have an exercise period of ten years from their date of issuance. If at the time the options are exercised the Company cannot
deliver shares of common stock to the optionee including, for example, if there are insufficient shares available under the Plan
at the time of exercise, then in lieu of the optionee paying the exercise price and the Company issuing shares of stock, the option
may only be exercised on a cash “net basis” so that the Company will pay cash in an amount equal to the excess of
the fair market value of the common stock over the option exercise price. There currently are not sufficient shares available
under the Plan and the Company would be obligated to settle these options in cash if they were exercised. Because these options
contain provisions that could require the Company to settle the options in cash in an event outside the Company’s control,
they are accounted for as liabilities.
The Liability Grants are subject to vesting
requirements. Twenty-five percent of the options have vested as of the grant date, 50% of the options will vest quarterly over
two years, and the remaining 25% will vest upon achievement of certain milestones related to clinical trial progress.
Compensation costs associated with the
Liability Grants are initially recognized, based on the grant-date fair values of these options, over the requisite or vesting
period for time-based options or when it is probable the performance criteria will be achieved for options that vest based on
performance. Compensation cost is remeasured each period based on the market value of our underlying stock until award vesting
or settlement.
For the three and six months ended June
30, 2018, the Company recognized compensation expense related to these options of $1,557,163.
The fair value of liability options granted
for the six months ended June 30, 2018 was calculated using the Black-Scholes option-pricing model applying the following assumptions:
|
|
Six
months ended June 30,
|
|
|
|
2018
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.71%
|
|
Expected term
|
|
|
5.0 years
|
|
|
|
|
|
|
Dividend yield
|
|
|
- %
|
|
Expected volatility
|
|
|
125.0%
|
|