Small-Cap Research. Atossa Genetics (ATOS-NASDAQ) ATOS: Zacks Company Report OUTLOOK

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1 Small-Cap Research June 8, 2016 Grant Zeng, CFA scr.zacks.com 10 S. Riverside Plaza, Chicago, IL Atossa Genetics (ATOS-NASDAQ) ATOS: Zacks Company Report ATOS: A pure play biopharma after sale of its diagnostics business, two Phase II clinical programs, and one new clinical program initiated. Current Price (06/03/16) $0.34 Valuation $2.50 OUTLOOK Atossa becomes a pure play biopharma company with a focus on breast care post the sale of its diagnostics business. The sale of its lab service subsidiary boosts the company s balance sheet, enhances its revenue potential. The company will focus its efforts and resources on the development of its therapeutic candidates. We continue to be optimistic about the prospect of the company. SUMMARY DATA 52-Week High $ Week Low $0.20 One-Year Return (%) Beta 1.25 Average Daily Volume (sh) 349,081 Shares Outstanding (mil) 39 Market Capitalization ($mil) $13 Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2012 Estimate P/E using 2013 Estimate Zacks Rank Risk Level Type of Stock Industry Zacks Rank in Industry ZACKS ESTIMATES Med Instruments Revenue (in millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 0.01 A 0.00 A 0.49 A 0.53 A A 2.69 A 0.77 A 0.19 A 5.52 A A 0.00 E 0.00 E 0.00 E 0.00 E E Earnings per Share (EPS is operating earnings before non recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.10 A -$0.13 A -$0.13 A -$0.15 A -$0.51 A $0.13 A -$0.11 A -$0.15 A -$0.15 A -$0.55 A $0.07 A -$0.07 E -$0.09 E -$0.10 E -$0.33 E $0.43 E Zacks Projected EPS Growth Rate - Next 5 Years % Copyright 2016, Zacks Investment Research. All Rights Reserved.

2 WHAT S NEW New Financial Commitment Secured There was no revenue recorded for the 1Q16 due to the sale of the NRLBH in December The NLRBH had total net revenue of $1.9 million and cost of revenue of $1.2 million for the three months ended March 31, 2015, consisting of mainly pharmacogenomics testing. G&A expenses were $2.2 million for 1Q16, compared to $3.2 million for 1Q15. R&D expenses were $0.2 million for 1Q16, compared to $0.8 million for 1Q15. Total operating expenses were $2.3 million for the three months ended March 31, 2016, compared to $3.3 million for the three months ended March 31, The decrease in operating expenses was mainly attributed to the 2015 launch of new devices and services which were not being pursued in 2016 and investing more in new R&D programs in the first quarter of 2015 compared to Net loss for 1Q16 was $2.3 million ($0.07 per share), as compared to net loss of $3.3 million ($0.13 per share) for 1Q15. As of March 31, 2016, Atossa had $3.1 million in cash which included $0.275 million in restricted cash. In late May 2016, Atossa entered into a $10 million stock purchase agreement with Aspire Capital Fund, LLC. Under terms of the agreement, Aspire has committed to purchase up to $10 million of Atossa's common stock over 30 months, based on prevailing market prices over a period preceding each sale. Key aspects of the agreement with Aspire Capital include: Atossa will control the timing and amount of any sales of common stock to Aspire Capital and will know the sales price before directing Aspire Capital to purchase shares; Aspire Capital has no right to require any sales by Atossa, but is obligated to make purchases as Atossa directs, in accordance with the terms of the purchase agreement; Aspire Capital has agreed to a long-only position; There are no limitations on use of proceeds, financial covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the purchase agreement; The purchase agreement may be terminated by Atossa at any time, at its discretion, without any additional cost or penalty; and Atossa has issued shares of its common stock to Aspire Capital as a commitment fee in connection with entering into the purchase agreement. Atossa will use the net proceeds from the sales of common stock for general corporate purposes and working capital requirements. Atossa also entered into a registration rights agreement with Aspire Capital in connection with its entry into the purchase agreement that requires the Company to file a registration statement regarding the shares sold to Aspire Capital. Atossa entered into a $25 million stock purchase agreement with Aspire Capital Fund in late May We see these terms are favorable for Atossa. With this new secured financing commitment, as well as the sale of its diagnostics business, we think Atossa is in a better position to focus on its growth plan and create long term shareholder value. Atossa Sells Diagnostics and Becomes a Pure Play Biopharma Zacks Investment Research Page 2 scr.zacks.com

3 The Deal In December 2015, Atossa entered into a Stock Purchase Agreement with NRL Investment Group, LLC, an unrelated entity. Under the agreement, Atossa sold to the NRL Group 100% of its shares of Common Stock in its wholly-owned subsidiary, the National Reference Laboratory for Breast Health, Inc. (NRLBH), while retaining 19% ownership through Preferred Stock. Atossa received $50,000 on December 16, 2015, for the sale of the Common Stock and the right to receive, commencing in December 2016, monthly earn-out payments equal to 6% of gross revenue of the NRLBH, up to a total of $10,000,000. Atossa also has the right in four years to sell its Preferred Stock to the NRL Group for the greater of $4,000,000 or fair market value. As a result of the transaction, the NRL Group is taking over the management, operations and related costs of the NRLBH. The Implications We think the sale of the diagnostics business makes sense in the following aspects: First, it boosts the company s balance sheet. In addition to the $50,000 already received in December 2015, Atossa will receive monthly payment of 6% of gross revenue. Atossa also has the rights to sell its preferred stock in four years whenever it thinks it is appropriate. This gives Atossa further financial flexibility. Second, when NRLBH becomes a standalone company, it will have more resource to enhance its operations and revenue, which further increases Atossa s revenue potential. Third, as a pure play biopharma company, Atossa will focus its efforts and resources on the development and commercialization of its pharmaceuticals currently including Fulvestrant and Afimoxifen Gel. We believe the company may acquire additional therapeutic candidates in the women s health area down the road. Update on Two Therapeutics Atossa has entered into the therapeutic market through the development of Fulvestrant and Afimoxifen Gel. Atossa Initiates Phase II Clinical Trial of Fulvestrant for the Treatment of DCIS On March 2, 2016, Atossa Genetics announced that the "007" trial, a Phase II study in women with ductal carcinoma in situ(dcis) or invasive breast cancer slated for mastectomy, is open for enrollment. This study will assess the safety and tolerability of fulvestrant when delivered directly into breast milk ducts of these patients. This Phase II clinical trial is an open-label, non-randomized pharmacokinetic study (PK) study of the distribution of fulvestrant in women scheduled for mastectomy. The first 6 study participants will receive the standard intramuscular fulvestrant dose of 500 mg to establish the reference drug distribution. The subsequent 24 participants will receive fulvestrant by intraductal instillation utilizing Atossa's patented investigational microcatheter device. The total dose administered in this manner will not exceed 500 mg. The primary endpoint of the clinical trial is to assess the safety and tolerability of intraductal administration of fulvestrant in women with DCIS or Stage 1 or 2 invasive ductal carcinoma prior to mastectomy. The secondary objective of the study is to determine if there are changes in the expression of Ki67 as well as estrogen and progesterone receptors between a pre-fulvestrant biopsy and post-fulvestrant Zacks Investment Research Page 3 scr.zacks.com

4 surgical specimen. Mammography before and after drug administration in both groups will be performed to determine the effect of fulvestrant on breast density of the participant. Atossa owns one issued patent and several pending applications directed to the treatment of breast conditions, including cancer, by the intraductal administration of fulvestrant and other pharmaceuticals. According to the American Cancer Society, over 292,000 American women were diagnosed with breast cancer (both local and invasive) in 2015 and over 40,000 women died in 2015 due to their disease. Providing drug directly into the ducts targeting the site of the localized cancerous lesions could reduce the need for systemic anti-cancer drugs, and potentially reduce or eliminate the systemic side effects of the drugs and morbidity in such patients and ultimately improve patient compliance. Atossa Intends to Advance Afimoxifene Gel into Phase IIb Clinical Trial in 2016 On May 18, 2015, Atossa announced that it has acquired Afimoxifene (4-Hydroxytamoxifen) Gel from private company Besins Healthcare. Atossa intends to develop Afimoxifen get for the potential treatment of hyperplasia of the breast, a precursor to breast cancer. Following are the summary of the terms: Atossa obtains exclusive world-wide rights to develop and commercialize Afimoxifene Gel for the potential treatment and prevention of hyperplasia of the breast. No upfront or milestone payments to Besins. Royalty of 8% - 9% of net sales for the first 15 years of commercialization. Atossa has the non-exclusive right to also develop Afimoxifene Gel for breast cancer and other breast diseases (subject to milestone payments for these additional indications). Atossa obtains access to Besins' pre-clinical and clinical studies and data for the treatment of breast pain with Afimoxifene Gel, which include animal, toxicity, and clinical trials with 144 patients. Results from additional 82 patients have been published from pre-surgical studies in invasive breast cancer and ductal carcinoma in situ (DCIS). Across all indications, over 450 patients have been treated with Afimoxifene Gel. Besins has the right of first refusal to commercialize the Afimoxifene Gel on a country-by-country basis in countries where they have a marketing presence. Besins has generated substantial pre-clinical and clinical data for Afimoxifen Gel that Atossa intends to utilize to advance the candidate, which will be used in conjunction with the company s devices and laboratory tests. In a NCI Phase II neoadjuvant study in DCIS, Afimoxifene Gel demonstrated similar efficacy as that of oral tamoxifen for the reduction of Ki-67 labelling index (used as a predictive and prognostic marker in breast cancer). Both agents can significantly reduce Ki-67 labelling index from baseline (61% reduction for oral tamoxifen and 53% reduction for Afimoxifene gel, respectively). Zacks Investment Research Page 4 scr.zacks.com

5 Based on the positive efficacy data and favorable safety profile, Atossa intends to advance Afimoxifene Gel into a Phase IIb clinical trial in In early August, Atossa entered into a manufacturing and quality agreements with AAIPharma Services Corp. for the manufacturing of a clinical supply for 4-Hydroxytamoxifen. We believe this will accelerate the clinical development of Afimoxifene Gel. Therapeutics: Our Key Takeaways from the Two Candidates Afimoxifen is the active metabolite of Tamoxifen, which is an oral hormonal drug typically prescribed for a five-year period. Tamoxifen is the most widely used hormonal drug in the world for the treatment of breast cancer, with sales of over one billion dollars in the early 2000s. However, due to the serious and highly detrimental side effects, such as endometrial cancer, cancer of the uterus; strokes, blood clots in the lungs, and blood clots in the legs, in patients pursuing a 5-year course of oral tamoxifen, its usage has been limited. Afimoxifen Gel is a transdermal topical gel directly to the breast, which gets through the skin into the breast tissue but is not absorbed at high levels into the blood stream, which reduces the side effects of tamoxifen. This is the vision upon which Atossa was founded, to develop a pharmaceutical that can locally treat atypical hyperplasia and which will reduce the incidence of breast cancer. Besins has conducted 16 Phase I and Phase II clinical studies of this product, providing a wealth of data on safety and pharmacokinetics of the drug in tissue and blood. Six pharmacokinetic and pharmacodynamic studies completed by Besins show that local, potentially therapeutic concentrations of Afimoxifene can be achieved while systemic plasma concentrations are minimized. Atossa intends to develop Afimoxifen Gel for the treatment of hyperplasia identified by its NAF cytology using repeated NAF collection and cytology to monitor the treatment process. Atossa intends to file an IND of Afimoxifen Gel with the FDA and meet with the FDA to go over the entire development plan, complete any necessary animal studies in 1Q16. We estimate the company will begin a Phase IIb clinical trial program in 2Q16. Besins had conducted an end-of-phase II trial meeting with the FDA and Atossa can take advantage of the outcome of that meeting in its own development process. We are also impressed with the positive terms of the Afimoxifen Gel acquisition. Atossa does not pay any upfront nor any milestone payments for the hyperplasia indication. The company plans to pay for the clinical trial costs out of revenues from its lab services and device sales. This non-dilutive financing strategy is very unique and will ultimately drive shareholder value. The initiation of Phase II trial for Fulvestrant is another significant milestone for Atossa. Together with Afimoxifene Gel, the company has two Phase II programs underway. The indication of Fulvestrant for DCIS complements the indication of Afimoxifene Gel for hyperplasia of the breast. DCIS is the most common type of non-invasive breast cancer. According to the American Cancer Society, about 60,000 cases of DCIS are diagnosed in the United States each year, accounting for about 1 out of every 5 new breast cancer cases. The current standard of care for these women includes surgical removal of the tumor, radiation, and/or Tamoxifen treatment and in some cases mastectomy. Local delivery of Fulvestrant has the potential to target DCIS. Atossa Initiates Additional Drug Development Program Zacks Investment Research Page 5 scr.zacks.com

6 On June 7, 2016, Atossa announced that it has initiated a new drug development program with oral endoxifen. Endoxifen is an active metabolite of tamoxifen, an FDA approved drug for breast cancer patients to prevent recurrence as well as new breast cancer. Tamoxifen is a hormone therapy that has been used for more than 40 years to reduce the risk of breast cancer and to prevent recurrence. However, research has demonstrated that patients with very low levels of a critical enzyme called CYP2D6 and those with low endoxifen levels have a higher risk of recurrence or progression when treated with tamoxifen. It is estimated that over one million people take tamoxifen annually in the United States and that up to 50% of those patients are refractory. Atossa has filed patent applications for endoxifen and contracted for the initial drug supply. The company has identified its initial indication -- breast cancer patients who are refractory to tamoxifen thereby getting little or no benefit from the drug. Atossa has received valuable input from the Medicines and Healthcare Products Regulatory Agency (MHRA) from UK. Written guidance from the FDA is expected very soon. Atossa will pursue strategic initiatives that include completion of the product development to support an IND filing to the FDA, which is anticipated to occur later this year. Atossa Shares Are Undervalued We continue to be optimistic about the prospect of Atossa and our fair value remains at $2.50 per share. With the sale of its diagnostics business, Atossa is becoming a pure play biopharma company with a focus on women s health. Based on Atossa s fundamentals, we think the Company s shares are undervalued. Currently, Atossa shares are trading at about $0.35 per share which values the Company at $13 million in terms of market cap based on 39 million shares outstanding. This is a deep discount compared to its peers. For a typical development stage small cap biopharma company, market value usually ranges from $50 million to $2 billion depending on how advanced its pipeline and the market potential of its candidates. Currently, Atossa has two Phase II clinical candidates with great market potential. The company just announced the initiation of a new clinical program Endoxifen. The company also receives monthly payment from its sold lab service subsidiary, which greatly enhances its balance sheet. Our target price values Atossa at $98 million in market cap, which we think is still very conservative. When the company continues to advance its three clinical programs, value will be generated for its shareholders. We are optimistic about the Company s prospect. Zacks Investment Research Page 6 scr.zacks.com

7 PROJECTED INCOME STATEMENT 2015A (Dec) 2016E (Dec) $ in million except per share data Q1 Q2 Q3 Q4 FYA Q1 Q2 Q3 Q4 FYE FYE FYE FYE FYE Laboratory Services Royalty $1.87 $2.69 $0.77 $0.18 $5.52 $0.00 $0.00 $0.00 $0.00 $0.00 $0.50 $1.00 $2.50 $5.00 Product/Medical Device sales $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $5.00 $7.50 $12.00 Total Revenues $1.87 $2.69 $0.77 $0.19 $5.52 $0.00 $0.00 $0.00 $0.00 $0.00 $0.50 $6.00 $10.00 $17.00 YOY Growth % % % -62.1% 950.4% % 66.7% 70.0% CoGS Gross Income $0.67 $0.84 $0.46 ($0.11) $1.85 $0.00 $0.00 $0.00 $0.00 $0.00 $0.43 $5.10 $8.50 $14.45 Gross Margin 35.5% 31.2% 59.4% % % 85.0% 85.0% 85.0% SG&A $3.15 $3.52 $3.76 $2.81 $13.24 $2.18 $2.20 $2.40 $2.50 $9.28 $12.50 $15.00 $17.50 $20.00 % SG&A 168.3% 130.8% 486.4% % % 250.0% 175.0% 117.6% R&D $0.80 $0.51 $1.09 $0.97 $3.37 $0.15 $0.50 $1.00 $1.50 $3.15 $4.00 $4.50 $5.00 $6.00 % Other Operating Income ($3.3) ($3.2) ($4.4) ($3.9) ($14.8) ($2.3) ($2.7) ($3.4) ($4.0) ($12.4) ($16.1) ($14.4) ($14.0) ($11.6) Operating Margin 2017E (Dec) 2018E (Dec) 2019E (Dec) 2020E (Dec) % % % % Other Net ($0.1) $0.0 $0.1 ($1.1) ($1.0) $0.0 $0.0 $0.0 $0.0 $0.0 ($0.1) ($0.1) ($0.1) ($0.1) Pre-Tax Income ($3.3) ($3.1) ($4.3) ($5.0) ($15.8) ($2.3) ($2.7) ($3.4) ($4.0) ($12.4) ($16.1) ($14.5) ($14.1) ($11.6) Income taxes(benefit) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Tax Rate Reported Net Income ($3.3) ($3.1) ($4.3) ($5.0) ($15.8) ($2.3) ($2.7) ($3.4) ($4.0) ($12.4) ($16.1) ($14.5) ($14.1) ($11.6) YOY Growth % -2.8% -17.4% Net Margin Diluted Shares Out Reported EPS ($0.13) ($0.11) ($0.15) ($0.15) ($0.55) ($0.07) ($0.07) ($0.09) ($0.10) ($0.33) ($0.43) ($0.36) ($0.31) ($0.23) One time charge $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Non GAAP Net Income ($3.3) ($3.1) ($4.3) ($5.0) ($15.8) ($2.3) ($2.7) ($3.4) ($4.0) ($12.4) ($16.1) ($14.5) ($14.1) ($11.6) Non GAAP EPS ($0.13) ($0.11) ($0.15) ($0.15) ($0.55) ($0.07) ($0.07) ($0.09) ($0.10) ($0.33) ($0.43) ($0.36) ($0.31) ($0.23) Source: Company filing and Zacks estimates Copyright 2016, Zacks Investment Research. All Rights Reserved.

8 HISTORICAL STOCK PRICE DISCLOSURES The following disclosures relate to relationships between Zacks Small-Cap Research ( Zacks SCR ), a division of Zacks Investment Research ( ZIR ), and the issuers covered by the Zacks SCR Analysts in the Small-Cap Universe. ANALYST DISCLOSURES I, Grant Zeng, CFA, hereby certify that the view expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the recommendations or views expressed in this research report. I believe the information used for the creation of this report has been obtained from sources I considered to be reliable, but I can neither guarantee nor represent the completeness or accuracy of the information herewith. Such information and the opinions expressed are subject to change without notice. INVESMENT BANKING, REFERRALS, AND FEES FOR SERVICE Zacks SCR does not provide nor has received compensation for investment banking services on the securities covered in this report. Zacks SCR does not expect to receive compensation for investment banking services on the Small-Cap Universe. Zacks SCR may seek to provide referrals for a fee to investment banks. Zacks & Co., a separate legal entity from ZIR, is, among others, one of these investment banks. Referrals may include securities and issuers noted in this report. Zacks & Co. may have paid referral fees to Zacks SCR related to some of the securities and issuers noted in this report. From time to time, Zacks SCR pays investment banks, including Zacks & Co., a referral fee for research coverage. Zacks SCR has received compensation for non-investment banking services on the Small-Cap Universe, and expects to receive additional compensation for non-investment banking services on the Small-Cap Universe, paid by issuers of securities covered by Zacks SCR Analysts. Non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, equity research, investment management, non-deal road shows, and attendance fees for conferences sponsored or co-sponsored by Zacks SCR. The fees for these services vary on a per client basis and are subject to the number of services contracted. Fees typically range between ten thousand and fifty thousand USD per annum. POLICY DISCLOSURES Copyright 2016, Zacks Investment Research. All Rights Reserved.

9 Zacks SCR Analysts are restricted from holding or trading securities placed on the ZIR, SCR, or Zacks & Co. restricted list, which may include issuers in the Small-Cap Universe. ZIR and Zacks SCR do not make a market in any security nor do they act as dealers in securities. Each Zacks SCR Analyst has full discretion on the rating and price target based on his or her own due diligence. Analysts are paid in part based on the overall profitability of Zacks SCR. Such profitability is derived from a variety of sources and includes payments received from issuers of securities covered by Zacks SCR for services described above. No part of analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in any report or article. ADDITIONAL INFORMATION Additional information is available upon request. Zacks SCR reports are based on data obtained from sources we believe to be reliable, but are not guaranteed as to be accurate nor do we purport to be complete. Because of individual objectives, this report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed by Zacks SCR Analysts are subject to change without notice. Reports are not to be construed as an offer or solicitation of an offer to buy or sell the securities herein mentioned. ZACKS RATING & RECOMMENDATION ZIR uses the following rating system for the 1139 companies whose securities it covers, including securities covered by Zacks SCR: Buy/Outperform: The analyst expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold/Neutral: The analyst expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell/Underperform: The analyst expects the company will underperform the broader U.S. Equity market over the next one to two quarters. The current distribution is as follows: Buy/Outperform- 15.9%, Hold/Neutral- 77.8%, Sell/Underperform business day immediately prior to this publication. 6.0%. Data is as of midnight on the Zacks Investment Research Page 9 scr.zacks.com