NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: NATURE OF OPERATIONS
Atossa Genetics Inc. (the “Company”)
was incorporated on April 30, 2009 in the State of Delaware. The Company was formed to develop and market medical devices, laboratory
tests and therapeutics to address breast health conditions. The Company’s fiscal year ends on December 31.
In December 2011, the Company established the
National Reference Laboratory for Breast Health, Inc., or NRLBH, as a wholly-owned subsidiary. NRLBH was the Company’s CLIA-certified
laboratory which performed the Company’s nipple aspirate fluid, or NAF, cytology test on NAF specimens including those collected
with the Company’s Mammary Aspiration Specimen Cytology Test (MASCT) System. The current version of the MASCT System is called
the ForeCYTE Breast Aspirator. The NRLBH provides other test services, including pharmacogenomics tests. On December 16, 2015,
the Company sold approximately 81% of the capital stock of the NRLBH to the NRL Investment Group, LLC, with the Company retaining
a 19% ownership through preferred stock. The Company received $50,000 at the time of the sale and the right to receive, commencing
December 2016, monthly earn-out payments equal to 6% of gross revenue of NRLBH up to $10,000,000, and the right to sell its preferred
stock after four years for the greater of $4,000,000 or fair market value. The Company has elected to recognize any subsequent
gain from the earn-out payments as they are determined realizable.
As a result of the sale of the laboratory business,
the Company is now focusing on development of its pharmaceutical programs.
NOTE 2: GOING CONCERN
The Company’s consolidated financial statements
are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred
net losses and negative operating cash flows since inception. For the six months ended June 30, 2016, the Company recorded a net
loss of approximately $4.0 million and used approximately $4.7 million of cash in operating activities. As of June 30, 2016, the
Company had approximately $1.2 million in cash and cash equivalents and working capital of approximately $0.9 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
during 2016 and short-term borrowings from banks, stockholders or other related party(ies), if needed. However, management cannot
provide any assurance that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a
going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually
to secure other sources of financing and attain profitable operations.
NOTE 3: SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) and in accordance with U.S.
generally accepted accounting principles (“GAAP”). The accompanying consolidated financial statements include the financial
statements of Atossa Genetics Inc. and its formerly wholly-owned subsidiary, NRLBH. The Company sold a majority of its interest
in the NRLBH in December 2015 and all of its activities are reported as discontinued operations in the accompanying consolidated
financial statements. All significant intercompany account balances and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements:
In May 2014, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers: Topic 606
(“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under U.S.
GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in
an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five
step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within
the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each
separate performance obligation. ASU 2014-09 is effective for the Company in the first quarter of 2018 using either of two methods:
(i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within
ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application and providing certain additional disclosures as defined per ASU 2014-09. The Company is currently evaluating the impact
of its pending adoption of ASU 2014-09 on its consolidated financial statements.
In August 2014, FASB issued ASU 2014-15,
Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
This ASU requires the management to determine
whether substantial doubt exists regarding the entity’s going concern presumption, which generally refers to an entity’s
ability to meet its obligations as they become due. If substantial doubt exists but is not alleviated by management’s plan,
the footnotes must specifically state that “there is substantial doubt about the entity’s ability to continue as a
going concern within one year after the financial statements are issued.” In addition, if substantial doubt exists, regardless
of whether such doubt was alleviated, entities must disclose (a) principal conditions or events that raise substantial doubt about
the entity’s ability to continue as a going concern (before consideration of management’s plans, if any); (b) management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations;
and (c) management’s plans that are intended to mitigate the conditions or events that raise substantial doubt, or that did
alleviate substantial doubt, about the entity’s ability to continue as a going concern. If substantial doubt has not been
alleviated, these disclosures should become more extensive in subsequent reporting periods as additional information becomes available.
In the period that substantial doubt no longer exists (before or after considering management’s plans), management should
disclose how the principal conditions and events that originally gave rise to substantial doubt have been resolved. The ASU applies
prospectively to all entities for annual periods ending after December 15, 2016, and to annual and interim periods thereafter.
Early adoption is permitted. The Company has not yet adopted the provisions of ASU 2014-15.
In February 2016, FASB issued ASU No. 2016-02,
Lease Accounting Topic 842.
This ASU requires a lessee to recognize lease assets and liabilities on the balance sheet for
all arrangements with terms longer than 12 months, the new standard applies a right-of-use (ROU) model that requires a lessee to
record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset for
the lease term and a liability to make lease payments. The lease term is the non-cancellable period of the lease, and includes
both periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option, and periods
covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that termination option. For leases
with a lease term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset,
not to recognize an ROU asset or lease liability. A lessee making this accounting policy election would recognize lease expense
over the term of the lease, generally in a straight-line pattern. The Lessor accounting remains largely consistent with existing
U.S. GAAP. The new standard takes effect in 2019 for public business entities and 2020 for all other entities. We have not adopted
the provisions of ASU No. 2016-02. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial
statements.
In April 2016, the FASB issued ASU No. 2016-09,
Stock Compensation
Topic 718: Improvements to Employee Share-based Payment Accounting.
This ASU simplifies the accounting
for stock compensation on income tax accounting, classification of awards as either equity or liabilities, estimating forfeitures,
and cash flow presentation. Based on this ASU, an entity should recognize all excess tax benefits and tax deficiencies, including
tax benefits of dividends on share-based payment awards, as income tax expense or benefit in the income statement; they do not
need to include the effects of windfalls and shortfalls in the annual effective tax rate estimate from continuing operations used
for interim reporting purposes. As a result of including income tax effects from windfalls and shortfalls in income tax expense,
the calculation of both basic and diluted EPS will be affected. The ASU also provides an accounting policy election for awards
with service conditions to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP)
or account for forfeitures when they occur. The ASU increases the allowable statutory tax withholding threshold to qualify for
equity classification from the minimum statutory withholding requirements up to the maximum statutory tax rate in the applicable
jurisdiction(s). The ASU clarifies that cash paid to a taxing authority by an employer when directly withholding equivalent shares
for tax withholding purposes should be considered similar to a share repurchase, and thus classified as a financing activity. All
other employer withholding taxes on compensation transactions and other events that enter into the determination of net income
continue to be presented within operating activities. The new standard takes effect in 2017 for public business entities and 2018
for all other entities. The Company has not adopted the provisions of ASU No. 2016-09. The Company is currently evaluating the
impact of adopting ASU 2016-09 on its consolidated financial statements.
NOTE 4: PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Prepaid insurance
|
|
|
169,911
|
|
|
|
104,954
|
|
Retainer and security deposits
|
|
|
39,218
|
|
|
|
39,218
|
|
Other
|
|
|
-
|
|
|
|
49,121
|
|
Total prepaid expenses
|
|
$
|
209,129
|
|
|
$
|
193,293
|
|
NOTE 5: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Machinery and equipment
|
|
$
|
205,988
|
|
|
$
|
206,337
|
|
Leasehold improvements
|
|
|
84,539
|
|
|
|
79,518
|
|
Total furniture and equipment
|
|
|
290,527
|
|
|
|
285,855
|
|
Less: Accumulated depreciation
|
|
|
(176,292
|
)
|
|
|
(114,287
|
)
|
Total furniture and equipment, net
|
|
$
|
114,235
|
|
|
$
|
171,568
|
|
Depreciation expense for the three months ended June 30, 2016 and
2015 was $32,734 and $13,278, respectively, and $62,353 and $63,438, for the six months ended June 30, 2016 and 2015, respectively.
NOTE 6: INTANGIBLE ASSET
S
Intangible assets consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Patents
|
|
$
|
1,630,000
|
|
|
$
|
1,630,000
|
|
Capitalized license costs
|
|
|
-
|
|
|
|
200,000
|
|
Software
|
|
|
113,540
|
|
|
|
113,540
|
|
Intangible assets
|
|
|
1,743,540
|
|
|
|
1,943,540
|
|
Less: Accumulated amortization
|
|
|
(296,530
|
)
|
|
|
(242,975
|
)
|
Total intangible assets, net
|
|
$
|
1,447,010
|
|
|
$
|
1,700,565
|
|
Intangible assets amounted to $1,743,540 and
$1,943,540 as of June 30, 2016 and December 31, 2015, respectively, and consisted of patents, capitalized license costs and software
acquired. The amortization period for the purchased software is 3 years. Amortization expense related to software for the three
months ended June 30, 2016 and 2015 was $7,857 and $11,018, respectively and $15,713 and $22,829 for the six months ended June
30, 2016 and 2015, respectively.
Patents amounted to $1,630,000 as of June 30,
2016 and December 31, 2015, and mainly consisted of patents acquired from Acueity on September 30, 2012 in an asset purchase transaction.
Patent assets are amortized based on their determined useful life, and tested annually for impairment. The amortization period
was from 7 to 12 years. Amortization expense related to patents was $37,254 for the three months ended June 30, 2016 and 2015,
respectively and $74,508 for the six months ended June 30, 2016 and 2015, respectively.
Capitalized license costs consist of fees paid
to A5 Genetics KFT, Corporation, pursuant to which the Company received the world-wide (other than the European Union) exclusive
license to use the software in the NextCYTE test. As the Company shifted its focus to developing pharmaceutical products and discontinued
NextCYTE test development, the A5 agreement was terminated in February 2016 and the entire net assets of $163,333, including $36,666
in accumulated amortization was written off.
Future estimated amortization expenses as of
June 30, 2016 for the five succeeding years is as follows:
For the Year Ending December 31,
|
|
Amounts
|
|
2016 (includes the remainder of the year)
|
|
$
|
87,600
|
|
2017
|
|
|
169,576
|
|
2018
|
|
|
149,623
|
|
2019
|
|
|
149,015
|
|
2020
|
|
|
149,015
|
|
Thereafter
|
|
|
742,181
|
|
|
|
$
|
1,447,010
|
|
NOTE 7: PAYROLL LIABILITIES:
Payroll liabilities consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Accrued bonus payable
|
|
$
|
305,464
|
|
|
$
|
555,345
|
|
Accrued payroll liabilities
|
|
|
100,469
|
|
|
|
510,179
|
|
Accrued payroll tax liabilities
|
|
|
87,034
|
|
|
|
93,811
|
|
Total payroll liabilities
|
|
$
|
492,967
|
|
|
$
|
1,159,335
|
|
NOTE 8: DISCONTINUED OPERATIONS
On December 16, 2015, the Company entered into
a Stock Purchase Agreement (the “Purchase Agreement”) with the NRLBH and NRL Investment Group, LLC (the “NRL
Group”) pursuant to which the Company sold to the NRL Group all of its shares of common stock in the NRLBH as of that date.
Under the terms of the Purchase Agreement, the Company retained its ownership of the Preferred Stock of the NRLBH, which constitutes
approximately 19% of the outstanding capital stock of the NRLBH, and the Company will have the right to sell to the NRL Group on
or after the fourth anniversary of the Purchase Agreement at the greater of $4,000,000 or fair market value. The Company has the
right to receive earn-out payments from NRL Group starting in December 2016 up to a total of $10,000,000. The Earn-out Payments
are payable to the Company each calendar month commencing with December 2016 and are equal to 6% of NRLBH gross sales calculated
in accordance with U.S. Generally Accepted Accounting Principles. The operations of the NRLBH sold to the NRL Group were accounted
for as discontinued operations as the operations and cash flows of the discontinued business were eliminated from ongoing operations
of the Company and there would not be significant involvement in the NRLBH’s operations after the disposal transaction.
The results of the NRLBH were segregated from
continuing operations and reflected as discontinued operations for the 2015 periods on the Company’s Consolidated Statements
of Operations and cash flow for the three and six months ended June 30, 2015. The loss from discontinued operations related to
the operations of the NRLBH for the six months ended June 30, 2015 was as follows:
|
|
Three Months
Ended June 30,
2015
|
|
|
Six Months
Ended June 30,
2015
|
|
Revenue
|
|
$
|
2,694,183
|
|
|
$
|
4,565,320
|
|
Cost of revenue
|
|
|
(1,847,646
|
)
|
|
|
(3,053,957
|
)
|
Gross profit
|
|
|
846,537
|
|
|
|
1,511,363
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
388,739
|
|
|
|
589,747
|
|
Research and development expenses
|
|
|
136,984
|
|
|
|
368,408
|
|
General and administrative expenses
|
|
|
344,212
|
|
|
|
588,296
|
|
Other expenses, net
|
|
|
40
|
|
|
|
49,554
|
|
Net loss from discontinued operations
|
|
$
|
(23,438
|
)
|
|
$
|
(84,642
|
)
|
NOTE 9: STOCKHOLDERS’ EQUITY
The Company is authorized to issue a total of
85,000,000 shares of stock consisting of 75,000,000 shares of Common Stock, par value $0.001 per share, and 10,000,000 shares of
Preferred Stock, par value $0.001 per share. The Company has designated 750,000 shares of Series A Junior Participating Preferred
Stock, par value $0.001 per share through the filing of certificate of designation with the Delaware Secretary of State.
On May 19, 2014, the Company adopted a stockholder
rights agreement which provides that all stockholders of record on May 26, 2014 received a non-taxable distribution of one preferred
stock purchase right for each share of the Company’s common stock held by such stockholder. Each right is attached to and
trades with the associated share of common stock. The rights will become exercisable only if one of the following occurs: (1) a
person becomes an “Acquiring Person” by acquiring beneficial ownership of 15% or more of the Company’s common
stock (or, in the case of a person who beneficially owned 15% or more of the Company’s common stock on the date the stockholder
rights agreement was executed, by acquiring beneficial ownership of additional shares representing 2.0% of the Company’s
common stock then outstanding (excluding compensatory arrangements)), or (2) a person commences a tender offer that, if consummated,
would result in such person becoming an Acquiring Person. If a person becomes an Acquiring Person, each right will entitle the
holder, other than the Acquiring Person and certain related parties, to purchase a number of shares of the Company’s common
stock with a market value that equals twice the exercise price of the right. The initial exercise price of each right is $15.00,
so each holder (other than the Acquiring Person and certain related parties) exercising a right would be entitled to receive $30.00
worth of the Company’s common stock. If the Company is acquired in a merger or similar business combination transaction at
any time after a person has become an Acquiring Person, each holder of a right (other than the Acquiring Person and certain related
parties) will be entitled to purchase a similar amount of stock of the acquiring entity.
2015 and 2016 Issuances of Additional Shares
to Aspire Capital
During the first quarter of 2015, we sold a
total of 2,653,199 shares of common stock to Aspire Capital Fund, LLC (“Aspire Capital”) under the stock purchase agreement
dated November 8, 2013 with aggregate gross proceeds to us of $4,292,349. No shares remain available for sale to Aspire Capital
under the terms of the November 8, 2013 agreement with them.
On May 26, 2015, we entered into a new common
stock purchase agreement with Aspire Capital , which provided that, upon the terms and subject to the conditions and limitations
set forth therein, Aspire Capital was committed to purchase up to an aggregate of $25.0 million of shares of our common stock over
the 30-month term of the purchase agreement. Concurrently with entering into the purchase agreement, we also entered into a registration
rights agreement with Aspire Capital, in which we agreed to file one or more registration statements, as permissible and necessary
to register under the Securities Act of 1933, registering the sale of the shares of our common stock that have been and may be
issued to Aspire Capital under the purchase agreement.
On November 11, 2015, we terminated the May
26, 2015 agreement with Aspire Capital and entered into a new common stock purchase agreement. Concurrently with entering into
the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital in which we agreed to register
6,086,207 shares of our common stock.
During the first quarter of 2016, we sold a
total of 6,086,207 shares of Common Stock to Aspire Capital Fund LLC under the stock purchase agreement dated November 11, 2015
with aggregate gross proceeds to the Company of $2,153,583. As a result, no shares remain available for sale to Aspire under this
agreement.
On May 25, 2016, we terminated the November
11, 2015 stock purchase agreement with Aspire Capital and entered into a new common stock purchase agreement with Aspire Capital
which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed
to purchase up to an aggregate of $10.0 million of shares of our common stock over the 30-month term of the purchase agreement.
Concurrently with entering into the purchase agreement, we also entered into a registration rights agreement with Aspire Capital,
in which we agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act
of 1933, registering the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the purchase
agreement. As part of the stock purchase agreement we issued 746,046 common shares as a commitment fee. The value of the common
shares issued as a commitment fee of $198,523 have been reflected as an addition to common stock of $746 and $197,777 in additional
paid in capital which will be amortized over the life of the stock purchase agreement. As of the date of filing this Quarterly
Report with the SEC no shares of stock have been sold to Aspire Capital under the May 25, 2016 purchase agreement.
2015 Offering of Common Stock and Pre-Funded
Warrants
In June 2015, the Company entered into a Placement
Agent Agreement with Roth Capital Partners, LLC. and Dawson James Securities, Inc. (the “2015 Placement Agents”), pursuant
to which the Company issued and sold an aggregate of 1,454,003 shares of common stock at the purchase price of $1.15 per share
and pre-funded warrants to purchase 3,610,997 shares of common stock (the “Pre-Funded Warrants”) at a purchase price
of $1.14 per share for net proceeds of $5.2 million after deducting $577,790 of offering expenses (the “2015 Offering”).
Each Pre-Funded Warrant was exercisable for $0.01 per share and all of these warrants had been exercised as of December 31, 2015.
Outstanding Warrants
As of June 30, 2016, warrants to purchase 6,033,426
shares of common stock were outstanding including:
|
|
Outstanding
Warrants to
Purchase
Shares
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
2011 private placement
|
|
|
4,252,050
|
|
|
|
$
1.25 - 1.60
|
|
|
May 18, 2018
|
Acueity warrants
|
|
|
325,000
|
|
|
|
5.00
|
|
|
September 30, 2017
|
2014 public offering
|
|
|
1,166,849
|
|
|
|
3.00
|
|
|
January 29, 2019
|
Placement agent fees for Company’s offerings
|
|
|
242,027
|
|
|
|
2.12 – 12.43
|
|
|
March - November, 2018
|
Outside consulting
|
|
|
47,500
|
|
|
$
|
4.24
|
|
|
January 14, 2018
|
|
|
|
6,033,426
|
|
|
|
|
|
|
|
NOTE 10: NET LOSS PER SHARE (RESTATED)
The Company accounts for and discloses
net loss per common share in accordance with FASB ASC Topic 260,
Earnings Per Share
. Basic net loss per common share is
computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding.
Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average
number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential
dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants.
Because the inclusion of potential common shares would be anti-dilutive for all periods presented, diluted net loss per common
share is the same as basic net loss per common share.
Subsequent to issuance of the Company’s
quarterly report on Form 10-Q for the three and six months ended June 30, 2016, filed with the SEC on August 12, 2016, the Company
discovered an inadvertent error in the weighted average shares outstanding in the financial statements for the three and six months
ended June 30, 2016.
The Company has calculated and recognized adjustments
accordingly. The following table shows the effect of the restatement on the Company’s financial statements for the three
and six months ended June 30, 2016:
|
|
Three Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2016
|
|
|
|
As Previously
Reported
|
|
|
Restated
|
|
|
As Previously
Reported
|
|
|
Restated
|
|
Weighted average common shares outstanding used to compute income (loss) per share, basic and diluted
|
|
|
34,550,826
|
|
|
|
38,818,069
|
|
|
|
33,058,066
|
|
|
|
37,287,800
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
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, 2016 and 2015 because the effect of them would be anti-dilutive since the Company recorded net losses for both periods:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common stock
|
|
|
5,911,359
|
|
|
|
4,312,409
|
|
|
|
5,911,359
|
|
|
|
4,312,409
|
|
Warrants to purchase common stock
|
|
|
6,033,426
|
|
|
|
9,644,423
|
|
|
|
6,033,426
|
|
|
|
9,644,423
|
|
Total
|
|
|
11,944,785
|
|
|
|
13,956,832
|
|
|
|
11,944,785
|
|
|
|
13,956,832
|
|
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, 2016 and December 31, 2015 due to the Company’s continuing operating losses.
NOTE 12: CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject
the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2016 and December 31, 2015, the Company
had $940,866 and $3,465,895 in excess of the FDIC insured limit, respectively.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The future minimum lease payments due subsequent
to June 30, 2016 under all non-cancelable operating and capital leases for the next five years are as follows:
|
|
Operating
Leases
|
|
Year Ending December 31,
|
|
Amount
|
|
2016 (remainder of year)
|
|
$
|
111,667
|
|
2017
|
|
|
3,750
|
|
Total minimum lease payments
|
|
$
|
115,417
|
|
The total rent expense for the three months
ended June 30, 2016 and 2015 was $78,600 and $149,174, respectively. Rent expense was included in general and administrative expenses
for both years.
Purchase Commitments
Effective May 19, 2016 the Company entered into
a services agreement with KriSan Biotech Co. Ltd., a corporation organized under the laws of Taiwan, Republic of China (“KSB”).
The agreement directs KSB to research and develop for the Company processes for manufacturing endoxifen and to produce an initial
supply of endoxifen so that release and stability studies may be conducted. The Company has agreed to pay $136,000 to KSB when
certain benchmarks have been delivered by KSB under the services agreement.
Litigation and Contingencies
On October 10, 2013, a putative securities class
action complaint, captioned
Cook v. Atossa Genetics, Inc.
, et al., No. 2:13-cv-01836-RSM, was filed in the United States
District Court for the Western District of Washington against us, certain of the Company’s directors and officers and the
underwriters of the Company November 2012 initial public offering. The complaint alleges that all defendants violated Sections
11 and 12(a)(2), and that the Company and certain of its directors and officers violated Section 15, of the Securities Act by making
material false and misleading statements and omissions in the offering’s registration statement, and that we and certain
of our directors and officers violated Sections 10(b) and 20A of the Exchange Act and SEC Rule 10b-5 promulgated thereunder by
making false and misleading statements and omissions in the registration statement and in certain of our subsequent press releases
and SEC filings with respect to our NAF specimen collection process, our ForeCYTE Breast Health Test and our MASCT device. This
action seeks, on behalf of persons who purchased our common stock between November 8, 2012 and October 4, 2013, inclusive, damages
of an unspecific amount.
On February 14, 2014, the Court appointed plaintiffs
Miko Levi, Bandar Almosa and Gregory Harrison (collectively, the “Levi Group”) as lead plaintiffs, and approved their
selection of co-lead counsel and liaison counsel. The Court also amended the caption of the case to read In re Atossa Genetics,
Inc. Securities Litigation. No. 2:13-cv-01836-RSM. An amended complaint was filed on April 15, 2014. The Company and other
defendants filed motions to dismiss the amended complaint on May 30, 2014. The plaintiffs filed briefs in opposition to these motions
on July 11, 2014. The Company replied to the opposition brief on August 11, 2014. On October 6, 2014 the Court granted defendants’
motion dismissing all claims against Atossa and all other defendants. The Court’s order provided plaintiffs with a deadline
of October 26, 2014 to file a motion for leave to amend their complaint and the plaintiffs did not file such a motion by that date.
On October 30, 2014, the Court entered a final order of dismissal. On November 3, 2014, plaintiffs filed a notice of appeal with
the Court and have appealed the Court’s dismissal order to the U.S. Court of Appeals for the Ninth Circuit. On February 11,
2015, plaintiffs filed their opening appellate brief. Defendants’ filed their answering brief on April 13, 2015, and plaintiffs
filed their reply brief on May 18, 2015. A hearing for the appeal has not been set.
The Company believes this lawsuit is without
merit and plans to defend itself vigorously; however, failure by the Company to obtain a favorable resolution of the claims set
forth in the complaint could have a material adverse effect on the Company’s business, results of operations and financial
condition. Currently, the amount of such material adverse effect cannot be reasonably estimated, and no provision or liability
has been recorded for these claims as of June 30, 2016. The costs associated with defending and resolving the lawsuit and ultimate
outcome cannot be predicted. These matters are subject to inherent uncertainties and the actual cost, as well as the distraction
from the conduct of the Company’s business, will depend upon many unknown factors and management’s view of these may
change in the future.
On January 28, 2016, the Company filed a complaint
in the United States District Court for the District of Delaware captioned
Atossa Genetics Inc. v. Besins Healthcare Luxembourg
SARL
, Case No. 1:16-cv-00045-UNA. The complaint asserts claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, and for declaratory relief against Defendant Besins Healthcare Luxembourg SARL (“Besins”).
The complaint was served upon Besins on February 15, 2016. The Company’s claims arise from Besins’ breach of an Intellectual
Property License Agreement dated May 14, 2015 (the “License Agreement”), under which Besins licensed to the Company
the worldwide exclusive rights to develop and commercialize Afimoxifene Topical Gel, or AfTG, for the potential treatment and prevention
of hyperplasia of the breast. The complaint seeks compensatory damages, a declaration of the parties’ rights and obligations
under the License Agreement, and injunctive relief. On March 7, 2016, Besins filed its response to the Company’s complaint,
generally denying liability for the Company’s claims and asserting counterclaims for breach of contract, fraud, negligent
misrepresentation, and declaratory judgment. Besins seeks unspecified money damages and preliminary and permanent injunctive relief,
among other forms of relief, for its counterclaims. The Company filed its answer to Besins’ counterclaims on March 31, 2016,
in which the Company disputed Besins’ allegations and denied that Besins is entitled to relief on its counterclaims. On August
4, 2016, the parties entered into a settlement agreement which provides that the parties will dismiss this legal action and settle
all claims and counterclaims. Pursuant to the settlement agreement, Besins will assume, and Atossa shall have no further rights
to, 4-hydroxy tamoxifen and AfTG in return for a termination payment to Atossa in the total amount of $1,762,931. See NOTE 15 Subsequent
Event.
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 1,000,000 shares were initially reserved for issuance in connection
with awards granted under the 2010 Plan and on May 18, 2016, an additional 2,000,000 shares were reserved for issuance under the
2010 Plan.
The following table presents the automatic additions
to the 2010 Plan since inception pursuant to the “evergreen” terms of the 2010 Plan:
January 1,
|
|
Number of
shares
|
|
2012
|
|
|
450,275
|
|
2013
|
|
|
516,774
|
|
2014
|
|
|
742,973
|
|
2015
|
|
|
983,362
|
|
2016
|
|
|
3,306,290
|
|
Total additional shares
|
|
|
5,999,674
|
|
The Company granted 2,778,671 additional options
to purchase shares of common stock to employees and directors during the three and six months ended June 30, 2016. No options were
exercised during the three and six months ended June 30, 2016. There are 2,113,315 shares available for grant under the 2010
Plan as of June 30, 2016.
Compensation costs associated with the Company’s
stock options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting
period. Accordingly, the Company recognized stock based compensation expense of $200,187 and $205,112 for the three months ended
June 30, 2016 and 2015, respectively and $392,644 and $353,981 for the six months ended June 30, 2016 and 2015, respectively.
Options issued and outstanding as of June 30,
2016 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, 2016
|
|
|
3,613,944
|
|
|
$
|
2.40
|
|
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
2,778,671
|
|
|
|
0.26
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
(481,256
|
)
|
|
|
1.66
|
|
|
|
|
|
|
|
-
|
|
Outstanding as of June 30, 2016
|
|
|
5,911,359
|
|
|
|
1.45
|
|
|
|
8.78
|
|
|
$
|
47,237
|
|
Exercisable as of June 30, 2016
|
|
|
1,885,703
|
|
|
|
3.07
|
|
|
|
7.37
|
|
|
$
|
-
|
|
Vested and expected to vest
(1)
|
|
|
3,007,207
|
|
|
$
|
2.55
|
|
|
|
7.77
|
|
|
$
|
-
|
|
|
(1)
|
vested shares and unvested shares after a forfeiture rate is applied
|
At June 30, 2016, there were 4,025,656 unvested
options outstanding and the related unrecognized total compensation cost associated with these options was approximately $4.0 million.
This expense is expected to be recognized over a weighted-average period of 2.32 years.
NOTE 15: SUBSEQUENT EVENT
Atossa and Besins Healthcare Luxembourg SARL
(“Besins”) have agreed, pursuant to a Termination Agreement dated August 4, 2016, to terminate their Intellectual
Property License Agreement dated May 14, 2015 (the “License Agreement”), dismiss the legal action relating to the License
Agreement pending in the United States District Court for the District of Delaware captioned Atossa Genetics Inc. v. Besins
Healthcare Luxembourg SARL, Case No. 1:16-cv-00045-UNA (the “Litigation”), and settle all claims and counterclaims
asserted in the Litigation. Atossa and Besins have further agreed, pursuant to and as set forth in the Termination Agreement,
that Besins will assume, and Atossa shall have no further rights to, all clinical, regulatory, manufacturing, and all other development
and commercialization of 4-hydroxy tamoxifen and Afimoxifene Topical Gel (the “AfTG Program”). In consideration for
Atossa’s comprehensive relinquishment of all rights granted in the License Agreement, termination of the License Agreement,
cessation of all efforts to develop Afimoxifene Gel, delivery of all API manufactured to date, assignment of a Drug Master File,
delivery to Besins of the work product Atossa has completed to date, and other consideration, Besins will reimburse Atossa
for out-of-pocket expenses incurred by Atossa to pursue the AfTG Program and will make a termination payment in the total amount
of $1,762,931.
NOTE 16: RELATED PARTY TRANSACTIONS
Shu-Chih Chen, Ph.D., a member of the
Board of Directors and spouse of Steve C. Quay, Ph.D., M.D., has provided consultancy services to the Company. Those services
primarily include providing scientific and technical expertise in Atossa’s negotiations and ongoing arrangements with the
manufacturer of endoxifen which is located in Taiwan. The cost of the services provided by Dr. Chen are approximately $15,000
through June 30, 2016 and have been approved by Atossa’s audit committee.