atos20210630

atos20210630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-35610

ATOSSA THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	26-4753208
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

107 Spring Street	98104
Seattle, WA	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (206) 325-6086

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.18 par value	ATOS	The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $0.18 par value per share, outstanding at August 6, 2021, was 126,623,256.

ATOSSA THERAPEUTICS, INC.

FORM 10-Q

QUARTERLY REPORT

INDEX

PART I. FINANCIAL INFORMATION		3

ITEM 1.	Condensed Consolidated Financial Statements – Unaudited	3

	Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020	4

	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	23

ITEM 4.	Controls and Procedures	23

PART II. OTHER INFORMATION		25

ITEM 1.	Legal Proceedings	25

ITEM 1A.	Risk Factors	25

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

ITEM 3.	Defaults upon Senior Securities	39

ITEM 4.	Mine Safety Disclosures	39

ITEM 5.	Other Information	39

ITEM 6.	Exhibits	40

SIGNATURES		41

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	*As of June 30, 2021*			*As of December 31,*
Assets	*(Unaudited)*			*2020*
Current assets
Cash and cash equivalents	$	142,432,961		$	39,553,671
Restricted cash		110,000			110,000
Prepaid expenses		2,391,966			1,813,902
Research and development tax rebate receivable		817,109			634,940
Other current assets		78,882			657,662
Total current assets		145,830,918			42,770,175

Furniture and equipment, net		14,501			20,632
Intangible assets, net		4,458			13,375
Right-of-use asset		4,720			18,053
Other assets		13,408			17,218
Total Assets	$	145,868,005		$	42,839,453

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	537,915		$	1,588,613
Accrued expenses		531,602			93,367
Payroll liabilities		700,588			963,665
Common stock warrant liability		-			13,003,075
Lease liability		4,720			18,053
Other current liabilities		21,278			4,748
Total current liabilities		1,796,103			15,671,521

Commitments and contingencies (Note 13)

Stockholders' equity
Preferred stock - $0.001 par value; 10,000,000 shares authorized; 587 and 621 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		1			1
Additional paid-in capital - Series B convertible preferred stock		586,999			620,999
Common stock - $0.18 par value; 175,000,000 shares authorized; 125,925,096 and 47,548,835 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		22,666,505			8,558,778
Additional paid-in capital		240,023,345			129,887,146
Accumulated deficit		(119,204,948	)		(111,898,992	)
Total Stockholders' Equity		144,071,902			27,167,932
Total Liabilities and Stockholders' Equity	$	145,868,005		$	42,839,453

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	*For the Three Months Ended June 30,*						*For the Six Months Ended June 30,*

	*2021*			*2020*			*2021*			*2020*
Operating expenses
Research and development	$	3,798,636		$	1,653,239		$	5,177,123		$	2,591,859
General and administrative		3,205,130			2,282,568			5,357,371			4,280,957
Total operating expenses		7,003,766			3,935,807			10,534,494			6,872,816
Operating loss		(7,003,766	)		(3,935,807	)		(10,534,494	)		(6,872,816	)
Other income (expense), net		(35,482	)		29,665			(42,823	)		19,254
Loss before income taxes		(7,039,248	)		(3,906,142	)		(10,577,317	)		(6,853,562	)
Income taxes		-			-			-			-
Net loss	$	(7,039,248	)	$	(3,906,142	)	$	(10,577,317	)	$	(6,853,562	)
Loss per common share - basic and diluted	$	(0.06	)	$	(0.43	)	$	(0.10	)	$	(0.75	)
Weighted average shares outstanding - basic and diluted		121,572,091			9,187,588			107,159,698			9,159,286

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	*Series B Convertible Preferred Stock*								*Common Stock*
						*Additional*							*Additional*					*Total*
	*Shares*			*Amount*		*Paid-in Capital*			*Shares*		*Amount*		*Paid-in Capital*		*Accumulated Deficit*			*Stockholders' Equity*
Balance at December 31, 2019		671		$	1	$	670,999			9,130,984	$	1,643,565	$	104,912,480	$	(94,071,040	)	$	13,156,005
Compensation cost for stock options granted		-			-		-			-		-		687,752		-			687,752
Net loss		-			-		-			-		-		-		(2,947,420	)		(2,947,420	)
Balance at March 31, 2020		671		$	1	$	670,999			9,130,984	$	1,643,565	$	105,600,232	$	(97,018,460	)	$	10,896,337
Issuance of common stock, net of issuance costs of $178,544		-			-		-			160,108		28,820		318,807					347,627
Conversion of Series B convertible preferred stock to common stock		(45	)		-		(45,000	)		12,786		2,301		42,699		-			-
Compensation cost for stock options granted		-			-		-			-		-		1,036,484		-			1,036,484
Net loss		-			-		-			-		-		-		(3,906,142	)		(3,906,142	)
Balance at June 30, 2020		626		$	1	$	625,999			9,303,878	$	1,674,686	$	106,998,222	$	(100,924,602	)	$	8,374,306

	*Series B Convertible Preferred Stock*								*Common Stock*
						*Additional*							*Additional*					*Total*
	*Shares*			*Amount*		*Paid-in Capital*			*Shares*		*Amount*		*Paid-in Capital*		*Accumulated Deficit*			*Stockholders' Equity*
Balance at December 31, 2020		621		$	1	$	620,999			47,548,835	$	8,558,778	$	129,887,146	$	(111,898,992	)	$	27,167,932
Cumulative effect of adopted accounting standard		-			-		-			-		-		9,731,714		3,271,361			13,003,075
Issuance of common stock and warrants, net of issuance costs of $5,493,310		-			-		-			41,211,100		7,417,998		62,250,410		-			69,668,408
Issuance of common stock upon warrant exercise		-			-		-			32,064,148		5,771,547		26,988,755		-			32,760,302
Conversion of Series B convertible preferred stock to common stock		(1	)		-		(1,000	)		285		51		949		-			-
Compensation cost for stock options granted		-			-		-			-		-		639,751		-			639,751
Net loss		-			-		-			-		-		-		(3,538,069	)		(3,538,069	)
Balance at March 31, 2021		620		$	1	$	619,999			120,824,368	$	21,748,374	$	229,498,725	$	(112,165,700	)	$	139,701,399
Issuance of common stock upon warrant exercise		-			-		-			5,091,351		916,443		9,279,198		-			10,195,641
Conversion of Series B convertible preferred stock to common stock		(33	)		-		(33,000	)		9,377		1,688		31,312		-			-
Compensation cost for stock options granted		-			-		-			-		-		1,214,110		-			1,214,110
Net loss		-			-		-			-		-		-		(7,039,248	)		(7,039,248	)
Balance at June 30, 2021		587		$	1	$	586,999			125,925,096	$	22,666,505	$	240,023,345	$	(119,204,948	)	$	144,071,902

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	*For the Six Months Ended June 30,*
	*2021*			*2020*
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(10,577,317	)	$	(6,853,562	)
Adjustments to reconcile net loss to net cash used in operating activities
Compensation cost for stock options granted		1,853,861			1,724,236
Disposal of assets		-			2,226
Depreciation and amortization		15,048			24,711
Changes in operating assets and liabilities:
Prepaid expenses		(578,064	)		(602,022	)
Research and development tax rebate receivable		(182,169	)		(20,966	)
Other assets		582,590			(237,827	)
Accounts payable		(1,050,698	)		739,536
Accrued expenses		438,235			14,967
Payroll liabilities		(263,077	)		(244,012	)
Other current liabilities		16,530			(6,704	)
Net cash used in operating activities		(9,745,061	)		(5,459,417	)

CASH FLOWS FROM INVESTING ACTIVITY
Purchase of furniture and equipment		-			(6,610	)
Net cash used in investing activities		-			(6,610	)

CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from issuance of common stock, net of issuance costs		-			347,627
Proceeds from issuance of common stock and warrants, net of issuance costs		69,668,408			-
Proceeds from exercise of warrants		42,955,943			-
Net cash provided by financing activities		112,624,351			347,627

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		102,879,290			(5,118,400	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING BALANCE		39,663,671			12,691,136
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING BALANCE	$	142,542,961		$	7,572,736

SUPPLEMENTAL DISCLOSURES
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	142,432,961		$	7,462,736
Restricted cash		110,000			110,000
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	142,542,961		$	7,572,736

NONCASH INVESTING AND FINANCING ACTIVITIES
Reclassification of the warrant liability to equity upon adoption of accounting standard	$	13,003,075		$	-
Conversion of Series B convertible preferred stock to common stock	$	34,000		$	45,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATOSSA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: NATURE OF OPERATIONS

On January 6, 2020, we changed our corporate name from Atossa Genetics Inc. to Atossa Therapeutics, Inc.

Atossa Therapeutics, Inc. (the “Company”) was incorporated on April 30, 2009, in the State of Delaware. The Company was initially formed to develop and market medical devices, laboratory tests and therapeutics to address breast health conditions. The Company is currently developing its pharmaceuticals in the fields of oncology and infectious disease with a focus on treatments of the novel coronavirus ("COVID-19"), breast cancer and other breast conditions. The Company’s fiscal year ends on December 31.

Impact of the Novel Coronavirus

The continued spread of the COVID-19 pandemic is affecting the United States 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 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. The evolving COVID-19 pandemic could also directly or indirectly impact the pace of enrollment in our clinical trials for at least the next several months and possibly longer as patients may avoid or may not be able to travel to healthcare facilities and physicians’ offices except for a health emergency. Such facilities and offices may also be required to focus limited resources on non-clinical trial activities, including treatment of COVID-19 patients, and may not be available, in whole or in part, for clinical trial activities related to the Company's products under development. We have not experienced any delay in drug supply for our ongoing and planned clinical studies, including studies of Endoxifen, AT-301 and AT-H201. However, our Phase 2 clinical study of Endoxifen that was being conducted in Australia was enrolling slower than expected due in part to COVID-19 restrictions. Also, the study site we plan to use in Sweden has been negatively impacted by COVID-19 restrictions which must be lifted before we can begin our study there. As a result, the study in Stockholm could be delayed or enroll more slowly than expected. 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. However, these effects could have a material adverse impact on the Company’s liquidity, capital resources, operations, financial position and business and those of the third parties on which we rely. We will continue to monitor future enrollment in studies for potential restrictions on site visits, mammograms or the impositions of new restrictions on trials as a result of the COVID-19 pandemic.

In response to the Coronavirus pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. On March 11, 2021, President Biden signed an additional coronavirus relief package entitled the American Rescue Plan Act of 2021, which included, among other things, provisions relating to stimulus payments to some Americans, extension of several CARES Act relief programs, expansion of the child tax credit, funding for vaccinations and other COVID-19 related assistance programs. The CARES Act and the American Rescue Plan Act have not had a material impact on the Company; however, we will continue to examine the impacts that the CARES Act and the American Rescue Plan Act, as well as any future economic relief legislation, may have on our business.

NOTE 2: LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred net losses and negative operating cash flows since inception. For the six months ended June 30, 2021, the Company recorded a net loss of approximately $10,577,000 and used approximately $9,745,000 of cash in operating activities. As of June 30, 2021, the Company had approximately $142,433,000 in cash and cash equivalents and working capital of approximately $144,035,000. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and believes it will need to continue to raise substantial additional capital to accomplish its business plan over the next several years. Management believes its currently available funding, including the funds received from warrant exercises and financing transactions with net proceeds of approximately $112,624,000 in the first six months of 2021, will be sufficient to finance the Company’s operations for at least one year from the date these condensed consolidated financial statements are issued. The Company plans to continue to fund its losses from operations and capital funding needs through a combination of public or private equity offerings, debt financings or other sources, including potential corporate collaborations, licenses and other similar arrangements. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. If the Company is unable to secure additional funding, it may be forced to curtail or suspend its business plans.

NOTE 3: SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by GAAP for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2020. The year-end condensed consolidated balance sheet presented was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Research and Development Expense

Research and development ("R&D") costs are generally expensed as incurred. R&D expenses include, for example, manufacturing expenses for the Company's drugs under development, expenses associated with clinical trials and associated salaries 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 total hours expended on research and development activities. The Company’s CEO is involved in the development of the Company’s drug candidates and oversight of the related clinical trial activity.

Fair Value Measurements

The Company records financial assets and liabilities measured on a recurring and non-recurring basis as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement. Also refer to Note 8.

Stock-based Payments

The Company measures and recognizes compensation expense for all stock-based payment awards made to employees, non-employee directors, and consultants, including employee stock options. Stock compensation expense is based on the estimated grant date fair value and is recognized as an expense over the requisite service period. The Company has made a policy election to recognize forfeitures when 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 stock options, the expected life of the options, an expectation regarding future dividends on the Company’s common stock, and estimation of an appropriate risk-free interest rate. The Company’s expected common stock price volatility assumption is based upon the historical volatility of our stock price. The Company has elected the simplified method for the expected life assumption for stock option grants, which averages the contractual term of the options of ten years with the vesting term, typically one to four years, as the Company does not have sufficient history of option exercise experience. The dividend yield assumption of zero is based upon the fact that the Company has never paid cash dividends and presently has 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.

Financial Instruments with Characteristics of Both Liabilities and Equity

During December 2020, the Company issued certain financial instruments, including warrants to purchase common stock, which have characteristics of both liability and equity. Financial instruments such as warrants that are classified as liabilities are fair valued upon issuance and are remeasured at fair value at subsequent reporting periods with the resulting change in fair value recorded in “change in fair value of common stock warrants”. The fair value of warrants is estimated using valuation models that require the input of subjective assumptions including stock price, exercise price, stock price volatility, expected life, an expectation regarding future dividends on the Company’s common stock, and estimation of an appropriate risk-free interest rate.

Recent Accounting Pronouncements

On May 3, 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options — a consensus of the FASB Emerging Issues Task Force. The ASU provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The guidance will be effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.

Recently Adopted Accounting Pronouncements

On January 1, 2021, the Company early adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (Topic 815) which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The guidance is effective for fiscal years beginning on or after December 15, 2023, with early adoption permitted, but not earlier than fiscal years beginning after December 15, 2020. The Company implemented this ASU using the modified retrospective approach. Upon adoption, the Company recorded a cumulative adjustment to beginning Stockholders' Equity in the amount of $13,003,075 to reclassify the common stock warrant liability to accumulated deficit and additional paid-in capital.

The guidance removes the liability and equity separation models for convertible instruments with a cash conversion feature or beneficial conversion feature. As a result companies will more likely account for a convertible debt instruments wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e. as a single unit of account). In addition, the guidance simplifies the settlement assessment that issuers perform to determine whether a contract in their own equity qualifies for equity classification. Finally, the guidance requires entities to use the if-converted method to calculate earnings per share for all convertible instruments.

The cumulative effect of initially applying the new standard was recognized as an adjustment to accumulated deficit. Upon the adoption of the new standard we recognized the following adjustments:

	*Ending Balance as of December 31, 2020*			*ASU 2020-06 Adjustments*			*Beginning Balance as of January 1, 2021*
Warrant liability	$	13,003,075		$	(13,003,075	)	$	-
Additional paid-in capital		129,887,146			9,731,714			139,618,860
Accumulated deficit		(111,898,992	)		3,271,361			(108,627,631	)

The $3,271,361 adjustment to accumulated deficit includes the reclassification of warrant financing expenses of $938,794 and the change in fair value of common stock warrants of $2,332,567 subsequent to initial recognition.

On January 1, 2021, the Company adopted ASU 2019-12, Income Taxes, (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. This ASU did not have a material effect on its condensed consolidated financial statements.

NOTE 4: RESTRICTED CASH

The Company's restricted cash balance of $110,000 as of June 30, 2021 and December 31, 2020 consists entirely of cash pledged as security for the Company's issued commercial credit cards.

NOTE 5: PREPAID EXPENSES

Prepaid expenses consisted of the following:

	*As of June 30,*		*As of December 31,*
	*2021*		*2020*
Prepaid research and development	$	1,689,936	$	1,215,834
Prepaid insurance		522,178		417,854
Professional services		122,594		128,229
Financial exchange fees		29,000		-
Retainer and security deposits		14,218		14,218
Prepaid rent		14,040		4,488
Other		-		33,279
Total prepaid expenses	$	2,391,966	$	1,813,902

NOTE 6: RESEARCH AND DEVELOPMENT TAX REBATE RECEIVABLE

On May 23, 2017, Atossa formed a wholly-owned subsidiary in Australia called Atossa Genetics AUS Pty Ltd. The purpose of this subsidiary is to perform R&D activities including our Phase 1 and Phase 2 Endoxifen and COVID-19 clinical trials. Australia offers an R&D cash rebate of $0.435 per dollar spent on qualified R&D activities incurred in the country. During the six months ended June 30, 2021 and 2020, the Company recorded a rebate receivable of approximately $271,000 and $203,000 respectively, related to qualified R&D activities incurred. At June 30, 2021 and December 31, 2020, we had a total R&D rebate receivable of $817,109 and $634,940, respectively.

The Company had realized losses on foreign currency exchange during the three and six months ended June 30, 2021 of $32,537 and $38,482, respectively, and realized gains on foreign currency exchange during the three and six months ended June 30, 2020 of $28,412 and $8,447, respectively, which is included in Other Income (Expense), net in the Condensed Consolidated Statements of Operations.

NOTE 7: PAYROLL LIABILITIES

Payroll liabilities consisted of the following:

	*As of June 30,*		*As of December 31,*
	*2021*		*2020*
Accrued bonuses	$	396,847	$	689,635
Accrued vacation		191,714		171,112
Accrued payroll		112,027		102,918
Total payroll liabilities	$	700,588	$	963,665

NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS

Pursuant to the accounting guidance for fair value measurement and its subsequent updates, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a hierarchy for inputs used in measuring fair value that minimizes the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

The fair value hierarchy is broken down into the three input levels summarized below:

● Level 1 —Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices on active markets.

● Level 2 —Valuations based on inputs other than the quoted prices in active markets that are observable either directly or indirectly in active markets. Examples of assets and liabilities utilizing Level 2 inputs are U.S. government agency bonds, corporate bonds, commercial paper, certificates of deposit and over-the- counter derivatives.

● Level 3 —Valuations based on unobservable inputs in which there are little or no market data, which require the Company to develop its own assumptions.

Warrants issued in the December 11, 2020 offering and December 28, 2020 overallotment closing contained provisions that may require the Company to settle the warrants in cash in an event outside the Company’s control and are therefore accounted for as liabilities, with changes in the fair values included in net loss for the respective periods. Because some of the inputs to the valuation model were either not observable or were not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability was classified as Level 3 in the fair value hierarchy as of December 31, 2020.

The following tables present the Company’s fair value hierarchy for all its financial assets and liabilities, by major security type measured at fair value on a recurring basis:

June 30, 2021	Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Money market account	$	51,793,570	$	51,793,570	$	-	$	-

December 31, 2020	Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Money market account	$	1,789,401	$	1,789,401	$	-	$	-
Liabilities:
Common stock warrant liability	$	13,003,075	$	-	$	-	$	13,003,075

The following table summarizes the changes in the Company’s Level 3 warrant liability for the six months ended June 30, 2021:

Warrant Liability
Beginning balance	$	13,003,075
Reclassification to equity upon adoption of accounting standard		(13,003,075	)
Issuance of warrants		-
Change in fair value

SEC Form 10-Q filed by Atossa Therapeutics, Inc.