ATOSSA THERAPEUTICS, INC. 10-K

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   Market Information   Our common stock, par value $0.18 per share, trades on the Nasdaq Capital Market under the symbol “ATOS”.   Stockholders   As of February 18, 2022, there were approximately 36   stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, or DTC and approximately 122,180 beneficial holders. All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede & Co. as one stockholder.   Dividends   The Company has never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to finance the growth and development of our business.   Issuer Purchases of Securities   We did not repurchase any of our equity securities during the fourth quarter of the year ended December 31, 2021.   Unregistered Sales of Equity Securities and Use of Proceeds   Not applicable.   ITEM 6. RESERVED         35 Table of Contents         ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   Overview   The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements, which are based on assumptions about the future of the Company's business. The actual results could differ materially from those contained in the forward-looking statements. Please read “Forward-Looking Statements” included elsewhere in this report for additional information regarding forward-looking statements.   Company Overview   We are a clinical-stage biopharmaceutical company seeking to develop proprietary innovative medicines in areas of significant unmet medical need in oncology and infectious diseases, with a current focus on breast cancer, other breast conditions and COVID-19. Our drug under development for breast cancer and other breast conditions is Endoxifen which is being developed primarily in two settings: one to reduce tumor cell activity in breast cancer patients in the neoadjuvant setting, meaning prior to surgery; and another to reduce dense breast tissue in women. Our two COVID-19 drugs under development are AT-H201, an inhalation therapy to improve lung function of moderate to severely ill, hospitalized COVID-19 patients; and AT-301, a nasal spray for COVID-19 patients for at-home use. A key feature of the original SARS-CoV-2 virus that is retained in both the Delta and Omicron variants, is the furin cleavage site found on the spike protein which facilitates viral infection. Our COVID-19 programs under development are designed to interact with this cleavage site so they are expected to be effective against both current and future COVID-19 variants that continue to contain a furin cleavage site.   Our business strategy is to advance our programs through clinical studies including with partners, and to opportunistically add programs in areas of high unmet medical need through acquisition, collaboration, or internal development.   Summary of Leading Programs   Endoxifen. Endoxifen is an active metabolite of tamoxifen which is an FDA-approved drug to treat and prevent breast cancer in high-risk women. We are developing a proprietary form of Endoxifen which is administered orally for the potential treatment of breast cancer and women with breast density.  We have successfully completed three Phase 1 clinical studies (including a study in men) and two Phase 2 clinical studies with our proprietary Endoxifen. We have also completed significant pre-clinical development and have developed clinical manufacturing capabilities through qualified third parties.   Endoxifen for Women with Breast Density.  Mammographic breast density (MBD) is an emerging public health issue affecting over 10 million women in the U.S. Studies conducted by others have shown that MBD increases the risk of developing breast cancer and that reducing MBD can reduce the incidence of breast cancer.   In December 2021, we commenced a Phase 2 study of our proprietary oral Endoxifen. The study, known as the Karisma-Endoxifen study, is a Phase 2, randomized, double-blind, placebo-controlled, dose-response study of our proprietary oral Endoxifen in healthy premenopausal women with measurable breast density. The primary objective of the study is to determine the dose-response relationship of daily Endoxifen on breast density reduction. Secondary endpoints will assess safety and tolerability, and the trial includes an exploratory endpoint to assess durability of the breast density changes. The study is being conducted at the South General Hospital in Stockholm and will include approximately 240 participants who will receive daily doses of Endoxifen or placebo for six months. The study is being led by principal investigator Per Hall, M.D., Ph.D., Department of Medical Epidemiology and Biostatistics at Karolinska Institutet.   Based on input from the FDA and Swedish Medical Products Agency, reduction in MBD may not be an approvable indication unless we can demonstrate that our Endoxifen also reduces the incidence of breast cancer. We may therefore conduct additional studies of Endoxifen to assess its correlation with the risk of breast cancer and/or reduction in the incidence of new breast cancers.   Endoxifen for Neoadjuvant Treatment of Breast Cancer.     We are also developing Endoxifen to treat breast cancer in the neoadjuvant setting, which is the administration of a therapy before the surgical treatment, with a current focus on breast cancers that are classified as estrogen receptor positive (ER+). Although there are numerous neoadjuvant treatments for breast cancers that are not ER+, there are few neoadjuvant treatments for ER+ breast cancer which comprises about 78% of all breast cancers. We believe there is a compelling need for therapy with our Endoxifen in this setting.   In December 2021, we completed a PIND meeting with the FDA. The purpose of the meeting was to obtain input from the FDA on pre-clinical, clinical, manufacturing and regulatory matters in the U.S. for our proprietary Endoxifen to treat breast cancer. Based in part on the feedback from the FDA, we plan to open an IND for a multi-center Phase 2 study to further advance our Endoxifen in the neoadjuvant setting. We plan to focus our development on pre-menopausal women with ER+, human epidermal growth factor receptor 2 negative (HER2-) breast cancer for whom the current treatment options typically include drugs that suppress ovarian function and essentially force the patient into menopause.   We recently completed a Phase 2 study in Australia which enrolled 7 newly diagnosed patients with ER+ and stage 1 or 2 invasive breast cancer, requiring mastectomy or lumpectomy. In February 2021, we concluded that the study produced substantially positive results and that continuing enrollment in the study would not be necessary in advancing the program. We therefore discontinued the study based in part on results from the first six patients. In June 2021, we reported final results from the study of all 7 patients which showed that tumor cell proliferation in study participants was reduced by an average of 65%, as measured by Ki-67 expression, which is a common measure of tumor cell activity in breast cancer.      36 Table of Contents     AT-301 for COVID-19 .  AT-301 is our proprietary drug formulation candidate intended for nasal administration in patients immediately following diagnosis of COVID-19 but who have not yet exhibited symptoms severe enough to require hospitalization. It is intended for at-home use to reduce symptoms of COVID-19 and to slow the infection rate so that a person’s immune system can more effectively fight COVID-19.   AT-301 is being developed with a nasal spray delivery mechanism because many COVID-19 patients are infected via the nasal passage. Our nasal spray formulation AT-301 is being designed to contain ingredients that can potentially block SARS-CoV-2 viral entry gene proteins in nasal epithelial cells by interfering with spike protein activation by host proteases, by masking receptor binding domains via electrostatic mechanisms, and by providing a generalized mucoadhesive epithelial barrier.   In October 2020, we completed enrollment in a Phase 1 study of AT-301 which was a double-blinded, randomized, and placebo-controlled safety study of AT-301 nasal spray in 32 healthy adult subjects. An evaluation of the data indicated that there were no serious adverse events, no discontinuations, and only one of the subjects in the study experienced adverse events that were considered related to the study drug and moderate in severity. We concluded that our AT-301 nasal spray was safe and well tolerated in this study. We received input from the FDA on this program in 2021 and based in part on that input, we are now preparing to conduct additional pre-clinical studies. Following that, we expect to apply to the FDA to commence a Phase 2 study in the United States.   We may also develop our AT-301 nasal spray to potentially help prevent COVID-19 infection — particularly for people in high-risk environments, such as people living with an infected patient, people living and working in healthcare facilities, emergency responders or teachers.   AT-H201 for COVID-19 . AT-H201 is a proprietary combination of two drugs previously approved by the FDA to treat other diseases. It is intended to improve compromised lung function for moderate to severely ill, hospitalized COVID-19 patients by inhalation. We also intend to study AT-H201 on long haul COVID-19 survivors. We received input from the FDA on potential pathways to develop AT-H201 and the FDA requested that we provide, among other things, additional pre-clinical results and other information on AT-H201.    In September 2021 we began enrollment in Australia in a Phase 1/2a study of AT-H201 and in February 2022, we began enrollment in the second of four parts of the study. The study plans to enroll 60 healthy participants and moderately ill hospitalized COVID-19 patients. The Australian regulatory authority will review data after each part of the study before we may proceed with subsequent parts of the study. Because the final part of the study in COVID-19 infected patients may require that we use additional study sites, approval of that part of the study, and additional sites will depend on COVID-19 infections and may therefore be delayed.   Impact of the Novel Coronavirus   The continued spread of the COVID-19 pandemic is affecting the U.S. and global economies and may affect the Company’s operations and those of third parties on which the Company relies, including causing possible disruptions in the supply of the Company’s Endoxifen, AT-H201, AT-301, the pace of enrollment in our clinical trials and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the U.S. FDA and other health authorities including similar entities/agencies in Sweden and Australia, which could result in delays in meetings, reviews and approvals. Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, financing or clinical trial activities or on healthcare systems or the global economy as a whole as a result of the COVID-19 pandemic; however, we have not experienced a significant delay in the enrollment or the drug supply for our ongoing and planned clinical studies, including studies of Endoxifen, AT-301 and AT-H201. In recent weeks the number of reported cases of COVID-19 has declined in many countries. If this trend continues it may be difficult to enroll participants in our COVID-19 clinical studies.       37 Table of Contents         Research and Development Phase   We are in the research and development phase and are not currently marketing any products. We do not anticipate generating revenue unless and until we develop and launch our pharmaceutical programs.   Commercial Lease Agreements   On March 1, 2021, the Company entered into an operating lease to pay $750 monthly rent for a term of 12 months with WW 107 Spring Street LLC to lease office space at 107 Spring Street, Seattle, Washington.       Critical Accounting Policies and Significant Estimates     Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on our historical experience, known trends and events, and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.     While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements included in this Form 10-k, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.   Research and Development    As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and work orders, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the associated cost incurred for the services, including, in some cases, when we have not yet been invoiced or otherwise notified of actual costs. R&D costs are generally expensed as incurred. R&D expenses include, for example, manufacturing expense for our drugs under development, expenses associated with preclinical studies, clinical trials and associated salaries, bonuses, stock-based compensation and benefits. R&D expenses also include an allocation of the CEO's salary and related benefits including bonus and non-cash stock-based compensation expense based on an estimate of his total hours expended on research and development activities.   We have entered into various research and development contracts with research institutions, CRO, clinical manufacturing organizations (CMO) and other companies. The majority of our service providers invoice us monthly for services performed, however, payments under some of these contracts may be required in advance of the services being performed, for example when a contract requires an initial payment at the outset of the contract. Payments made in advance of performance of services are reflected in the accompanying consolidated balance sheets as prepaid expenses.    We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with CROs and other companies that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. However, additional information may become available to us, which may allow us to make a more accurate estimate in future periods. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates.   Stock-Based Payments   We measure all stock option awards grated to employees, non-employee directors and consultants based on the fair value on the date of grant and recognize compensation expense over the requisite estimated service period which is generally the vesting period of the respective award. The straight-line method of expense recognition is applied to all awards with service-only conditions. We account for forfeitures as they occur.     The fair value of each option grant is estimated using the Black-Scholes option-pricing model, which requires assumptions regarding the expected volatility of our stock options, the expected life of the options, an expectation regarding future dividends on our common stock, estimation of an appropriate risk-free interest rate and expected term. Our expected common stock price volatility assumption is based upon the historic volatility of our stock price. The expected life assumption for stock option grants is based an average of the contractual term of the options of ten years with the average vesting term of one to four years. The dividend yield assumption of zero is based upon the fact that we have never paid cash dividends and presently have no intention of paying cash dividends in the future. The risk-free interest rate used for each grant was based upon prevailing short-term interest rates over the expected life of the options.   While assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgement. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.       38 Table of Contents       Results of Operations   Comparison of Years Ended December 31, 2021 and 2020 (amounts in thousands)   Revenue and Cost of Revenue:   For the years ended December 31, 2021 and 2020, we have no source of sustainable revenue and no associated cost of revenue.   Operating Expenses : Total operating expenses were $20,521 for the year ended December 31, 2021, which is an increase of $5,914, or 40% from the year ended December 31, 2020. Operating expenses for 2021 consisted of research and development (R&D) expenses of $9,210 and general and administrative (G&A) expenses of $11,311. Operating expenses for 2020 consisted of R&D expenses of $6,608 and G&A expenses of $7,999. The basis for the increased operating expenses in 2021 is explained below.      Research and Development Expenses : R&D expenses for the year ended December 31, 2021, were $9,210, an increase of $2,602 or 39% from total R&D expenses for the year ended December 31, 2020, of $6,608. The increase in R&D expense is attributed to increased spending on clinical and non-clinical trials of $422 over 2020 due to additional pre-clinical testing and manufacturing expenses for Endoxifen. Stock-based compensation, which is a non-cash charge, increased $693 year over year. R&D compensation was also up $227 due to salary, bonus and benefit increases during 2021. 2021 R&D expenses also include a $1,000 exclusivity payment for the exclusive right to negotiate a with a leading research organization for the rights to two oncology clinical programs. Refer to Note 15 Subsequent Events, included in this Annual Report on Form 10-K. There were no similar exclusivity payments made during 2020. The remaining increase is due to increased spending on professional fees in 2021 as compared to 2020, due to the hiring of regulatory consultants and other vendors.   General and Administrative Expenses : G&A expenses were $11,311 for the year ended December 31, 2021, an increase of $3,312, or 41% from total G&A expenses for the year ended December 31, 2020, of $7,999. The increase in G&A expenses for the year ended December 31, 2021, is attributable to non-cash stock-based compensation expense of $1,555. Compensation also increased $460 due to the addition of a new employee during 2021, increased hourly employees time, and employee bonus increases over the prior year. Insurance expense has also increased $668 due to the addition of the COVID-19 program year over year. Professional fees have also increased $897 due primarily to an increase of proxy costs for investor outreach on a proposal to increase authorized shares, expense related to a special stockholder meeting and increased consulting and auditing fees. Legal fees decreased $360 year over year due to lower patent activity in 2021.   Warrant Financing Costs and Change in Fair Value of Common Stock Warrants:  There were no common stock liability warrants issued during the year ended December 31, 2021. The December 11, 2020 financing including the overallotment on December 28, 2020, included the issuance of common stock liability warrants. The Company incurred financing costs associated with these common stock liability warrants of $939 upon issuance. The Company also recorded changes in the fair value of the liability warrants during the year ended December 31, 2020 of $2,333. On January 1, 2021, the Company implemented ASU No. 2020-06 and reclassified the common stock warrant liability to equity.    Income taxes: We have incurred net operating losses since inception; we did not record an income tax benefit for our incurred losses for the years ended December 31, 2021 and 2020, due to uncertainty regarding utilization of our net operating loss carryforwards and due to our history of losses.   Liquidity and Capital Resources   The Company has incurred net losses and negative operating cash flows since inception. For the year ended December 31, 2021, the Company recorded a net loss of $20,606 and used $16,472 of cash in operating activities. As of December 31, 2021, the Company had $136,377 in cash and cash equivalents and working capital of $138,114.  We believe we have sufficient cash to fund our projected operating requirements for at least the next 12 months.        39 Table of Contents     Cash Flows   As of December 31, 2021, we had cash, cash equivalents and restricted cash of $136,487.   Net Cash Flows from Operating Activities : Net cash used in operating activities was $16,472 for the year ended December 31, 2021, an increase of $4,902, or 42%, compared to net cash used in operating activities for the year ended December 31, 2020, of $11,570. The increase in the 2021 period as compared to 2020 resulted primarily from an increase in clinical trial activity of $422. Stock-based compensation also increased $2,248 over the same period in 2020. The decrease of $2,333 in fair value of common stock warrant liability and warrant financing expense of $939 was the result of the implementation of ASU No. 2020-06 on January 1, 2021, which resulted in the reclassification of the liability warrants to equity. An additional $1,000 of the increase year over year was attributable to a one-time fee we paid in 2021 to a leading research institution for the exclusive right to negotiate for world-wide rights to two oncology R&D programs.   Net Cash Flows from Investing Activities : Net cash used in investing activities was $9 for the year ended December 31, 2021, which was the same amount used in investing activities for the year ended December 31, 2020, of $9.    Net Cash Flows from Financing Activities: Net cash provided by financing activities was $113,304 for the year ended December 31, 2021, an increase of $74,752, or 194%, compared to net cash provided by financing activities of $38,552, for the year ended December 31, 2020. During the year ended December 31, 2021, the Company issued common stock and warrants for net proceeds of $69,668 and received proceeds from the exercise of warrants of $43,818. The 2020 financing activity of $38,552 consisted of the issuance of common stock and warrants for net proceeds of $28,954, the issuance of Series C convertible preferred stock and warrants for net proceeds of $4,947 and proceeds from issuance of common stock of $4,665.    Funding Requirements   We expect to incur ongoing operating losses for the foreseeable future as we continue to develop our planned therapeutic programs including related clinical studies and other programs in the pipeline.    If we are unable to raise additional capital when needed, however, we could be forced to curtail or cease operations. Our future capital uses and requirements will depend on the time and expenses needed to begin and continue clinical trials for our new drug developments. As mentioned earlier, the COVID-19 outbreak could adversely impact the timing and enrollment of our clinical trials.   Additional funding may not be available to us on acceptable terms or at all. The continued spread of COVID-19 and uncertain market conditions may limit our ability to access capital. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities or by selling debt securities, if convertible, further dilution to our existing stockholders would result. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, collaboration agreements, debt financings or licensing arrangements.   If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. Further, we may elect to raise additional funds even before we need them if we believe the conditions for raising capital are favorable.   Off-Balance Sheet Arrangements   We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.   Recent Accounting Pronouncements   Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for recently issued accounting pronouncements not yet adopted.   Recently Adopted Accounting Pronouncements   Refer to Note 3 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for recently adopted accounting pronouncements.     40 Table of Contents         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not applicable.   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   The financial statements required by this item are set forth beginning on page 48 of this report and are incorporated herein by reference.   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   None.