Scott Gordon - IR Steven Quay - Chairman, CEO and President Kyle Guse - CFO and General Counsel

Marc Steinberg - Dawson James Securities

Good afternoon and welcome to the Atossa Genetics' Third Quarter 2014 Earnings Conference Call. 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 Gordon, President of CorProminence. Please go ahead, sir.

Thank you, Laura, and thank you for joining today’s conference call to discuss Atossa Genetics’ corporate development and financial results for the third quarter ended September 30, 2014. With us today are Dr. Steven Quay, Chairman, CEO and President; and Mr. Kyle Guse, CFO and General Counsel. At 4:01 PM Eastern Time today, Atossa released financial results for the third quarter ended September 30, 2014. 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 the 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 filings with the SEC, including without limitations Form 10-K, 10-Q and 8-K. I will now turn the call over to Dr. Quay.

Thank you, Scott, and good afternoon. We are the breast health company. Our mission is to improve breast health to the development and commercialization of proprietary specimen collection devices, laboratory test and pharmaceutical treatments. Our laboratory tests are being developed and commercialized by our subsidiary the National Reference Lab for Breast Health or NRLBH. Before I provide an update on our products and services, kyle will summarize our third quarter financial results.

Thank you, Dr. Quay, and good afternoon everybody. Revenue for the three and nine months ended September 30, 2014, totaled $3,000 and $37,000 consisting of additional cash collected in excess of the amounts we previously accrued at the Medicare rates. Total revenue for the three and nine months ended September 30, 2013, were $77,000 and $585,000. Cost of revenue was $0 for the three and nine months ended September 30, 2014, compared to $26,000 and $315,000 in the same periods in 2013. For the three and nine months ended September 30, 2014, gross profit totaled $3,000 and $37,000, compared to $51,000 and $271,000 in the same period in 2013. Total operating expenses for the three months ended September 30, 2014, were $3.2 million consisting of G&A expenses of $2 million, R&D expenses of $923,000 and selling expenses of $282,000 representing a decrease of $304,000 or 9% from $3.6 million in the same period in 2013, which consisted of G&A expenses of $2.9 million, R&D of $321,000 and selling expenses of $373,000. Operating expenses for the nine months ended September 30, 2014, were $8.9 million, consisting of G&A expenses of $3.6 million, pardon me, $6.3 million, R&D expenses of $1.9 million and selling expenses of $744,000. Operating expenses increased $583,000 or 7% from $8.3 million for the same period in 2013 which consisted of $6.6 million in G&A expense, $731,000 in R&D expense and $965,000 in selling expenses. G&A expenses decreased primarily as a result of lower capital raising expenses, lower recall expenses, lower consulting fees, lower advertising and marketing fees and lower bad debt expenses, which were offset by higher regulatory fees, higher legal fees, higher salaries and director fees and higher employee benefits. Our selling expenses decreased primarily as a result of our reduced sales and marketing efforts after our voluntary recall in 2013. R&D increased primarily as a result of increased expenditures on the development of our new products and tests in the pipeline, including the NextCYTE Test and FullCYTE microcatheters. We expect our G&A and selling expenses will increase in the future periods as we hire additional administrative and manufacturing personnel to prepare for and execute on the launch of the ForeCYTE Breast Aspirator and FullCYTE Breast Aspirator, and our products and services under development, and as we incur additional costs associated with being a publicly traded company. We also expect our R&D expenses will continue to increase as we add additional full time employees and incur additional costs to continue the development of our products and services under development. We incurred a net loss of $8.8 million for the nine months ended September 30, 2014. Net cash used in operating activities was $7.8 million. Net cash used in investing activities was $288,000 and net cash provided by financing activities was $13 million. At September 30, 2014, we had cash and cash equivalents of $11.3 million versus $6.3 million at December 31, 2013. Recall in November 2013, that we entered into a stock purchase agreement with Aspire Capital Fund. Under the terms of the agreement, Aspire has committed to purchase up to an aggregate of $25 million of Atossa common stock and then in January 2014, we raised an additional $13 million net in a public offering. Additional detail about our third quarter financial results can be found in our 10-Q that we're filing today with the SEC. We've diligently managed our expenses and cash. In fact our cash and cash equivalents at September 30, 2014, are substantially higher than they were at the beginning of the year. We're in a good financial position to execute on our plans to launch the ForeCYTE Breast Aspirator in select European countries, launch the FullCYTE Breast Aspirator in the United States and start the development of our planned therapeutic programs by beginning one and more studies using our devices and tests as companions to pharmaceutical therapies and we expect our capital resources to be sufficient to fund our planned operations for the remainder of 2014 and through at least quarter of 2015. This concludes my comments and I’d like to turn the call back over to Dr. Quay.

Thank you, Kyle. I'll first talk about the businesses we are in and then I'll talk in more detail about our products and services, our business strategy and our near term milestones. Atossa Genetics is focused on breast health and more specifically developing and commercializing a suite of medical devices, laboratory tests and therapeutics, with the goal of improving breast health. As you know we own a clear certified laboratory called the National Reference Laboratory for Breast Health or NRLBH located here in Seattle, which is developing and providing the laboratory tests that we offer. Separate from our laboratory tests, we're also developing medical devices to collect specimens from the breast and we intend to develop pharmaceuticals to treat various breast health conditions, including the treatment of precancerous hyperplasia conditions. Ultimately, we plan for our devices and laboratory tests to be used as companion diagnostics to the pharmaceuticals that we intend to develop. So there are three distinct aspects to our business; medical devices, laboratory tests and pharmaceuticals, all targeted at breast health. I’d like to say a few words about each of these. The [receptor] [ph] laboratory test, the NRLBH has historically been focused on NAF cytology testing. In 2013, we were recognizing $600 on average per patient in insurance reimbursement for the NAF cytology testing performed in our laboratory. As you know, the laboratory in its state-of-the-art equipment and highly trained personal is a valuable tactical asset for Atossa, which is a critical part of our overall financial strategy. In this context, we are continuously evaluating new tests that could potentially be offered by the NRLBH, with the goal of complementing our other test under development and providing a positive financial contribution to our business. We've been seeing a strong demand for pharmacogenomic testing, which are genetic tests that help doctors determine drug tolerance and doses for particular patients based on the patient's genetic makeup. These tests address a serious medical and financial problem. Each year, more than two million U.S. patients have adverse drug reactions resulting in more than 100,000 deaths. In October, the NRLBH completed the development of this new test and began offering it to the NRLBH's sales and marketing partner BioVentive. We're very pleased with the initial progress we're making with this new test. In the first three weeks, the NRLBH has received and processed approximately 238 pharmacogenomics tests. For most of these tests, we've build about $1,700. We expect that our actual collections will be less than this build amount as is typical in our industry and at this point, we don't have enough history to predict what our actual collections will be, but it is fair to say that we believe this testing can make a meaningful contribution to our working capital requirements in a completely non-dilutive manner within the next six to nine months. In the third quarter, the FDA issued a draft guidance around the regulations of laboratory developed tests. We're currently reviewing the requirements for filing with the FDA the NextCYTE and ArgusCYTE test and what additional testing might be needed to meet any of these requirements. Both the NextCYTE and ArgusCYTE tests, which have not been commercialized yet, will be reviewed with respect to the need for FDA approvals or clearances before launching. As such, we're no longer providing guidance around the timing of the launch for these tests. Our medical devices include the ForeCYTE Breast Aspirator and FullCyte Breast Aspirator, both with the intended use of collecting nipple aspirate fluid from adult women. In October, we received the CE Mark for the FullCyte Breast Aspirator, which is a necessary step in launching this device in the European Union. As explained on our last call, we plan to launch the ForeCYTE Breast Aspirator in one or more select European countries in the first quarter of 2015. For the U.S. market, we're developing the FullCyte Breast Aspirator. We plan to also launch it in the United States in the first quarter of 2015. Of course because the FullCyte and ForeCYTE are two different devices, with different manufacturing and supply requirements for two different markets, our launch plans are more complex. As such the reasons we can't currently anticipate, we could experience delays in actually shipping these products. Our devices under development also include our patented microcatheters, which are intended for both a ductal lavage process to collect the specimen for diagnostic cytology and also for the delivery of pharmaceuticals into the breast ducts where cancer and precancerous conditions reside. Our current focus and priority is to develop the microcatheters to deliver pharmaceuticals, which will require additional testing and regulatory approvals as the pharmaceutical is identified and developed. We therefore plan to progress the microcatheters through our development pipeline, concurrently with the advancement of a pharmaceutical opportunity, which I'll discuss in a moment. [Bioreceptor] [ph] pharmaceutical development, we plan to develop our microcatheters to deliver pharmaceuticals for the treatment of ductal carcinoma in situ or DCIS. We intend to partner with another company to provide that pharmaceutical, which we hope to identify in and announce in the first quarter. Suffice it to say, we're not where I had wanted to be at this point with our potential partnership arrangement, but I am determined to get the right deal for Atossa, which will provide long-term strategic enterprise value and not sacrifice that objective by doing the quickest deal to meet an artificial timeline but which does not recognize the value we bring to the table with our devices and lab tests. At this point, when we sign the right deal, we will announce it promptly. We also plan to develop pharmaceuticals that can be delivered orally and topically. These will be developed to treat conditions that are detected by lab tests conducted on the specimens collected with our devices. For example, we intend to use our ForeCYTE Breast Aspirator to collect specimens of the nipple aspirate fluid or NAF. Test the NAF specimens in our laboratory, provide pharmaceutical treatment options for the breast health conditions detected by those tests and use our medical devices to monitor treatment response. We expect that these companion diagnostic systems will initially target growth of a breast disease and/or high risk women. Certain of our medical devices and planned pharmaceutical treatments are currently under development and we must receive additional regulatory clearance or approvals prior to marketing and commercialization. Finally, I would like to review some corporate developments. First, as I've indicated the NRLBH launched the pharmacogenomic testing in October with our partner -- with our sales and marketing partner BioVentive and over the past three weeks, have now processed about 238 specimens. We hired Scott Youmans as Senior Vice President of Operations, a seasoned medical device executive and engineer. We obtained a CE Mark for the ForeCYTE Breast Aspirator, which is a significant milestone in our plans to launch the device in key European markets. And finally, we received a complete dismissal with prejudice of the securities class action lawsuit filed against Atossa and certain officers and directors in October 2013 which the plaintiffs have now appealed to the U.S. Ninth Circuit Court. So with that, I would like to turn it back over the to operator please.

We will now begin the question-and-answer session. (Operator instructions) And our first question will come from Marc Steinberg of Dawson James Securities. Marc Steinberg - Dawson James Securities: Good afternoon. I just had actually two quick questions. The first one had to do with any kind of update or additional information that you can provide with regards to [Magellan] [ph] ThermoFisher Scientific with commercialization of either the ForeCYTE in Europe or the FullCYTE here in the U.S.?

Okay Marc, yes I thought two questions. Good afternoon. With respect to Magellan and ThermoFisher to key points, number one is those are U.S. partners and we do not currently believe we would use them for distribution purposes outside of the United States. And as has been the case for almost a year now, they remain our partners, they remain in the wings until we get clearance or ready to launch these products and we believe when we are ready with product in warehouses and ready to go, that we can re-approach them and establish a launch plan that will use their extensive distribution networks Magellan with respect to OB/GYN offices and ThermoFisher with respect to the hospital suites. Marc Steinberg - Dawson James Securities: And that would be anticipated Dr. Quay in the first quarter of 2015.

That is correct. Marc Steinberg - Dawson James Securities: Okay. Thank you. And just one last question, any kind of update with the inspection of the Seattle facility?

Yes, so a good question Marc, we appreciate that. we have continued to work with the FDA both in written communications and in face to face meetings to move the process along to clear our facility with respect to the observations made in the warning letter in February 2013. And we believe that in the next three to six months, we should be able to put a period at the end of the settings on that. We feel comfortable at this time saying that we think we've answered all of their questions and at this time, we don't have any outstanding issues with respect to the FDA and their inspection and observations at our facility. Marc Steinberg - Dawson James Securities: I see. Okay, well thank you. Thank you for the information.

Thanks Marc.

[Operator Instructions] And this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Quay for any closing remarks.

Well thank you very much for your attention here this afternoon and your questions. In closing, we're very optimistic about the future of Atossa. The traction we're seeing with our new pharmacogenomic test looks very promising. We hope it will have a positive financial contribution to our business. We now have our CE Mark for foresight and are driving towards a Q1 launch in select EU countries. We're also planning to launch the FullCYTE aspirator in the first quarter of 2015 and we've been making significant progress towards commercializing our products and services and expect to achieve several important milestones as we finish the year and into the first part of 2015. We appreciate your patience and your continued support.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.