ATOS - NASDAQ

Scott Gordon - President, CorProminence LLC Steven Quay - Chairman and Chief Executive Officer Kyle Guse - Chief Financial Officer, General Counsel and Secretary Cindy Atha - Vice President, Sales and Marketing

Good afternoon. And welcome to the Atossa Genetics Earnings Conference Call for the Second Quarter Ended June 30, 2015. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Scott Jordon – I’m sorry, excuse me, Scott Gordon, President of CorProminence. Please go ahead, sir.

Thank you, Danielle. And thank you for joining today’s conference call to discuss Atossa Genetics corporate development and financial results for the second quarter ended June 30, 2015. With us today are Dr. Steven Quay, Chairman, CEO and President; Mr. Kyle Guse, CFO and General Counsel; and Ms. Cindy Atha, Vice President, Sales and Marketing. At 4:01 PM ET today, Atossa released financial results for the quarter ended June 30, 2015. If you have not received Atossa’s earnings release, please visit www.atossagenetics.com. Before we begin, I would like to note that comments made during this call may include forward-looking statements regarding future events or the future financial performance of the company. Such statements are predictions only and actual events or results could differ materially from those made in any forward-looking statements, due to a number of risks and uncertainties including assumptions about future events based on current expectations, plans, business development efforts, near- and long-term objectives, regulatory actions, potential new business strategies or organizational changes, changing markets, future business performance and outlook. Please see Atossa’s most recent filing with the SEC, including without limitations, Form 10-K, 10-Q and 8-K. I’ll now turn the call over to Dr. Quay.

Thank you and good afternoon. Atossa is a healthcare company focused on the development of locally administered pharmaceuticals to treat proliferative breast disease or hyperplasia. Our leading pharmaceutical underdevelopment is Afimoxifene Gel, which we licensed from Besins Healthcare and which is in Phase II clinical trials. We have also developed and are commercializing proprietary laboratory test and medical devices. Our laboratory procedures are being developed and commercialized by our subsidiary, The National Reference Laboratory for Breast Health, or the NRLBH. Before I provide an update on our products and services, Kyle will summarize our second quarter ended June 30, 2015 financial results.

Thank you, Steve. Good afternoon, everyone. Total revenues for the three months and six months ended June 30, 2015 were $2.7 million and $4.6 million respectively. Consisting of pharmacogenomics testing, compared to $10,000 and $34,000 of revenue in the same periods in 2014 which consisted of additional cash collections on NAF cytology test performed in 2013. In March 2015, we begin to launch of the FullCYTE Breast Aspirator in the U.S. and the ForeCYTE Breast Aspirator in the EU, focusing initially on the Netherlands, Germany, Switzerland and United Kingdom. However, we are in the early stages of commercializing these devices and have not yet generated revenue in 2015 from sales of these devices. Gross profit for the three months and six months ended June 30, 2015 totaled $839,000 and $1.5 million compared to $10,000 and $34,000 in the same period in 2014. Total cost of revenue for the three months and six months ended June 30, 2015 was $1.9 million and $3 million respectively consisting of costs relating to pharmacogenomics testing services. There was no cost of revenue during the same periods in 2014, as the only revenue generated during those periods was from additional cash collections on NAF cytology tests performed in 2013. Total operating expenses for the three months ended June 30, 2015 were $4 million consisting of G&A expenses of $2.8 million, R&D expenses of $510,000, and selling expenses of $732,000; representing an increase of $837,000 or 26% from $3.2 million in the same period in 2014, consisting of G&A expenses of $2.5 million, R&D expenses of $511,000 and selling expenses of $223,000. Operating expenses for the six months ended June 30, 2015 were $8 million consisting of G&A expenses of $5.4 million, R&D expenses of $1.3 million and selling expenses of $1.3 million. Operating expenses increased $2.4 million or 42% from $5.6 million for the same period in 2014 which consisted of $4.2 million in G&A expenses, $933,000 in R&D expenses and $461,000 in selling expenses. The increase in selling expenses is mainly due to increase in compensation expenses, travel, advertisement, and as a result of the ForeCYTE and FullCYTE launch and commercialization in Europe and the United States. We expect that our selling expenses will continue to increase during 2015. As we built the sales force in the United States and outside of United States to support the launch in commercialization of ForeCYTE and FullCYTE Breast Aspirators and our laboratory service offerings. Selling expenses may also increase as we market and sell the services offered by the NRLBH including NAF cytology tests, pharmacogenomics test and potentially other tests. G&A expenses consist primarily of personnel and related benefit costs, facilities, professional services, insurance and public company-related expenses. The increase in G&A expenses is due primarily to increase in compensation expense, professional fees and recruiting fees as we hired additional headcount to support the launch of our new products, as well as an increase in bad debt expenses as a result of the significant increase in revenue. We expect our G&A and selling expenses to continue to grow throughout 2015, as we hire additional administrative and manufacturing personnel to support the increased sales and operating activities as we commercialize the ForeCYTE Breast Aspirator and FullCYTE Breast Aspirator, pharmacogenomics testing and other products and services under development and as we incur additional costs associated with being a public company. The increase in R&D expenses is attributed to additional R&D expenditures on the launch and development of ForeCYTE and FullCYTE in the second quarter of 2015. We expect that our R&D expenditures will continue to grow as we develop our new products and tests in the pipeline, including Afimoxifene Gel, our NextCYTE test and other laboratory tests we may develop. We will add additional full-time employees and incur additional costs to continue the development of our products and services under development, including the development of Afimoxifene Gel and other potential pharmaceuticals, and conducting one or more clinical studies. Finally, we grew our cash resources in the second quarter ended June 30, 2015 with cash and cash equivalents of approximately $11.4 million. Our cash was grown through the significant growth in our pharmacogenomics tests and through a financing we completed in the second quarter with two institutional healthcare investors raising approximately $5.8 million in growth proceeds. This concludes my comments. I like to turn the call back over to Steve.

Thank you, Kyle. We began the year with the announcement of four goals for 2015 and I’m pleased to report the strong progress we have made through the second quarter. As a reminder, our four goals for 2015 are: number 1, launching and commercializing the FDA cleared FullCYTE Breast Aspirator in the United States; number 2, launching and commercializing the CE-marked ForeCYTE Breast Aspirator in the European Union; 3, achieving top-line combined gross revenue of $8 million for medical device sales and laboratory services; and finally, initiating pharmaceutical clinical trials in women for the treatment of precancerous proliferative breast diseases via local delivery of proprietary pharmaceuticals. We are pleased to have achieved a number of crucial milestones in the second quarter that represent significant progress in achieving our goals. I’ll now explain our continued progress. On May 18, 2015, we announced that we had acquired the worldwide rights to Afimoxifene Gel, a patented locally administered transdermal pharmaceutical that we intend to develop for the potential treatment of atypical ductal hyperplasia, a condition associated with breast cancer. This is the most significant event in the six-year history of Atossa Genetics and transforms us into a late-stage Phase II pharmaceutical company, when that today announced $2.7 million in top-line quarterly revenue for the second quarter. These results are most encouraging and represent our continued strong execution towards achieving our stated goals. This combination of currently generating revenue from our laboratory services and future potential value of drug development puts us in a very small and select class of NASDAQ public biotech and biomedical companies. Afimoxifene a tamoxifen analog is applied as a transdermal topical gel directly to the breast which gets through the skin into the breast tissue but it is not absorbed at high levels into the blood stream. Thus, avoiding the devastating side effects normally associated with the orally administered tamoxifen. As we announced yesterday, we have now secured a manufacturing source for the active pharmaceutical ingredient or API which is the Afimoxifene. This is a substantial and important step in the development process of this drug candidate. The next steps to continue the development of the Afimoxifene Gel are to file an IND with the FDA and meet with them to go over the entire development plan, and begin a Phase IIb clinical trial program. Besins had conducted 16 studies and held an End-of-Phase II trial meeting with the FDA, and we can take advantage of the outcome of that meeting in our own development process. We do not plan to conduct the clinical trials ourselves. Rather, we will engage a contract research organization or CRO for that aspect of the development. Also, we are evaluating the possibility of conducting the study, so that it includes patients with atypical hyperplasia that is diagnosed from core-needle biopsies, as well as our breast aspirators. This could be a very compelling opportunity, as there are more than 200,000 cases of atypia diagnosed annually in the U.S. from a core-needle biopsy. This strategy could also speed up the development of our drug, as it uses patients that are already being identified with atypical hyperplasia through the current practice of medicine. So, let me pause to reiterate. There is a large potential market opportunity using Afimoxifene Gel to treat atypia diagnosed through the current standard practice of medicine, which is based on the diagnosis of atypical hyperplasia found by core biopsy, as well as with our aspirators. We expect that our second pharmaceutical program will involve the use of a drug in combination with our patented microcatheters. Our plan is to use a pharmaceutical that has already been approved by the FDA for another right of administration [ph] and to administer it locally through our microcatheters. We hope to give you more details and begin a clinical study on this opportunity within six to nine months. Two of our objectives in 2015 are to launch our breast aspirators in the U.S. and the EU. ForeCYTE is now available in the EU and ForeCYTE is also available in the U.S. We have begun the process to commercialize these devices in their respective markets. Commercialization will take time and, therefore, we have not yet developed revenue from the sale of these devices. However, we are making steady progress introducing them into their respective markets. I’d like to have Cindy Atha, who joined us as our Vice President of Sales and Marketing in May of this year to provide some color on our commercialization strategy.

Thank you, Steve. In the first quarter, we announced the launch of the FullCYTE Breast Aspirator in the U.S. having engaged Thermo Fisher Scientific and Henry Schein Medical as our national distributors, which are two of the largest medical device distributors in the country. We also announced the launch of our ForeCYTE Breast Aspirator in the EU, focusing initially on markets within the Netherlands, Germany, Switzerland, and the United Kingdom. We are continuing our concerted efforts at engaging leading healthcare providers and key strategic markets to began implementing the device into their practices, by building awareness of NAF cytology in the medical and patient communities and both the U.S. and EU markets. Most importantly, we are advancing our efforts to further lay the foundation for the development of our companion care path, which is intended to improve breast health through a three-step process. Using our medical devices to collect NAF, studying the NAF at a laboratory and for patients who test positive for proliferative breast disease, treating patients with the pharmaceutical that we intend to develop, having physicians utilize our breast aspirators in key markets is a critical step towards developing this companion care path. In our last conference call, we discussed our efforts to further generate experience with our devices in the U.S. and the EU. In the U.S., we are pursuing adoption of the FullCYTE breast aspirator in, at least, three physician practices each in, at least, 80 metropolitan markets across the U.S., and in at least three hospital systems. We plan to accomplish this through collaborations with our national distributors and through our on-direct sales force and clinical support specialists. In the EU, we are working to engage early adopters of the ForeCYTE Breast Aspirator through direct sales efforts in key EU markets. We are also working to build physician and patient awareness and adoption by commencing three patient studies in leading breast centers. For example, we have engaged a CRO to conduct a study using the ForeCYTE device in Israel and are planning additional studies in the UK and the Netherlands. We are also pursuing additional new opportunities to aid in the commercialization and adoption of these devices. Let’s now turn to our third key 2015 objectives. As you may recall in October 2014, we launched a new lab test called pharmacogenomics testing, which is a genetic test that helps doctors determine drug tolerance and doses for particular patients, based on the patients’ genetic makeup. These tests address a serious medical and financial problem. Each year more than 2 million U.S. patients have adverse drug reactions, resulting in more than 100,000 deaths. By offering a pharmacogenomics test to guide pharmaceutical therapy, we are helping to move the concept of precision medicine into physician practices. We’re very pleased with the continued progress we are making with this new test, and are excited to report that with this test, we’ve recognized nearly $2.7 million in revenue in the second quarter of 2015, and over $4 million for the first-half of 2015. I'm very pleased to report that we recently announced expanding the pharmacogenetics test offered by Atossa Genetics’ subsidiary, the NRLBH, which now provides an enhanced pharmacogenetics test, based on the Luminex xTAG platform. The NRLBH is the first commercial laboratory in the world to develop and now offer the new pharmacogenetic test with expanded genetic targets, and we expect to continue to grow our revenues and cash flow from both our current and new enhanced testing capability. I'm very pleased to report that we also secured in-network contracts with Meridian Health Plan of Michigan and Washington Medicaid, which represents an important step in securing reimbursement for our pharmacogenomics testing. We are continuing our pursuit of such reimbursement with other third-party payers. We are highly encouraged by the continued growth we are experiencing in our PGX testing. Let me now turn the call back to Steve.

Thank you, Cindy. We have a strong business plan in place that we’re executing to drive our success. I’d like to highlight some other developments. We recently announced acquisition of a Ductal Lavage Specimen Bank from the Dr. Susan Love Research Foundation containing approximately 25,000 ductal lavage specimens collected from approximately 1,000 patients every six months from 2004 to 2007. The specimen bank includes ductal lavage specimens collected at 16 centers in the United States and one in the United Kingdom. It also includes blood and urine specimens for a total of approximately 40,000 samples. The specimen bank, as I have previously mentioned has tremendous potential value to Atossa as we may be able to assess if there is a correlation between the initial ductal lavage cytology findings or the presence of novel protein RNA or DNA biomarkers in the later development of breast cancer in these patients. Data that we generate should help inform the regulatory and clinical pathway for our FullCYTE ductal lavage device, which is currently under development. Another very significant development we announced in the second quarter was the issuance of a patent by the USPTO for breast cancer risk assessment. This is a major step forward for Atossa in creating stockholder value and securing our proprietary rights to develop devices and tests that might one day be used to predict the risk of developing breast cancer, based on the protein concentration and/or the number of cells present in the breast fluid sample. The patent provides protection for this invention into 2032. Our patent estate now includes – I just misspoke, it’s 2032. Our patent estate now includes 147 issued patents. In support of our efforts to commercialize our medical devices and laboratory services and develop pharmaceutical treatments for breast health conditions, we recently announced the addition of Dr. Gerald Engley, who has joined the company as Senior Director of Medical Affairs. Dr. Engley has over 20 years of pharmaceutical industry and managed care hospital pharmacy experience at leading companies including The Medicines Company and

At this time, we will begin the question-and-answer session. [Operator Instructions]

It appears that there are no questions. So I’d like to turn the conference back over to Dr. Quay for closing remarks.

Well, thank you for your attention this afternoon. In closing, we are especially pleased with our steady progress in achieving our 2015 milestones, and look forward to additional opportunities to update you on important activities. We’re convinced that we are establishing the strong foundation upon which our success will evolve. We realized the importance of our commitment to Atossa Genetics and we are dedicated to creating and preserving shareholder value in all that we do. We appreciate your patience, and thank you for your continued support.