atos20220630

atos20220630_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, 2022

☐	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 as of August 5, 2022, was 126,624,110.

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ATOSSA THERAPEUTICS, INC.
FORM 10-Q
QUARTERLY REPORT

INDEX



PART I. FINANCIAL INFORMATION


ITEM 1.	Condensed Consolidated Financial Statements – Unaudited	3

	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021	4

	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	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

ITEM 1.	Legal Proceedings	24

ITEM 1A.	Risk Factors	24

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

ITEM 3.	Defaults upon Senior Securities	38

ITEM 4.	Mine Safety Disclosures	38

ITEM 5.	Other Information	38

ITEM 6.	Exhibits	39

SIGNATURES		40

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except for par value)

	*As of June 30, 2022*			*As of December 31,*
Assets	*(Unaudited)*			*2021*
Current assets
Cash and cash equivalents	$	125,537		$	136,377
Restricted cash		110			110
Prepaid expenses		5,304			2,488
Research and development rebate receivable		900			1,072
Other current assets		1,570			1,193
Total current assets		133,421			141,240

Other assets		627			22
Total Assets	$	134,048		$	141,262

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	2,052		$	1,717
Accrued expenses		834			204
Payroll liabilities		875			1,184
Other current liabilities		31			21
Total current liabilities		3,792			3,126

Total Liabilities		3,792			3,126

Commitments and contingencies (Note 13)

Stockholders' equity
Preferred stock - $0.001 par value; 10,000 shares authorized; 1 share issued and outstanding as of June 30, 2022 and December 31, 2021		-			-
Additional paid-in capital - Series B convertible preferred stock		582			582
Common stock - $0.18 par value; 175,000 shares authorized; 126,624 shares issued and outstanding as of June 30, 2022 and December 31, 2021		22,792			22,792
Additional paid-in capital - common stock		247,573			243,996
Accumulated deficit		(140,691	)		(129,234	)
Total Stockholders' Equity		130,256			138,136
Total Liabilities and Stockholders' Equity	$	134,048		$	141,262

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

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ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(amounts in thousands, except for per share amounts)

	*For the Three Months Ended June 30,*						*For the Six Months Ended June 30,*
	*2022*			*2021*			*2022*			*2021*

Operating expenses
Research and development	$	3,433		$	3,799		$	4,937		$	5,177
General and administrative		3,162			3,205			6,411			5,357
Total operating expenses		6,595			7,004			11,348			10,534
Operating loss		(6,595	)		(7,004	)		(11,348	)		(10,534	)
Other expense, net		(77	)		(35	)		(109	)		(43	)
Loss before income taxes		(6,672	)		(7,039	)		(11,457	)		(10,577	)
Income taxes		-			-			-			-
Net loss	$	(6,672	)	$	(7,039	)	$	(11,457	)	$	(10,577	)
Loss per common share - basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.09	)	$	(0.10	)
Weighted average shares outstanding - basic and diluted		126,624			121,572			126,624			107,160

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

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ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(amounts in thousands)

	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		1	$	-	$	621			47,550	$	8,559	$	129,887	$	(111,899	)	$	27,168
Cumulative effect of adopted accounting standard		-		-		-			-		-		9,732		3,271			13,003
Issuance of common stock and warrants, net of issuance costs of $5,493		-		-		-			41,211		7,418		62,250		-			69,668
Issuance of common stock upon warrant exercise		-		-		-			32,063		5,771		26,989		-			32,760
Conversion of Series B convertible preferred stock to common stock		-		-		(1	)		-		-		1		-			-
Compensation cost for stock options granted		-		-		-			-		-		640		-			640
Net loss		-		-		-			-		-		-		(3,538	)		(3,538	)
Balance at March 31, 2021		1	$	-	$	620			120,824	$	21,748	$	229,499	$	(112,166	)	$	139,701
Issuance of common stock upon warrant exercise		-		-		-			5,091		917		9,279		-			10,196
Conversion of Series B convertible preferred stock to common stock		-		-		(33	)		9		2		31		-			-
Compensation cost for stock options granted		-		-		-			-		-		1,214		-			1,214
Net loss		-		-		-			-		-		-		(7,039	)		(7,039	)
Balance at June 30, 2021		1	$	-	$	587			125,924	$	22,667	$	240,023	$	(119,205	)	$	144,072

	*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, 2021		1	$	-	$	582		126,624	$	22,792	$	243,996	$	(129,234	)	$	138,136
Compensation cost for stock options granted		-		-		-		-		-		1,806		-			1,806
Net loss		-		-		-		-		-		-		(4,785	)		(4,785	)
Balance at March 31, 2022		1	$	-	$	582		126,624	$	22,792	$	245,802	$	(134,019	)	$	135,157
Compensation cost for stock options granted		-		-		-		-		-		1,771		-			1,771
Net loss		-		-		-		-		-		-		(6,672	)		(6,672	)
Balance at June 30, 2022		1	$	-	$	582		126,624	$	22,792	$	247,573	$	(140,691	)	$	130,256

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

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ATOSSA THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)

	*For the Six Months Ended June 30,*
	*2022*			*2021*
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(11,457	)	$	(10,577	)
Adjustments to reconcile net loss to net cash used in operating activities
Compensation cost for stock options granted		3,577			1,854
Depreciation and amortization		4			15
Disposal of assets		1			-
Changes in operating assets and liabilities:
Prepaid expenses		(2,816	)		(578	)
Research and development rebate receivable		172			(182	)
Other assets		(974	)		582
Accounts payable		335			(1,051	)
Accrued expenses		630			438
Payroll liabilities		(309	)		(263	)
Other current liabilities		10			17
Net cash used in operating activities		(10,827	)		(9,745	)

CASH FLOWS FROM INVESTING ACTIVITY
Purchase of furniture and equipment		(13	)		-
Net cash used in investing activities		(13	)		-

CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from issuance of common stock and warrants, net of issuance costs		-			69,668
Proceeds from exercise of warrants		-			42,956
Net cash provided by financing activities		-			112,624

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(10,840	)		102,879
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING BALANCE		136,487			39,664
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING BALANCE	$	125,647		$	142,543

SUPPLEMENTAL DISCLOSURES
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	125,537		$	142,433
Restricted cash		110			110
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	125,647		$	142,543

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

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

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ATOSSA THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1: NATURE OF OPERATIONS

Atossa Therapeutics, Inc. (the Company) was incorporated on April 30, 2009 in the State of Delaware to develop and market medical devices, laboratory tests and therapeutics to address breast health conditions. The Company is currently focused on development of its pharmaceuticals for the treatment of breast cancer and other breast conditions, lung injury caused by cancer treatments, and the novel coronavirus (COVID-19). The Company’s fiscal year ends on December 31.

Impact of the Novel Coronavirus

The ongoing COVID-19 pandemic 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 pace of enrollment in our 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. 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, 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. If the number of COVID-19 cases decline or if antiviral therapies (such as paxlovid) become widely adopted, it may be difficult to enroll participants in our planned COVID-19 clinical studies.

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, 2022, the Company recorded a net loss of $11,457 and used $10,827 of cash in operating activities. As of June 30, 2022, the Company had $125,537 in cash and cash equivalents and working capital of $129,629. 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 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.

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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, 2021. The year-end condensed consolidated balance sheet presented was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. All amounts have been presented in thousands, except for par value and other per share data.

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, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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.

Segments

The Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, our chief operating decision maker has made such decisions and assessed performance at the company level as one segment.

Research and Development

Research and development (R&D) costs are generally expensed as incurred. R&D expenses include, for example, manufacturing expense for the Company's drugs under development, expenses associated with clinical trials and associated salaries and benefits. The Company has entered into various research and development contracts with research institutions, clinical research organizations, clinical manufacturing organizations and other companies. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and payments made in advance of performance are reflected in the accompanying condensed consolidated balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued expenses, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the prepaid expense or accrued expense balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

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.

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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.

Recently Adopted 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. As there were no modifications or exchanges of freestanding equity-classified warrants during the three or six months ended June 30, 2022, the standard did not have an impact on the condensed consolidated financial statements.

On January 1, 2022, the Company adopted ASU 2021-10 Annual Disclosure Requirements for Business Entities Receiving Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance, which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy. For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction. The disclosure of the Company's research and development rebate receivable is detailed in Note 6.

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NOTE 4: RESTRICTED CASH

The Company's restricted cash balance of $110 as of June 30, 2022 and December 31, 2021, 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,*
	*2022*		*2021*
Prepaid research and development	$	4,488	$	1,853
Prepaid insurance		579		461
Professional services		186		124
Other		51		50
Total prepaid expenses	$	5,304	$	2,488

NOTE 6: RESEARCH AND DEVELOPMENT 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. The Australian R&D tax incentive program is a self-assessment process, and as such, the Australian Government has the right to review the Company’s qualifying programs and related expenditures for a period of four years. If such a review were to occur, and as a result of the review and failure of a related appeal a qualified program and related expenditures could be disqualified, and the respective R&D rebates could be recalled with penalties and interest. The Company uses the grant accounting model by analogy to International Accounting Standards (IAS) 20 to account for the cash rebates received from the Australian government.

During the three and six months ended June 30, 2022, the Company incurred qualified R&D expenses in Australia of $607 and $930, respectively. Qualified R&D expenses incurred by the Company were $275 and $546 during the three and six months ended June 30, 2021, respectively. During the six months ended June 30, 2022 and June 30, 2021, the Company collected R&D cash rebates of $629 and $0, respectively. At June 30, 2022 and December 31, 2021, we had a total research and development rebate receivable of $900 and $1,072, respectively. We record the R&D rebate credit in the period when we incur the associated R&D cost. As such, the rebate reduced the Research and Development expense line item on the Condensed Consolidated Statements of Operations by $264 and $404 for the three and six months ended June 30, 2022 and $109 and $216 for the same periods in 2021, respectively.

The Company had realized losses on foreign currency exchange, related to the research and development rebate receivable balance, during the three and six months ended June 30, 2022 of $85 and $114, respectively, and $33 and $38 for the same periods in 2021, respectively. Foreign currency exchange gains and losses are included in Other expense, net in the Condensed Consolidated Statements of Operations.

NOTE 7: PAYROLL LIABILITIES

Payroll liabilities consisted of the following:

	June 30,		December 31,
	2022		2021
Accrued bonuses	$	504	$	894
Accrued vacation		244		183
Accrued payroll		127		107
Total payroll liabilities	$	875	$	1,184

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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.

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, 2022	Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Money market account	$	51,809	$	51,809	$	-	$	-

December 31, 2021	Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Money market account	$	51,796	$	51,796	$	-	$	-

Warrants issued in December of 2020 contained provisions that may have required the Company to settle the warrants in cash in an event outside the Company’s control and were 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. On January 1, 2021, the Company early adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Topic 470) and Derivative Hedging - Contracts in an Entity's Own Equity (Topic 815). Upon adoption, the Company recorded a cumulative adjustment to beginning Stockholders' Equity in the amount of $13,003 to reclassify the common stock warrant liability to accumulated deficit and additional paid-in capital.

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
Reclassification of equity upon adoption of accounting standard		(13,003	)
Issuance of warrants		-
Change in fair value		-
Ending balance	$	-

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NOTE 9: STOCKHOLDERS’ EQUITY

The Company is authorized to issue a total of 185,000 shares of stock consisting of 175,000 shares of common stock, par value $0.18 per share, and 10,000 shares of preferred stock, par value $0.001 per share. The Company has designated 750 shares of Series A junior participating preferred stock, par value $0.001 per share, 4 shares of Series A convertible preferred stock, par value $0.001 per share, 25 shares of Series B convertible preferred stock, par value $0.001 and 20 shares of Series C convertible preferred stock, par value $0.001 per share, through the filings of certificates of designation with the Delaware Secretary of State. No shares of Series A junior participating preferred stock, no shares of Series A convertible preferred stock and no shares of Series C convertible preferred stock are outstanding as of June 30, 2022 and December 31, 2021.

2021 Financing Transactions

On January 6, 2021, the Company entered into a securities purchase agreement with certain institutional and accredited investors relating to the offering and sale of 23,850 shares of Company common stock, par value $0.18 per share and warrants to purchase 17,888 shares of common stock. The combined purchase price for one share of common stock and a warrant to purchase 0.75 shares of common stock was $1.055. Subject to certain ownership limitations, the warrants are exercisable upon issuance. The warrants will expire on the 4.5-year anniversary of the date of issuance and have an exercise price of $1.055 per share. The common stock and warrants have been registered under the Securities Act of 1933, as amended. The offering closed on January 8, 2021 with net proceeds to the Company from the offering of $23,300 after deducting fees and expenses.

On March 22, 2021, the Company entered into a securities purchase agreement with certain institutional and accredited investors relating to the offering and sale of 17,361 shares of our common stock, par value $0.18 per share. Concurrently with the offering, and pursuant to the purchase agreement, the Company also commenced a private placement whereby it issued and sold warrants exercisable for an aggregate of up to 13,021 shares of common stock. The combined purchase price for one share of common stock and a purchase warrant to purchase 0.75 shares of common stock is $2.88. Subject to certain ownership limitations, the warrants are exercisable upon issuance. The warrants will expire on the 4.5-year anniversary of the date of issuance. Subsequent to the issuance of the warrants, the Company filed a registration statement on Form S-3 (File No. 333-255411) to cover the sale of an aggregate of 13,021 shares of common stock issuable upon exercise of the warrants which was declared effective by the SEC on April 29, 2021. The net proceeds to the Company from the offering and the private placement are $46,400, after deducting fees and expenses.

Series B Convertible Preferred Stock

Conversion. Each share of Series B convertible preferred stock is convertible at our option at any time on or after the first anniversary of the closing of the rights offering or at the option of the holder at any time, into the number of shares of our common stock determined by dividing the $1,000 stated value per share of the Series B convertible preferred stock by a conversion price of $3.52 per share. In addition, the conversion price per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations or reclassifications. Subject to limited exceptions, a holder of the Series B convertible preferred stock will not have the right to convert any portion of the Series B convertible preferred stock to the extent that, after giving effect to the conversion, the holder, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion.

Fundamental Transactions. In the event we effect certain mergers, consolidations, sales of substantially all of our assets, tender or exchange offers, reclassifications or share exchanges in which our common stock is effectively converted into or exchanged for other securities, cash or property, we consummate a business combination in which another person acquires 50% of the outstanding shares of our common stock, or any person or group becomes the beneficial owner of 50% of the aggregate ordinary voting power represented by our issued and outstanding common stock. Then, upon any subsequent conversion of the Series B convertible preferred stock, the holders of the Series B convertible preferred stock will have the right to receive any shares of the acquiring corporation or other consideration it would have been entitled to receive if it had been a holder of the number of shares of common stock then issuable upon conversion in full of the Series B convertible preferred stock.

Dividends. Holders of Series B convertible preferred stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares of the common stock when, as and if such dividends are paid on shares of common stock.

Voting Rights. Except as otherwise provided in the certificate of designation or as otherwise required by law, the Series B convertible preferred stock has no voting rights.

Liquidation Preference. Upon our liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series B convertible preferred stock will be entitled to receive out of our assets, whether capital or surplus, the same amount that a holder of common stock would receive if the Series B convertible preferred stock were fully converted (disregarding for such purpose any conversion limitations under the certificate of designation) to common stock, which amounts shall be paid pari passu with all holders of common stock.

Redemption Rights. We are not obligated to redeem or repurchase any shares of Series B convertible preferred stock. Shares of Series B convertible preferred stock are not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous provisions.

Warrants

The terms and conditions of the warrants are as follows:

Exercisability. Each warrant is exercisable at any time and will expire between 4 and 4.5-years from the date of issuance. The warrants are exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and payment in full for the number of shares of our common stock purchased upon such exercise, except in the case of a cashless exercise as discussed below.

The number of shares of common stock issuable upon exercise of the warrants is subject to adjustment in certain circumstances, including a stock split, stock dividend on, or a subdivision, combination or recapitalization of the common stock. Upon the merger, consolidation, sale of substantially all of our assets, or other similar transaction, the holders of warrants shall, at the option of the Company, be required to exercise the warrants immediately prior to the closing of the transaction, or such warrants shall automatically expire. Upon such exercise, the holders of warrants shall participate on the same basis as the holders of common stock in connection with the transaction.

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Cashless Exercise. If at any time there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of, the shares issuable upon exercise of the warrant, the holder may exercise the warrant on a cashless basis. When exercised on a cashless basis, a portion of the warrant is cancelled in payment of the purchase price payable in respect of the number of shares of our common stock purchasable upon such exercise.

Exercise Price. Each warrant represents the right to purchase one share of common stock. In addition, the exercise price per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations, or reclassifications, and for certain dilutive issuances. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of the warrant to the extent that, after giving effect to the exercise, the holder, together with its affiliates, and any other person acting as a group together with the holder or any of its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its exercise. The holder, upon notice to the Company, may increase or decrease the beneficial ownership limitation provisions of the warrant, provided that in no event shall the limitation exceed 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise of the warrant.

Transferability. Subject to applicable laws and restrictions, a holder may transfer a warrant upon surrender of the warrant to us with a completed and signed assignment in the form attached to the warrant. The transferring holder will be responsible for any tax liability that may arise as a result of the transfer.

Exchange Listing. We do not intend to apply to list the warrants on any securities exchange or recognized trading system.

Rights as Stockholder. Except as set forth in the warrant, the holder of a warrant, solely in such holder’s capacity as a holder of a warrant, will not be entitled to vote, to receive dividends, or to any of the other rights of our stockholders.

Warrants Outstanding

As of June 30, 2022, warrants to purchase shares of common stock were outstanding including:

	Outstanding Warrants to Purchase Shares		Exercise Price Per Share		Expiration date
December 2020 warrants		6,490	$	1.00	December 11 2024-June 21, 2025
January 2021 warrants		4,500	$	1.055	July 8, 2025
March 2021 warrants		10,525	$	2.88	September 22, 2025
		21,515

Warrant Activity

There were no warrant exercises during the three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, the Company received $10,196 and $42,956 respectively, from the exercises of warrants. The warrant exercises resulted in the reduction of 5,091 and 37,154 warrants, respectively, for the three and six months ended June 30, 2021 and the issuance of 5,091 and 37,154 shares of common stock for the same periods.

Conversion of Convertible Preferred Stock

During the three and six months ended June 30, 2022, there were no conversions of Series B convertible preferred stock. During the three and six months ended June 30, 2021, certain holders of the Series B convertible preferred stock exercised their conversion option and converted an aggregate of 0.033 and 0.034 shares, respectively, into 9 and 9 shares of the Company's common stock.

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NOTE 10: NET LOSS PER SHARE

The Company follows the two-class method when computing net loss per share as the Company has issued warrants and preferred stock that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back any convertible preferred dividends. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of potential future exercises of outstanding stock options and common stock warrants. Because the inclusion of potential common shares would be anti-dilutive for all periods presented, they have been excluded from the calculation.

The Company’s warrants and preferred stock contractually entitle the holders of such securities to participate in dividends but do not contractually require the holders of such securities to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three and six months ended June 30, 2022, and 2021.

The following table summarizes the Company’s calculation of net loss per common share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Numerator
Net loss attributable to common shareholders	$	(6,672	)	$	(7,039	)	$	(11,457	)	$	(10,577	)
Denominator
Weighted average common shares outstanding used to compute net loss per share, basic and diluted		126,624			121,572			126,624			107,160
Net loss per share of common stock, basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.09	)	$	(0.10	)

The following table sets forth the weighted average number of potential common shares excluded from the calculation of net loss per diluted share, because including them would be anti-dilutive:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Options to purchase common stock		13,337		8,905		12,219		7,991
Series B convertible preferred stock		165		175		165		176
Warrants to purchase common stock		22,009		26,919		22,142		26,003
		35,511		35,999		34,526		34,170

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NOTE 11: INCOME TAXES

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

As a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s net deferred tax assets is appropriate. No income tax liabilities existed as of June 30, 2022 and December 31, 2021, due to the Company’s continuing operating losses.

NOTE 12: CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits which include a money market account. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250. As of June 30, 2022 and December 31, 2021, the Company had $125,332 and $136,185, respectively, including restricted cash, in excess of the FDIC insured limit, respectively.

NOTE 13: COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company evaluates all contractual agreements at inception to determine if they contain a lease. Lease liabilities are measured at present value of lease payments not yet paid, using a discounted cash flow model that requires the use of a discount rate, or incremental borrowing rate. Lease terms of 12 months or less are considered short term operating leases and no asset or liability is recognized.

Our office lease expired February 28, 2022. In March 2022, the Company entered into a new operating lease for office space to pay monthly rent of $1 for a term of 12 months. The Company had lease expense under short term leases during the three and six months ended June 30, 2022, of $2 and $8, respectively. Lease expense under short term leases during the three and six months ended June 30, 2021 were $7 and $12, respectively. As of June 30, 2022 and December 31, 2021, the right of use asset and lease liability balances were $0.

Litigation and Contingencies

We are subject to legal proceedings and claims that arise in the normal course of business. We believe these matters are either without merit or of a kind that should not have a material effect, individually or in the aggregate, on our financial position, results of operations or cash flows.

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NOTE 14: STOCK BASED COMPENSATION

Stock Option and Incentive Plan

On March 24, 2020, the Board of Directors approved the adoption of the 2020 Stock Incentive Plan (2020 Plan) to provide for the grant of equity-based awards to employees, officers, non-employee directors and other key persons providing services to the Company. No awards may be granted under the 2020 Plan after the date that is 10 years from the date of stockholder approval. An aggregate of 3,000 shares were initially reserved for issuance in connection with awards granted under the 2020 Plan. On May 14, 2021, the stockholders approved an additional 15,000 shares available for issuance under the 2020 Plan. There are 8,086 options available for grant under the 2020 Plan as of June 30, 2022.

The Company granted options to purchase 1,128 and 3,849 shares of common stock to employees during the three and six months ended June 30, 2022. For the three and six months ended June 30, 2021, the Company granted 3,644 options to employees to purchase shares of common stock. The weighted average grant date fair value of options granted during the three and six months ended June 30, 2022 was $0.80 and $0.99, respectively, and $2.55 and $2.55 for the same periods in 2021, respectively. There were no options exercised during the three and six months ended June 30, 2022 and 2021.

The fair value of stock options granted for the three and six months ended June 30, 2022 and 2021, was calculated using the Black-Scholes option-pricing model applying the following assumptions:

	Three Months Ended June 30,			Six Months Ended June 30,
	2022			2022
Risk-free interest rate	2.87%	-	3.02%	1.86%	-	3.02%
Expected term (in years)	5.19	-	6.11	5.19	-	6.11
Dividend yield		-			-
Expected volatility	114%	-	126%	114%	-	128%

	Three Months Ended June 30,			Six Months Ended June 30,
	2021			2021
Risk-free interest rate	0.89%	-	1.08%	0.89%	-	1.08%
Expected term (in years)	5.31	-	6.17	5.31	-	6.17
Dividend yield		-			-
Expected volatility	122%	-	130%	122%	-	130%

Compensation costs associated with the Company’s stock options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. Accordingly, the Company recognized stock-based compensation expense, which was included in the following captions in the consolidated statements of operations:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
General and administrative	$	1,140	$	853	$	2,323	$	1,303
Research and development		631		361		1,254		551
Total stock compensation expense	$	1,771	$	1,214	$	3,577	$	1,854

Options issued and outstanding as of June 30, 2022, and their activities during the six months ended are as follows:

	Number of Underlying Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Contractual Life Remaining in Years		Aggregate Intrinsic Value
Outstanding as of January 1, 2022		10,027	$	2.82		-
Granted		3,849		1.16		-		50,738
Exercised		-		-		-
Forfeited		-		-		-
Expired		-		-		-		-
Outstanding as of June 30, 2022		13,876		2.35		8.31	$	183
Exercisable as of June 30, 2022		8,418		2.72		7.60

SEC Form 10-Q filed by Atossa Therapeutics Inc.