Scott Gordon - President, CorProminence LLC Steven Quay - Chairman and Chief Executive Officer Kyle Guse - Chief Financial Officer

Good afternoon. And welcome to the Atossa Genetics Earnings Conference Call for the Third Quarter Ended September 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 that this event is being recorded. I would now like to turn the conference over to Mr. Scott Gordon, President of CorProminence. Please go ahead, sir.

Thank you, Kacia [ph]. And thank you all for joining today’s conference call to discuss Atossa Genetics’ corporate developments and financial results for the third quarter ended September 30, 2015. 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, Atossa released financial results for the quarter ended September 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 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 and good afternoon. Atossa is a healthcare company focused on the development of locally administered pharmaceuticals to treat breast health conditions and to prevent breast cancer. Our leading pharmaceutical product is Afimoxifene Gel, which is in Phase II clinical development. We are also developing intraductal delivery and pharmaceuticals for local delivery and to avoid systemic exposure. Our first program is Fulvestrant. Fulvestrant is commercially available in the U.S. as a monthly intramuscular injection. We’ve also developed proprietary lab test and medical devices. Before I provide an update, Kyle will summarize our third quarter ended September 30, 2015 financial results.

Thank you, Steve. Good afternoon, everyone. Total revenues for the three months and nine months ended September 30, 2015 were $772,000 and $5.3 million respectively, consisting of pharmacogenomics testing, compared to virtually no revenue in the same periods in 2014. We saw a decrease in revenue from Q2 to Q3 2015 caused directly and indirectly by changes in Medicare rates that we cautioned investors about in May. The Medicare change has reduced the number of tests we performed, reduced the amount we received from Medicare and we believe has caused some private carriers to also reduce and/or decline coverage for our PGX test. Gross profit for the three months and nine months ended September 30, 2015 $459,000 and $2.2 million respectively which is attributable to the pharmacogenomics testing compared to virtually no gross margin in 2014 Total operating expenses for the three months ended September 30, 2015 were $4.8 million representing an increase of $1.6 million or 49% from $3.2 million in the same period in 2014. Operating expenses for the nine months ended September 30, 2015 were $12.8 million. Operating expenses increased $3.9 million or 44% from $8.9 million for the same period in 2014. Finally, our cash and cash equivalents as of September 30, 2015 were approximately $7.8 million. That concludes my comments. I’d like to turn the call back over to Steve.

Thank you, Kyle. I want to spend the majority of the call today providing you with details on the progress we’ve made with our therapeutic program and developing pharmaceuticals to treat breast health conditions and to prevent breast cancer. This is where we are now focusing our financial and human resources and will continue to do so for the foreseeable future. Before I do that, let me briefly update you on our laboratory business and medical devices. The laboratory services business has opportunities to grow. Based on September 30, 2015 year-to-date results, the lab is near breakeven for its direct cost and doesn’t require much additional equity capital. Because of this, we are looking at leveraging the equipment, lab and sales personnel to grow the business by expanding the PGX test portfolio and we’re evaluating potential new offerings. This is the direction of the lab business as we end the year and look into 2016. During the third quarter, the lab received the coveted ISO 15189:2012 Certification, making it we believe one of less than 10 labs in the entire U.S. who is certified, approximately 23,000 labs in the U.S. The lab, also become the first commercial web in the country to offer the enhanced PGX testing based on Luminex xTAG Platform. Both of these achievements help us stand out with doctors and patients. The reimbursement picture for PGX test however is quite surreal, not just for Atossa but for all labs in the business, and which makes revenue forecasting challenging. In Q3, revenue was especially impacted by Medicare and Blue Cross Blue Shield reimbursement changes. Here is why I call it surreal. For the year-to-date period ending September 30, 2015, we performed 8,580 PGX tests. This is within 5% of our internal forecast we had at the beginning of the year and it’s a tribute to the great sales reps we have calling on doctors and the great service the lab provides in its reporting function. The billing for those 8,580 tests year-to-date is a little over $14 million. This is incredible progress for a test that was introduced barely a year ago. Now, in the real world, processing more than 8,500 tests and billing $14 million in its first year would be a time for celebration, applause to say job well done. But in the PGX world, the cutting-edge labs that do this test tend to be small and run by doctors and scientists, and they are no match for the big insurance companies with their own profit motives that make it difficult for us to collect the money they owe us with delays and denials that take months of work to adjudicate. So, what happens is we bill for the test during the quarter and then accrue revenue based on historic payment history and expected payments from each insurance company. But in many instances, actual reimbursements particularly for non-Medicare payers are directly impacted and would vary based on particular patient plans and particular patient eligibility. And as we’ve recently seen, based on changes in Medicare reimbursement policies. As a result, each payer might have different payment rates and trends and unexpected denials that fluctuate from quarter to quarter. We continuously evaluate the reasonableness of our accrual estimates and adjust our accrual rates as more information becomes known about each payer. And we will of course continue to have our reimbursement team working hard to try to receive as much as of that $14 million as they can. We were particularly impacted in Q3 by these reimbursement challenges and as a result, we are reporting about $800,000 in revenue from our test for the quarter and about $5.3 million year-to-date. Because of the uncertainties created by the change in Medicare reimbursement, as we explained back in May, and because of the direct and indirect impact that is having on our business, we’re withdrawing our 2015 revenue guidance. We simply don’t have enough clarity on how these issues will impact the last quarter of the year. With respect to the breast aspirators, the FullCYTE and ForeCYTE medical devices, we are preparing to generate additional clinical data in academic centers in Europe. This is being collected without substantial burden on Atossa Resources of cash and people. With respect to achievements during the quarter, we announced that we received Institutional Review Board approval to begin a clinical trial in Israel using our ForeCYTE device to example Cytology and Biomarkers in BRACA patients. As a reminder, the actress Angelina Jolie is a BRACA mutation carrier and elected to have bilateral mastectomies without the diagnoses of cancer. Our colleagues in Israel hope that ForeCYTE could provide a test to monitor pre-cancer changes so that radical surgical procedures like these could be delayed or avoided altogether. We are also evaluating an opportunity to conduct a study in the Netherlands aimed at identifying biomarkers. And today we are announcing that we have filed an application with the American Medical Association for a CPT code for NAF collection in doctors’ offices. This is a critical step in helping to acquire third party reimbursement for the collection procedure. This addresses an important element in generating test procedures. We are currently relying on only Henry Schein and Thermo Fisher to sell our ForeCYTE device in the U.S. And at this time are not allocating internal sales and marketing resources to promote FullCYTE as we believe our limited internal marketing resources should be focused on driving revenue for our PGX business. I’d now like to turn to our pharmaceutical programs. We have made substantial progress on two pharmaceutical programs each with multi-billion dollar opportunities. Atossa has two programs, a topical gel the patient applies themselves daily and a drug a surgeon administers through our intraductal catheters that we believe address the most significant unmet problems in the breast cancer space. I’ll spend the rest of our time talking about these. As a reminder, we are in Phase II development with our Afimoxifene Gel program which is a patented topical gel formulation of the active ingredient in tamoxifen, a well-known and FDA approved drug. Atossa Genetics is announcing today that the National Cancer Institute, Division of Cancer Prevention has approved a letters’ intent submitted by a member of the Consortia for Cancer Prevention Clinical Trials Program, for the study of Afimoxifene Gel in women with DCIS. The Consortia includes five major medical research centers, the University of Arizona, Northwestern University, the Mayo Clinic Foundation and the Anderson Cancer Center in the University of Wisconsin. The next step is for the academic investigator to develop a clinical protocol. If this program is ultimately approved, the majority of the cost of the clinical trial is expected to be paid for by the National Cancer Institute. This program could provide major clinical validation of Afimoxifene Gel by the NCI and leading breast cancer academic investigators and obviously having the NCI pay for this study would be less costly than if we were to pay for this study ourselves. I would now like to review additional activities in our pharmaceutical program. This September, we held an advisory meeting in San Francisco with key opinion leaders who are attending the ASCO Breast Cancer Symposium, to get advice on the Afimoxifene Gel program. They met for about four hours, discussed the data we have from many of the clinical studies already conducted and made recommendations to Atossa. This is a summary of their recommendations given publicly here for the first time today. They were uniformly excited because they believe Afimoxifene Gel could play a very important role in breast cancer screening and treatment. And because it deals on the knowledge of oral tamoxifen, the gold standard for the treatment of breast cancer and the pioneering medicine for prevention of breast cancer in high-risk women. The opinion leaders were very concerned about the 20 million women with high-breast density and what to do for them. A popular press has also shown a light on another significant issue and that is the over-treatment of women with lesions that will never become cancer. These two different patient populations have something very important in common. Our current treatment for both situations involves too many expensive tests that are greater than 90% negative because needless anxiety and a broken healthcare budget and the use of the oral drug tamoxifen which works well but failed to provide a solution because of the fear and the reality that women simply won’t take it because of adverse effects and tolerance issues. Let’s start with breast density. Data indicates there are 20 million women, about half of those between 35 and 50 years of age who have dense breasts on mammograms. The current guideline recommendations for breast density are to get more expensive tests like Ultrasound and MRI. Many women are also encouraged to take oral tamoxifen, which is so unpleasant that only about 1% of the women are eligible will actually take it. The identification of a woman with dense breast happens at a rate of 40 women per second. Women having to hear from their doctors they have dense breast, which makes signing cancer really hard and which is itself an increased risk for breast cancer. And the only treatment oral tamoxifen causes strokes, cataracts, blood clots in the legs and lungs and cancer of the uterus. It is no wonder the medical profession and insurance companies don’t want the laws that require women to be told they have dense breasts. Facing 2,400 angry women every minute somewhere in America and telling them the best we can do is hopefully an adequate is not something anyone who wants to get up in the morning and do all day. And the imaging recommendations alone could break many insurance company budgets. An annual MRI or 3D Ultrasound for 40 women every second is a big number and a huge expense. Tamoxifen is the only drug that has been shown to reduce breast density, yet as noted earlier, has some potentially significant side-effects. Afimoxifene Gel is an active metabolite of tamoxifen, and is implied to the skin rather than administered via a daily oral tablet. Afimoxifene Gel may provide an alternative to tamoxifen. And now to the over-treatment of lesions that may never become cancer. Ductal Carcinoma in Situ or DCIS is a condition diagnosed every 10 minutes in the U.S. We currently treat like cancer with a program of cut burn and poison when we don’t necessarily need to do so. As not every DCIS case will progress to more invasive cancer. As highlighted by the New York Times, by a New York Times article in August, leading researchers like Laura Esserman from UCSF are doing what is called active surveillance with some women with low-risk DCIS where surgery, radiation and chemotherapy are not utilized. And it sounds wonderful. Currently every woman with DCIS with a DCS diagnoses have important options to consider, surgery versus active surveillance. But one issue with active surveillance which is similar to the issue we see with the treatment of high breast density is that it can lead to additional expensive tests, more worry every six months waiting for the test results and that old standby oral tamoxifen with its known adverse side-effects. So, we are concerned that active surveillance of DCIS won’t get widespread adoption because patients are left waiting and worrying perhaps with a daily dose of oral tamoxifen thrown in for good measure. So, to say that the treatment of breast density and DCIS is a critical unmet medical need is an understatement. The Advisory Panel is made up of doctors, who see patients every day and their energy around these problems was palpable. But the flipside of this huge unmet medical need is the potential for a tremendous medical advancement, fixing the cumulative financial and human cost of the current breast cancer screening paradigm and the associated programs in pre-cancer could save tens of billions of dollars of waste in the lives of literally hundreds of thousands of women. I say all of this in the context of the good side of oral tamoxifen. Because with all it’s worth oral tamoxifen is really good at preventing breast cancer, here is the data. Studies were done with oral tamoxifen in the four populations of women we are considering for our topical gel, high-risk women is determined by family history etcetera, women with high breast density and women with a biopsy showing either atypical hyperplasia or DCIS. Excuse me a second. These are massive studies and were conducted and paid for by organizations like the National Cancer Institute or the Cancer Research U.K. They involve thousands of women in multiple countries for five or more years and the results are stunning. The efficacy of oral tamoxifen in preventing cancer in these populations varies from a low of about 50% to a high of almost 85%, that and itself would be incredible. But for the next analysis which is almost hard to believe. When you examine the cancers that did occur in the patients in these studies, they had a common theme, none of them were estrogen receptor positive. So, in reality, the most common kind of breast cancer estrogen positive is almost entirely prevented by oral tamoxifen. Again, not cured but prevented in the first place never to occur. These studies show that one drug prevents the most common breast cancer almost completely. Put that in context, that’s the most effective preventive program in all of cancer by a long-shot. If oral tamoxifen did not have systemic side-effects, the world would be half over and over 100,000 women would never get breast cancer. So this is what gets us up every day. This is what we think about every day at Atossa. Changing the current paradigm for so many millions of women, preventing estrogen positive breast cancer and this is why we are so excited about our Afimoxifene Gel program. Because it is designed to solve the treatment problems for these situations and the prior studies give us confidence it would work using the gel formulation. It has the same active ingredient as oral tamoxifen but when applied to the breast, we hope our studies will show that it doesn’t get into the bloodstream and cause strokes, cataracts, blood clots to the legs and lungs and cancer of the uterus. As a reminder of the principle here, it is intended to be applied to the breast like a lotion in the morning say after a shower as the women is dressing. It soaks into the breast and the estrogen receptors in the breast tissue which are its targets soak it up like a dry sponge. So very little gets into the bloodstream, meaning there should be significantly reduced toxicity compared to oral tamoxifen. Interestingly the most common form of male breast cancer is also estrogen receptor positive so there is potential promise for this currently underserved breast cancer population. And in a previous done by the National Cancer Institute in academic settings in women with DCIS oral tamoxifen or Afimoxifene Gel was given to women for a month. And the amount of drug was measured in the breast where it is needed and in the blood where it causes toxicity. The results were stunning. There were similar amounts of active drug in the breast of both groups but less than 5% of the drug in the blood with our gel compared to the oral tamoxifen. The blood-markers of stroke, blood clots and uterine cancer were increased by oral tamoxifen but not by our gel. And the biomarker in the breast of blocking estrogen activity called KI67 showed similar blockage of cell-growth with both drugs. To prepare for the 2016 clinical trial schedule for Afimoxifene Gel, we announced that we had engaged AAIPharma/Cambridge Major Laboratories to manufacture Afimoxifene. They are an experienced pharmaceutical manufacturer with a good FDA track-record. And we are confident will produce the CGMP quantities in a timely manner to support our study needs. Beyond the end of the quarter, we hired Janet Rea as VP for Pharma Regulatory Development. The next step is to get FDA feedback on these potential clinical programs. This will occur in the first quarter of 2016 with a goal of enrolling a first patient in trial in mid-2016. We’ll keep you informed of our progress. Now, to the intraductal Fulvestrant and DCIS program. To understand our second clinical program you must understand the current uses and market for this FDA approved intramuscularly injected drug and how it will compare to our intraductally administered product. As administration takes than 30 minutes and uses local anesthetic and is thus painless. Fulvestrant is an oil solution and is given as a monthly injection of two big shots, typically given in the buttocks. In 2012, a published study documented at the singe-dose cost of intramuscular Fulvestrant is approximately $12,000 which is over $140,000 per patient per year. So, the first potential market for intraductal therapy is to take advantage of the huge difference in the amount of drug that gets into the tissue when it’s administered in the buttocks versus intraductal route. One analysis suggests that the drug levels in tissue might be over 20,000 times higher with a direct route. This provides a potential to test a one-and-done intraductal therapy modality instead of the monthly injections and to figure out how to get better tissue levels that are possible with the intramuscular administration. And it saves the healthcare system a lot of money at the same time. Even if it turned out the intraductal administration had to be every six months, there is a huge potential to obtain efficacy with much lower cost. As a reminder, we have an issued patent for the intraductal use of Fulvestrant as well as many other pharmaceuticals. The second potential is in what is called the Neoadjuvant setting, meaning that the drug would be delivered before the primary treatment of surgery. Huge drug concentrations at the sight of the tumor and lack of systemic exposure and subsequent toxicity could represent real treatment advances. The current Neoadjuvant schedules can run for three months before surgery and the ability to shorten that time by even one or two months has immense value for the patient in the healthcare system. With respect to the regulatory path forward, we will be developing the clinical path and indications we intend to follow over the next three months. And then, we’ll request an FDA meeting during Q1 just like we’ve done with our gel program. We do not yet have FDA’s thoughts but our preliminary analysis again subject to FDA feedback, is that this program could qualify for designation under what is the called the 505(b)(2) status. This would allow us to file with clinical data only and without having to perform additional significant clinical or preclinical studies. So the path to market is both faster and less expensive than a standard NDA program. To support this development program, we have successfully completed the clinical build of Microcatheters for the clinical trial program. We also announced that the FDA reviewed and issued a safe-to-proceed letter for our first Investigational New Drug application or IND for this study to begin. Every IND is a major accomplishment for any company but the first IND is always special. I now know I have the people in-house who can work with the FDA and get the right outcome. This will be a critical resource in 2016. Finally, we announced that the Columbia University Medical Center Breast Cancer Program will be conducting our first clinical study in Intraductal Fulvestrant and we hope to enroll the first patient in the next 60 days or so. Besides the operations at Atossa and keeping our programs on top, management spends significant time with potential new and existing investors. This last quarter, Kyle and I attended Investor conferences and non-deal road shows throughout the U.S. During these one-on-ones and presentation, we’ve been providing more details about the pharma business and the potential we have there. These investors include some pretty sophisticated investors, folks of MD degrees from the world’s leading medical centers and these folks really get it. They tell us uniformly that the pharma assets we have are significant and as we kick-off clinical development steps, the value increases quickly. Speaking of development steps, I want to identify upcoming milestones that you can watch for. One, the IRB approval of Fulvestrant intraductal study conducted by Columbia. That first patient enrolled in that study, IND acceptance by the FDA for our initial Afimoxifene Gel Study, the first patient enrolled in that study. By keeping these milestones, we’ll create incredible value for the company and its shareholders. This concludes our prepared remarks. I’d like to address a number of issues that folks might have questions about. Number one, are there other uses and other drugs you could give intraductally? We believe the answer is, yes. There is an entire program around breast cancer treatment which involves after lumpectomy, radiation therapy to basically sterilize the breast. We believe that intraductal treatment with chemotherapy agents like the studies we’re done at Johns Hopkins and in China provide the basis to imagine that we might be able to replace radiation therapy for breast cancer management. As you know there are around 240,000 breast cancers a year, the majority of them are handled with lumpectomy where the breast remains intact. All of those women are currently getting radiation therapy in spending about $4 billion on that. So we believe going head-to-head with radiation therapy is an attractive possibility for the future. Second question, getting paid by insurance companies for the PGX test, is challenging. Big picture, how do you change that? I think the answer there is pretty straight forward but difficult. You sit down with each insurance company, you negotiate a price and then you get what’s called the network. That is the process we began this year and we will continue to try to advance that because that changes the whole dynamic when you’re in network and they’ve agreed upon price, the pricing and the payments come more quickly. And finally, what is it that you’re thinking about Afimoxifene Gel in Europe and how would you see marketing this? We believe that this product has the same potential in Europe, in the indications I’ve mentioned as in the U.S. And in fact in some ways the Europeans are especially advanced in using drugs to prevent breast cancer and we believe that we’ll have a clinical path there at some point in the near future. In addition we believe that the marketing of this will require partnerships. And so we intend to look for a partner for our program and the marketing of it at an appropriate time. At this point, I’d like now to turn the call over to the operator for any additional questions.

[Operator Instructions]. The first question comes from David Null [ph] of Atossa. Please go ahead.

Hi, it’s David Null here, an investor in your product. When do you anticipate, I have few questions. When do you anticipate the Afimoxifene Gel IND application being submitted to the FDA?

Yes, so, great question. The process is two-step. In the first quarter we will meet with the FDA around the details of the clinical program. And as any Phase II trial, as you know, any Phase II trials can have a lot of nitty-gritty details and each one of them is important to get agreement with the FDA. And then, once that protocol is agreed upon and baked, then we would be submitting for the IND of that at that point in time.

Okay.

I’m sorry, before - this drug is already been studied in 16 clinical trials with existing IND. So we expect the FDA has seen this drug before in an IND format. So we don’t expect that to be a difficult or challenging situation.

Okay. And then, the other question is, recently we fell out of compliance with the NASDAQ listing with stock price for overall 10 consecutive base closing above the dollar. What is management doing to address that and how do they plan on maintaining the NASDAQ listing?

Yes, thanks David. I’m going to have Kyle address that if he would?

Yes, thanks for that good question. Our plan really is to execute on our business and to continue to put out good news at the appropriate time. We think the fundamental development of the business will enhance shareholder value and drive the stock price back up over $1. That’s really our strategy is to focus on the business and let the stock price take care of itself and catch up with the value of the business that we’re creating here. We do have until approximately the end of March to regain compliance and then typically companies get a 6-month extension. So we have quite a bit of time before we would need to address in a different fashion.

[Operator Instructions]. As there are no further questions at this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Dr. Quay for any closing remarks.

Well, thank you for your attention this afternoon and for your questions. I hope you also detected that management is palpably excited about these pharmaceutical programs. We think we have an incredible opportunity to change the paradigm in breast cancer and we just can’t wait to get to the next step here. So, thank you for your patience. Thank you for your attention. And that ends the call.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.