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 March 16, 2023, there were approximately 40   stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, or (DTC). 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   We have never declared or paid any cash dividends on our common stock and do not currently anticipate declaring or paying cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance the growth and development of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and other factors that our Board of Directors may deem relevant.   Issuer Purchases of Securities   We did not repurchase any of our equity securities during the fourth quarter of fiscal 2022.   Unregistered Sales of Equity Securities and Use of Proceeds   None.   ITEM 6. RESERVED   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. Actual results and outcomes could differ materially from those contained in the forward-looking statements. Please read “Forward-Looking Statements” included elsewhere in this Annual Report for additional information regarding forward-looking statements.   Company Overview   We are a clinical-stage biopharmaceutical company developing proprietary innovative medicines in areas of significant unmet medical need in oncology, with a current focus on breast cancer and other breast conditions. Our lead drug candidate under development is oral (Z)-endoxifen which we are developing in two settings: one to treat breast cancer by reducing tumor cell activity prior to surgery and another to reduce dense breast tissue in women. More than ten million women in the U.S. and millions more worldwide have high breast density, which reduces the ability of mammograms to detect cancer and increases the risk of breast cancer. There is no FDA-approved treatment for breast density. We believe there is also a significant unmet need for breast cancer treatments in premenopausal women prior to surgery as the typical treatment for the majority of early-stage breast cancer patients currently involves ovarian suppression, which can induce premature menopause and dramatically impact a patient’s quality of life.    We have been granted two U.S. patents covering our proprietary (Z)-endoxifen and we have numerous applications pending in the U.S. and in other major countries.   Our business strategy is to advance our programs through clinical studies, including with partners, and opportunistically add programs in areas of high unmet medical need through acquisition, minority investment, collaboration, or internal development.   33 Table of Contents   Summary of Our Leading Programs   The following is a summary of the status of our major clinical development programs as of the date of this Annual Report: (Z)-endoxifen. (Z)-e ndoxifen 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 (Z)-endoxifen which is administered orally for the potential treatment of breast cancer and reduction of breast density. We have completed four Phase 1 clinical studies (including a study in men) and two Phase 2 clinical studies with our proprietary (Z)-endoxifen (including oral and topical formulations). We have also completed significant pre-clinical development and have developed clinical manufacturing capabilities through qualified third-parties.   (Z)-endoxifen for Women with Measurable Breast Density.  Mammographic breast density (MBD) is an emerging public health issue affecting over ten million women in the U.S. alone. Studies conducted by others have shown that MBD increases the risk of developing breast cancer and that reducing MBD may reduce the incidence of breast cancer.    In December 2021, we commenced a Phase 2 study of our proprietary oral (Z)-endoxifen. The study, known as the Karisma-(Z)-endoxifen study, is a Phase 2, randomized, double-blind, placebo-controlled, dose-response study of our proprietary oral (Z)-endoxifen in healthy premenopausal women with measurable breast density. The primary objective of the study is to determine the dose-response relationship of daily (Z)-endoxifen on breast density reduction. Secondary endpoints will assess safety and tolerability. The study also includes an exploratory endpoint to assess durability of the breast density changes. The study is being conducted in Stockholm, Sweden and will include approximately 240 participants, at full enrollment, who will receive daily doses of oral (Z)-endoxifen or placebo for six months after they enroll.    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 (Z)-endoxifen also reduces the incidence of breast cancer. We may therefore conduct additional studies of (Z)-endoxifen to assess its correlation with the risk of breast cancer and/or reduction in the incidence of new breast cancers.       (Z)-endoxifen for Neoadjuvant Treatment of Breast Cancer.     We are also developing (Z)-endoxifen to treat estrogen receptor positive (ER+) / human epidermal growth factor receptor 2 negative (HER2-) breast cancer in the neoadjuvant setting, which is the administration of a therapy before surgical treatment. Although there are 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 and the treatments that are available typically involve ovarian suppression which can induce premature menopause and significantly impact quality of life. We believe there is a compelling need for therapy with our (Z)-endoxifen in this setting.      In October 2022, we received authorization from the U.S. FDA for our Investigational New Drug (IND) application for oral (Z)-endoxifen. The study, “A Randomized Phase 2 Noninferiority Trial of (Z)-endoxifen and Exemestane + Goserelin as Neoadjuvant Treatment in Premenopausal Women with ER+/HER2- Breast Cancer,” also known as “EVANGELINE,” is an open-label, randomized, Phase 2 study designed to investigate (Z)-endoxifen for the neoadjuvant treatment of premenopausal women ages 18 and older with early stage (Grade 1 or 2) ER+/HER2- breast cancer. In February 2023, we enrolled the first patient in this study.   Inhaled HNAC (AT-H201) . AT-H201 was under development as a potential treatment for COVID-19; however, due to the rapidly shifting treatment landscape and introduction of effective vaccines and treatments, in late 2022 we shifted our focus to the treatment of patients with compromised lung function due to the damaging effects of cancer treatment. We are scheduled to conclude our study in healthy volunteers with AT-H201 in early 2023, but we do not expect to advance the program further in 2023 as we focus on our (Z)-endoxifen programs.   Recent Investment in CAR-T Company   On December 23, 2022, we closed our previously announced investment in Dynamic Cell Therapies, Inc. (DCT), a privately-held, venture capital-backed, developer of CAR-T therapies. DCT is in the pre-clinical phase of developing controllable CAR-T cells to address difficult-to-treat cancers. Its platform technology of dynamic control of engineered T-cells is designed to improve the safety, efficacy, and durability of CAR-T cell therapies. While its initial focus is hematologic malignancies, it's possible that its innovative approach could also have broad applicability in solid tumors and autoimmune diseases. Atossa’s investment in DCT, which totaled $4.7 million, resulted in Atossa owning approximately 19% of the outstanding capital stock of DCT as of December 31, 2022.   34 Table of Contents   Impact of the Ongoing Coronavirus Pandemic   The ongoing COVID-19 pandemic may affect our operations and those of third-parties on which we rely, including causing possible disruptions in the supply of (Z)-endoxifen, 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. As the COVID-19 pandemic reaches endemic stages, the extent to which it may continue to impact our operations, including COVID-19-related delays or other impacts on our business, financing or clinical trial activities or on healthcare systems or the global economy as a whole, remains highly uncertain and difficult to predict; however, as of March 16, 2023, we have not experienced a significant delay in the enrollment or the drug supply for our ongoing and planned clinical studies, including studies of (Z)-endoxifen.   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 Agreement   On March 1, 2021, the Company entered into an operating lease with WW 107 Spring Street LLC to lease office space at 107 Spring Street, Seattle Washington. The Company agreed to pay $750 in monthly rent for an initial term of 12 months. On March 1, 2022, the Company entered into an operating lease for the same space to pay $1,000 monthly rent for a new term of 12 months.      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, (U.S. GAAP). The preparation of these consolidated 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 Annual Report, 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.   Investments in Equity Securities   Our investment in DCT Series Seed Preferred Stock does not have a readily determinable fair value, so we have elected to measure the investment at cost less any impairment. As part of preparing our consolidated financial statements we considered qualitative impairment factors in determining if an impairment analysis is required. Specifically, the Company considered the adverse change in the general market condition of the industry in which DCT operates and concerns about the investee’s ability to continue as a going concern, due to negative cash flows from operations. Based on these impairment indicators, we performed a fair value measurement using a Black-Scholes options pricing model. The model requires assumptions regarding the expected average volatility of comparable companies, the expected term of our investment, and an estimation of an appropriate risk-free interest rate over the term of our investment. The expected stock price volatility assumption is based upon the average historic volatility of eighteen comparable public clinical stage immunotherapy or CAR-T companies. The expected term of our investment is four years. The risk-free interest rate used is based upon prevailing short-term interest rates over the expected term of the investment.    The resulting valuation concluded that the investment was not impaired, thus, no impairment has been recorded. The assumptions and estimates used to estimate the fair value of the investment include the following information from DCT:       ● Unaudited financial statements;   ● Projected technological developments of DCT;   ● Current fundraising transactions;   ● Current ability of DCT to raise additional financing when needed;   ● Changes in the economic environment which may have a material impact on the operating results of DCT, and;   ● Timing of a deemed liquidation event occurring.   While assumptions used to calculate and account for the investment in non-marketable equity securities represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgement. As a result, if underlying assumptions and estimates change, our investment may be impaired in future periods.   Research and Development Expenses    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.   35 Table of Contents   We have entered into various research and development contracts with research institutions, CRO, clinical manufacturing organizations (CMOs) 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 granted to employees, non-employee directors and consultants based on the fair value on the date of grant, and we recognize compensation expense over the requisite 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 the price of our common stock, 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 on 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 is based upon prevailing short-term interest rates over the expected lives of the options.   While assumptions used to calculate and account for stock-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 stock-based compensation expense could vary significantly from period to period.   Results of Operations   Comparison of Years Ended December 31, 2022 and 2021 ( dollar amounts in thousands unless otherwise noted )   Revenue and Cost of Revenue:   For the years ended December 31, 2022 and 2021, we have no source of sustainable revenue and no associated cost of revenue.   Operating Expenses:   The following table provides a breakdown of major categories within Research and Development (R&D) and General and Administrative (G&A) expenses for the years ended December 31, 2022 and 2021, together with the dollar change in those categories:         2022     2021     Period-Period Change   Research and Development                             Clinical trials   $ 10,225     $ 4,656     $ 5,569     Compensation     1,875       1,482       393     Stock-based compensation     2,393       1,591       802     Professional fees     1,242       454       788     Exclusivity agreements     (700 )     1,000       (1,700 )   Other     48       27       21     Research and Development Total   $ 15,083     $ 9,210     $ 5,873                               General and Administrative                             Compensation   $ 3,034     $ 2,371     $ 663     Stock-based compensation     4,395       3,676       719     Professional fees     1,625       2,317       (692 )   Legal     1,135       534       601     Insurance     1,640       1,576       64     Other     779       837       (58 )   General and Administrative Total   $ 12,608     $ 11,311     $ 1,297     36 Table of Contents   Total operating expenses were $27,691 for the year ended December 31, 2022, which was an increase of $7,170, or 35% from the year ended December 31, 2021. Operating expenses for 2022 consisted of R&D expenses of $15,083 and G&A expenses of $12,608. Operating expenses for 2021 consisted of R&D expenses of $9,210 and G&A expenses of $11,311. Factors contributing to the increased operating expenses in the year ended December 31, 2022 are explained below.   R&D Expenses : R&D expenses for the year ended December 31, 2022, were $15,083, an increase of $5,873 or 64% from total R&D expenses for the year ended December 31, 2021 of $9,210. Key changes were as follows:   • The increase in R&D expense was attributed primarily to increased spending on clinical and non-clinical trials of $5,569 compared to the prior year period due to additional pre-clinical toxicology studies in our (Z)-endoxifen and AT-H201 programs as well as increased trial costs and manufacturing expenses for (Z)-endoxifen.   • R&D compensation increased $393 in 2022 compared to the prior year period due to increased headcount, salary, bonuses and benefits during 2022.   • Stock-based compensation, which is a non-cash charge, increased $802 due to the increased number of options being expensed as well as the weighted average fair value of options amortizing in 2022 was higher compared to the prior year period.    • Professional fees increased $788 compared to the prior year period, due primarily to a CAR-T technology market analysis performed during 2022.    • In 2022, the Company received a refund of $1,000 from the research institution with which the Company had an exclusive right to negotiate for the acquisition of the worldwide rights to two oncology R&D programs. In 2021, R&D expenses included $1,000 attributable to the same one-time exclusivity fee. Finally, in 2022, we paid $300 for the exclusive right to negotiate with another CAR-T Company. Net, the exclusivity agreements caused a decrease in expenses of $1,700 compared to the prior year period.   G&A Expenses : G&A expenses were $12,608 for the year ended December 31, 2022, an increase of $1,297, or 11% from total G&A expenses for the year ended December 31, 2021 of $11,311. Key changes were as follows:   • The increase in G&A expense for the year ended December 31, 2022 compared to the prior year period, was in part attributable to the increase in compensation expense of $663 in 2022 due to an increase in headcount, hourly wages, salaries and bonus accruals.   • Non-cash stock-based compensation expense also increased by $719 due to the increased number of options being expensed as well as the weighted average fair value of options amortizing in 2022 was higher compared to the prior year period.    • Professional fees decreased by $692 in 2022 compared to the prior year period, due primarily to a decrease in proxy costs for investor outreach.   • Legal fees increased $601 in 2022 compared to the prior year period, due to higher patent activity in 2022 for (Z)-endoxifen and our immunotherapy research.   Interest Income:  Interest income was $877 for the year ended December 31, 2022 compared to the prior year period of $6. The increase is due to the investment of an additional $50,000 in a money market account during 2022 and higher average interest rates for the year ended December 31, 2022 compared to 2021.    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, 2022 and 2021, 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, 2022, the Company recorded a net loss of $26,960 and used $20,760 of cash in operating activities. As of December 31, 2022, the Company had $110,890 in unrestricted cash and cash equivalents and working capital of $112,629.  We believe we have sufficient cash to fund our projected operating requirements for at least the next 12 months. Refer to Note 10 of our consolidated financial statements included in this Annual Report for a discussion of our 2021 financing transactions.    Cash Flows   As of December 31, 2022, we had cash, cash equivalents and restricted cash of $111,000.   Net Cash Flows from Operating Activities : Net cash used in operating activities was $20,760 for the year ended December 31, 2022, an increase of $4,288, or 26%, compared to net cash used in operating activities for the year ended December 31, 2021 of $16,472. The increase in 2022 compared to the prior year period was primarily due to an increase in clinical trial activity of $5,569. This was partially offset by the net impact of several exclusivity agreements, which resulted in a net decrease in cash used of $1,700.   Net Cash Flows from Investing Activities : Net cash used in investing activities was $4,727 for the year ended December 31, 2022, an increase of $4,718 compared to net cash used in investing activities of $9 for the year ended December 31, 2021. The increase was primarily due to our investment in the equity securities of DCT for $4,700.       Net Cash Flows from Financing Activities:  There were no financing activities during the year ended December 31, 2022. Net cash provided by financing activities was $113,304 for the year ended December 31, 2021. During the year ended December 31, 2021, we sold common stock and warrants for net proceeds of $69,668 and received proceeds of $43,818 from the exercise of warrants. In addition, we received $391 from proceeds from employee stock options and paid $573 related to taxes on the net-exercise of employee stock options.   37 Table of Contents   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. Our future funding requirements will depend on many factors, including:   •the cost of manufacturing drugs under development, the costs associated with clinical trials and associated salaries and benefits;   •the extent to which we enter into contracts or invest in third parties in order to further develop our drug candidates;   •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending other intellectual property-related claims;   •the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;   If we are unable to raise additional capital when needed, however, we could be forced to curtail or cease our 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 coronavirus pandemic 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 coronavirus pandemic and uncertain market and macroeconomic 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, we may raise additional funds by issuing equity securities or by 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.   Although we submitted a proposal to our stockholders to amend our amended and restated certificate of incorporation, as amended, to add additional authorized shares of our common stock for various potential purposes, including potential capital raising transactions, our stockholders did not approve the proposal at our 2021 and 2022 annual stockholders’ meetings nor did they approve it at a special meeting of stockholders in September 2021. A lack of authorized shares may limit our ability to raise capital when needed.    We may not be able to satisfy the continued listing standards of The Nasdaq Capital Market (the Nasdaq) going forward, including its $1.00 minimum bid price requirement. If we cannot satisfy the continued listing standards of Nasdaq going forward, Nasdaq may commence delisting procedures against us, which could result in our common stock being removed from listing on Nasdaq. On October 5, 2022, we received a letter from Nasdaq stating that we were not in compliance with Listing Rule 5550(a)(2) because our common stock failed to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business days. We have until April 3, 2023, to either regain compliance, or request additional time to regain compliance.    If we are unable to regain compliance with Nasdaq Listing Rule 5550(a)(2), and if our stock price continues to trade below the $1.00 minimum bid price requirement, or if we otherwise fail to satisfy other continued listing requirements, we may be delisted from Nasdaq, which could adversely affect our stock price, liquidity, and our ability to raise funding.    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.   Recently Adopted Accounting Pronouncements   Refer to Note 3 to our consolidated financial statements included in this Annual Report for recently adopted accounting pronouncements.   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K.