Atossa Therapeutics, Inc. (NASDAQ:ATOS) Q2 2023 Earnings Conference Call August 14, 2023 9:00 AM ET Company Participants Eric Van Zanten - Vice President of Investor and Public Relations Steven Quay - President and Chief Executive Officer Greg Weaver - Executive Vice President and Chief Financial Officer Conference Call Participants Michael Okunewitch - Maxim Group Edward Woo - Ascendiant Capital Operator Good morning, ladies and gentlemen, thank you for standing by and welcome to the Atossa Therapeutics Q2 ...

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED](index=3&type=section&id=ITEM%201.%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS%20-%20UNAUDITED) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's financial position, performance, and accounting policies for the periods ended June 30, 2023, and December 31, 2022 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of specific dates | Assets/Liabilities & Equity (in thousands) | As of June 30, 2023 | As of December 31, 2022 | | :----------------------------------------- | :------------------ | :---------------------- | | Cash and cash equivalents | $99,390 | $110,890 | | Total current assets | $106,003 | $118,197 | | Total Assets | $108,355 | $123,532 | | Total current liabilities | $3,478 | $5,568 | | Total Liabilities | $3,478 | $5,568 | | Total Stockholders' Equity | $104,877 | $117,964 | | Total Liabilities and Stockholders' Equity | $108,355 | $123,532 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section outlines the company's financial performance over specific periods, detailing revenues, expenses, and net loss | Operating Expenses (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $3,705 | $3,433 | $7,213 | $4,937 | | General and administrative | $4,088 | $3,162 | $7,678 | $6,411 | | Total operating expenses | $7,793 | $6,595 | $14,891 | $11,348 | | Operating loss | $(7,793) | $(6,595) | $(14,891) | $(11,348) | | Impairment charge | $(2,990) | $- | $(2,990) | $- | | Interest income | $983 | $11 | $1,833 | $13 | | Net loss | $(9,830) | $(6,672) | $(16,111) | $(11,457) | | Loss per share (basic and diluted)| $(0.08) | $(0.05) | $(0.13) | $(0.09) | [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section details changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit | Stockholders' Equity (in thousands) | Balance at December 31, 2022 | Balance at June 30, 2023 | | :---------------------------------- | :--------------------------- | :----------------------- | | Common Stock Amount | $22,792 | $22,792 | | Additional Paid-in Capital | $250,784 | $253,960 | | Treasury Stock | $- | $(152) | | Accumulated Deficit | $(156,194) | $(172,305) | | Total Stockholders' Equity | $117,964 | $104,877 | - The company repurchased **119 shares** of common stock for **$152 thousand** as of June 30, 2023, which are recorded as treasury stock[11](index=11&type=chunk)[45](index=45&type=chunk) - Stock-based compensation cost for stock options granted totaled **$1,603 thousand** for the three months ended June 30, 2023, and **$3,176 thousand** for the six months ended June 30, 2023[11](index=11&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flows (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------ | :----------------------------- | :----------------------------- | | Net loss | $(16,111) | $(11,457) | | Net cash used in operating activities | $(11,487) | $(10,827) | | Net cash used in investing activities | $(13) | $(13) | | Net cash used in financing activities | $- | $- | | Net decrease in cash | $(11,500) | $(10,840) | | Ending cash, cash equivalents and restricted cash | $99,500 | $125,647 | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [NOTE 1: NATURE OF OPERATIONS](index=7&type=section&id=NOTE%201:%20NATURE%20OF%20OPERATIONS) This note describes the company's primary business activities as a clinical-stage biopharmaceutical company focused on oncology - Atossa Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing proprietary innovative medicines in oncology, specifically breast cancer and other breast conditions[16](index=16&type=chunk) [NOTE 2: LIQUIDITY AND CAPITAL RESOURCES](index=7&type=section&id=NOTE%202:%20LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This note discusses the company's financial liquidity, cash position, and future capital funding requirements - The company has incurred net losses and negative operating cash flows since inception, with a net loss of **$16,111 thousand** and **$11,487 thousand** cash used in operating activities for the six months ended June 30, 2023[17](index=17&type=chunk) - As of June 30, 2023, the company had **$99,390 thousand** in unrestricted cash and cash equivalents and working capital of **$102,525 thousand**[17](index=17&type=chunk) - Management believes current cash and cash equivalents are sufficient to finance operations for at least one year, but the company will need to raise substantial additional capital for its business plan[17](index=17&type=chunk) [NOTE 3: SUMMARY OF ACCOUNTING POLICIES](index=8&type=section&id=NOTE%203:%20SUMMARY%20OF%20ACCOUNTING%20POLICIES) This note outlines the significant accounting principles and methods used in preparing the financial statements - The financial statements are prepared in accordance with GAAP for interim information, with all amounts presented in thousands except for par value and per share data[19](index=19&type=chunk) - The company operates as a single segment and measures non-marketable equity investments at cost less impairment, performing assessments for impairment at each reporting period[21](index=21&type=chunk) - Research and development costs are generally expensed as incurred, including manufacturing, preclinical studies, clinical trials, and associated compensation[25](index=25&type=chunk) [NOTE 4: INVESTMENT IN EQUITY SECURITIES](index=9&type=section&id=NOTE%204:%20INVESTMENT%20IN%20EQUITY%20SECURITIES) This note details the company's investment in Dynamic Cell Therapies, Inc. and related impairment charges - On December 23, 2022, the company invested **$4,700 thousand** in Dynamic Cell Therapies, Inc. (DCT), a preclinical CAR T-cell therapy developer, acquiring approximately **19%** of its outstanding shares[30](index=30&type=chunk) - An impairment charge of **$2,990 thousand** was recorded as of June 30, 2023, due to adverse market conditions and concerns about DCT's going concern ability, reducing the investment's value to **$1,710 thousand**[31](index=31&type=chunk)[33](index=33&type=chunk) [NOTE 5: RESTRICTED CASH](index=10&type=section&id=NOTE%205:%20RESTRICTED%20CASH) This note explains the nature and amount of cash held for specific purposes, such as security for credit cards - Restricted cash remained at **$110 thousand** as of June 30, 2023, and December 31, 2022, serving as security for commercial credit cards[34](index=34&type=chunk) [NOTE 6: PREPAID EXPENSES](index=10&type=section&id=NOTE%206:%20PREPAID%20EXPENSES) This note provides a breakdown of various prepaid expenses, including research and development and insurance | Prepaid Expenses (in thousands) | As of June 30, 2023 | As of December 31, 2022 | | :------------------------------ | :------------------ | :---------------------- | | Prepaid research and development| $4,918 | $3,480 | | Prepaid insurance | $509 | $387 | | Professional services | $191 | $130 | | Other | $141 | $34 | | Total prepaid expenses | $5,759 | $4,031 | [NOTE 7: RESEARCH AND DEVELOPMENT REBATE RECEIVABLE](index=10&type=section&id=NOTE%207:%20RESEARCH%20AND%20DEVELOPMENT%20REBATE%20RECEIVABLE) This note details the R&D rebate received by the Australian subsidiary and the total rebate receivable - The company's Australian subsidiary incurred **$34 thousand** and **$86 thousand** in qualified R&D expenses for the three and six months ended June 30, 2023, respectively, receiving a rebate that reduced R&D expense by **$10 thousand** and **$37 thousand** for the same periods[37](index=37&type=chunk) - Total R&D rebate receivables were **$737 thousand** as of June 30, 2023, down from **$743 thousand** at December 31, 2022[37](index=37&type=chunk) [NOTE 8: ACCRUED EXPENSES](index=10&type=section&id=NOTE%208:%20ACCRUED%20EXPENSES) This note presents a breakdown of accrued liabilities, including research and development and professional services | Accrued Expenses (in thousands) | As of June 30, 2023 | As of December 31, 2022 | | :------------------------------ | :------------------ | :---------------------- | | Research and development | $559 | $1,038 | | Professional Services | $244 | $21 | | Total accrued liabilities | $803 | $1,059 | [NOTE 9: PAYROLL LIABILITIES](index=10&type=section&id=NOTE%209:%20PAYROLL%20LIABILITIES) This note details the company's payroll-related liabilities, such as accrued bonuses and vacation | Payroll Liabilities (in thousands) | As of June 30, 2023 | As of December 31, 2022 | | :--------------------------------- | :------------------ | :---------------------- | | Accrued bonuses | $50 | $1,060 | | Accrued vacation | $23 | $224 | | Accrued payroll liabilities | $1,382 | $241 | | Total payroll liabilities | $1,455 | $1,525 | [NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS](index=12&type=section&id=NOTE%2010:%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) This note provides information on the fair value measurements of financial assets, specifically money market accounts | Financial Assets (in thousands) | As of June 30, 2023 (Level 1) | As of December 31, 2022 (Level 1) | | :------------------------------ | :---------------------------- | :-------------------------------- | | Money market account | $97,182 | $102,681 | - The company had no financial liabilities subject to fair value measurements on a recurring basis as of June 30, 2023, and December 31, 2022[42](index=42&type=chunk) [NOTE 11: STOCKHOLDERS' EQUITY](index=12&type=section&id=NOTE%2011:%20STOCKHOLDERS'%20EQUITY) This note details the components of stockholders' equity, including authorized shares, repurchase programs, and outstanding warrants - The company is authorized to issue **175,000 shares** of common stock (**$0.18 par value**) and **10,000 shares** of preferred stock (**$0.001 par value**)[43](index=43&type=chunk) - A share repurchase program was authorized on June 27, 2023, to repurchase up to **$10,000 thousand** of common stock, expiring December 31, 2023. As of June 30, 2023, **119 shares** were purchased for **$152 thousand**[45](index=45&type=chunk) | Warrants Outstanding (shares) | Exercise Price Per Share | Expiration Date | | :---------------------------- | :----------------------- | :-------------- | | December 2020 warrants (6,490)| $1.00 | Dec 11, 2024 - Jun 21, 2025 | | January 2021 warrants (4,500) | $1.055 | July 8, 2025 | | March 2021 warrants (10,525) | $2.88 | Sep 22, 2025 | | Total (21,515) | | | [NOTE 12: NET LOSS PER SHARE](index=14&type=section&id=NOTE%2012:%20NET%20LOSS%20PER%20SHARE) This note explains the calculation of basic and diluted net loss per share and the impact of anti-dilutive securities - Basic and diluted net loss per share are the same due to the anti-dilutive effect of potential common shares from stock options, Series B convertible preferred stock, and warrants[59](index=59&type=chunk)[60](index=60&type=chunk) | Common Share Equivalents Excluded (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Options to purchase common stock | 17,828 | 13,337 | 16,294 | 12,219 | | Series B convertible preferred stock | 165 | 165 | 165 | 165 | | Warrants to purchase common stock | 21,515 | 22,009 | 21,515 | 22,142 | | Total | 39,508 | 35,511 | 37,974 | 34,526 | [NOTE 13: INCOME TAXES](index=15&type=section&id=NOTE%2013:%20INCOME%20TAXES) This note discusses the company's income tax position, including deferred tax assets and valuation allowances - A full valuation allowance is provided against net deferred tax assets due to cumulative losses, and no income tax liabilities existed as of June 30, 2023, and December 31, 2022[63](index=63&type=chunk) [NOTE 14: CONCENTRATION OF CREDIT RISK](index=15&type=section&id=NOTE%2014:%20CONCENTRATION%20OF%20CREDIT%20RISK) This note highlights the company's exposure to credit risk, particularly regarding cash and cash equivalents exceeding insured limits - The company had **$99,208 thousand** and **$110,647 thousand** in cash and cash equivalents exceeding FDIC insured limits as of June 30, 2023, and December 31, 2022, respectively[64](index=64&type=chunk) [NOTE 15: COMMITMENTS AND CONTINGENCIES](index=15&type=section&id=NOTE%2015:%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's contractual obligations, including lease agreements and CRO contracts - The company terminated its existing office lease and entered a new 12-month operating lease for **$3 thousand** monthly rent, commencing July 1, 2023[65](index=65&type=chunk) - Lease expense for the three and six months ended June 30, 2023, was **$3 thousand** and **$7 thousand**, respectively[66](index=66&type=chunk) - As of June 30, 2023, the company had an estimated non-cancellable contractual commitment of **$908 thousand** related to a CRO contract[67](index=67&type=chunk) [NOTE 16: STOCK-BASED COMPENSATION](index=15&type=section&id=NOTE%2016:%20STOCK-BASED%20COMPENSATION) This note details the stock options granted and the associated compensation expense recognized by the company - The company granted **4,230** and **6,691 options** to purchase common stock during the three and six months ended June 30, 2023, respectively, with weighted average grant date fair values of **$0.74** and **$0.69**[69](index=69&type=chunk) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | General and administrative | $1,156 | $1,140 | $2,211 | $2,323 | | Research and development | $447 | $631 | $965 | $1,254 | | Total stock compensation expense | $1,603 | $1,771 | $3,176 | $3,577 | - The company recorded **$320 thousand** in compensation expense related to accelerated unvested options for the former CFO and is obligated to pay an additional **$554 thousand** for salary and bonus severance[72](index=72&type=chunk) [NOTE 17: SUBSEQUENT EVENT](index=16&type=section&id=NOTE%2017:%20SUBSEQUENT%20EVENT) This note reports on significant events occurring after the reporting period, specifically further share repurchases - From July 1, 2023, to August 10, 2023, **720 shares** were purchased for a total cost of **$868 thousand** under the share repurchase program[76](index=76&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=17&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial condition and operational results, highlighting key developments in its clinical programs, investment activities, and financial performance for the three and six months ended June 30, 2023, compared to the prior year. It also discusses liquidity, capital resources, and critical accounting policies [Forward-Looking Statements](index=17&type=section&id=Forward-Looking%20Statements) This section cautions readers about statements regarding future business, clinical, and financial performance, which are subject to inherent risks - The report contains forward-looking statements regarding future business, clinical and commercialization activities, operating costs, supply chain, regulatory approvals, and financial performance, which are subject to risks and uncertainties[77](index=77&type=chunk)[78](index=78&type=chunk) [Company Overview](index=18&type=section&id=Company%20Overview) This section introduces Atossa Therapeutics as a clinical-stage biopharmaceutical company focused on breast cancer and related conditions - Atossa Therapeutics is a clinical-stage biopharmaceutical company focused on developing innovative medicines for breast cancer and other breast conditions[81](index=81&type=chunk) - The lead drug candidate is oral (Z)-endoxifen, being developed for ER+ HER2- breast cancer treatment prior to surgery and for reducing dense breast tissue[81](index=81&type=chunk) - The company holds two U.S. patents and one international patent for (Z)-endoxifen, with protection through **November 17, 2038**, and numerous pending applications[82](index=82&type=chunk) [Summary of Leading Programs](index=18&type=section&id=Summary%20of%20Leading%20Programs) This section provides an overview of the company's key drug development programs, including (Z)-endoxifen and AT-H201 [(Z)-endoxifen](index=19&type=section&id=(Z)-endoxifen) This subsection describes (Z)-endoxifen as a proprietary oral SERM under development for breast cancer and breast density reduction - (Z)-endoxifen is a proprietary oral Selective Estrogen Receptor Modulator (SERM) being developed for breast cancer and breast density reduction, having completed four Phase 1 and two Phase 2 clinical studies[84](index=84&type=chunk) [(Z)-endoxifen for Women with Breast Density](index=19&type=section&id=(Z)-endoxifen%20for%20Women%20with%20Breast%20Density) This subsection details the Phase 2 Karisma-(Z)-endoxifen study for reducing breast density in premenopausal women - A Phase 2, randomized, double-blind, placebo-controlled Karisma-(Z)-endoxifen study in premenopausal women with measurable breast density commenced in December 2021 in Stockholm, Sweden, aiming to enroll approximately **240 participants**[86](index=86&type=chunk) - The primary objective is to determine the dose-response relationship of daily (Z)-endoxifen on breast density reduction, with secondary endpoints assessing safety and tolerability[86](index=86&type=chunk) - FDA input suggests that MBD reduction may require demonstration of breast cancer incidence reduction for approval, potentially necessitating additional studies[87](index=87&type=chunk) [(Z)-endoxifen for Neoadjuvant Treatment of Breast Cancer](index=19&type=section&id=(Z)-endoxifen%20for%20Neoadjuvant%20Treatment%20of%20Breast%20Cancer) This subsection outlines the Phase 2 EVANGELINE and I-SPY 2 studies for (Z)-endoxifen in neoadjuvant breast cancer treatment - The company received FDA IND authorization in October 2022 and Health Canada authorization in June 2023 for the Phase 2 EVANGELINE study of oral (Z)-endoxifen for neoadjuvant treatment of premenopausal women with ER+/HER2- breast cancer[88](index=88&type=chunk) - The first PK Run-in Cohort of the EVANGELINE study was fully enrolled in June 2023, with **six patients** treated at **40 mg/day**. The **80 mg/day** dose level will commence as the initial dose did not achieve optimal plasma concentrations[91](index=91&type=chunk) - A second Phase 2 trial investigating oral (Z)-endoxifen as a neoadjuvant treatment for locally advanced ER+ breast cancer was initiated in March 2023 as part of the I-SPY 2 clinical trial, with **six patients** dosed as of June 30, 2023[92](index=92&type=chunk) [Inhaled HNAC(AT-H201)](index=20&type=section&id=Inhaled%20HNAC(AT-H201)) This subsection discusses the shift in focus for AT-H201 development and its current status after a healthy volunteer study - Development of AT-H201 for COVID-19 was shifted in late 2022 to focus on lung function compromised by cancer treatment, and the program is not expected to advance further after concluding a healthy volunteer study in Q1 2023[93](index=93&type=chunk) [Investment in CAR-T Company](index=20&type=section&id=Investment%20in%20CAR-T%20Company) This section details the company's strategic investment in Dynamic Cell Therapies, Inc., a preclinical CAR-T therapy developer - On December 23, 2022, the company invested in Dynamic Cell Therapies, Inc. (DCT), a preclinical CAR-T therapy developer, acquiring approximately **19%** of its outstanding capital stock[94](index=94&type=chunk) [Research and Development Phase](index=20&type=section&id=Research%20and%20Development%20Phase) This section clarifies that the company is in the R&D phase and does not anticipate generating revenue until product launch - The company is currently in the research and development phase and does not anticipate generating revenue until its pharmaceutical programs are developed and launched[95](index=95&type=chunk) [Commercial Lease Agreements](index=20&type=section&id=Commercial%20Lease%20Agreements) This section describes the termination of an old office lease and the commencement of a new 12-month operating lease - On June 26, 2023, the company terminated its existing office lease and entered a new 12-month operating lease for a larger office space at the same location for **$3 thousand** monthly rent, commencing July 1, 2023[96](index=96&type=chunk) [Critical Accounting Policies and Significant Estimates](index=20&type=section&id=Critical%20Accounting%20Policies%20and%20Significant%20Estimates) This section highlights key accounting policies and estimates, including investment impairment and R&D expense recognition - The company's investment in DCT Series Seed Preferred Stock is measured at cost less impairment, with a **$2,990 thousand** impairment charge recorded for the three and six months ended June 30, 2023, due to adverse market conditions and going concern concerns[99](index=99&type=chunk) - Research and development expenses are estimated based on open contracts, work orders, and communication with personnel, with costs generally expensed as incurred[101](index=101&type=chunk) - Stock option awards are measured at fair value on the grant date using the Black-Scholes model and recognized as compensation expense over the vesting period[104](index=104&type=chunk)[105](index=105&type=chunk) [Results of Operations](index=22&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, comparing operating expenses and net loss for current and prior periods [Comparison of the Three Months Ended June 30, 2023 and 2022](index=22&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202023%20and%202022) This subsection compares the company's operating expenses and financial results for the three-month periods - Total operating expenses increased by **$1,198 thousand (18%)** to **$7,793 thousand** for the three months ended June 30, 2023, compared to **$6,595 thousand** in the prior year[108](index=108&type=chunk) | Expense Category (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Research and Development | $3,705 | $3,433 | $272 | 8% | | General and Administrative | $4,088 | $3,162 | $926 | 29% | | Clinical and non-clinical trials| $2,538 | $1,821 | $717 | 39% | | G&A Compensation | $2,534 | $1,826 | $708 | 39% | | Legal and professional fees | $964 | $676 | $288 | 43% | | Interest income | $983 | $11 | $972 | 8836% | | Impairment charge | $2,990 | $- | $2,990 | N/A | - G&A compensation increased due to **$554 thousand** in severance costs for the CFO and **$138 thousand** for new employees, partially offset by a decrease in non-cash stock-based compensation[110](index=110&type=chunk) [Comparison of the Six Months Ended June 30, 2023 and 2022](index=23&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202023%20and%202022) This subsection compares the company's operating expenses and financial results for the six-month periods - Total operating expenses increased by **$3,543 thousand (31%)** to **$14,891 thousand** for the six months ended June 30, 2023, compared to **$11,348 thousand** in the prior year[114](index=114&type=chunk) | Expense Category (in thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($) | Change (%) | | :------------------------------ | :--------------------------- | :--------------------------- | :--------- | :--------- | | Research and Development | $7,213 | $4,937 | $2,276 | 46% | | General and Administrative | $7,678 | $6,411 | $1,267 | 20% | | Clinical trials | $4,874 | $3,109 | $1,765 | 57% | | G&A Compensation | $4,619 | $3,831 | $788 | 21% | | Legal and professional fees | $1,891 | $1,346 | $545 | 40% | | Interest income | $1,833 | $13 | $1,820 | 14000% | | Impairment charge | $2,990 | $- | $2,990 | N/A | - R&D expense increased primarily due to **$1,765 thousand** higher spending on clinical and non-clinical trials, API, and drug product formulation[115](index=115&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its short-term and long-term financial obligations and funding needs - As of June 30, 2023, the company had **$99,390 thousand** in unrestricted cash and cash equivalents and working capital of **$102,525 thousand**, believing it has sufficient funds for at least the next 12 months[119](index=119&type=chunk) - The company incurred a net loss of **$16,111 thousand** and used **$11,487 thousand** in operating activities for the six months ended June 30, 2023[119](index=119&type=chunk) [Cash Flows](index=24&type=section&id=Cash%20Flows) This section analyzes the sources and uses of cash from operating, investing, and financing activities - Net cash used in operating activities increased by **$660 thousand (6.1%)** to **$11,487 thousand** for the six months ended June 30, 2023, primarily due to increased clinical trial activity[120](index=120&type=chunk) - Net cash used in investing activities remained consistent at **$13 thousand** for both periods, mainly for computer purchases[120](index=120&type=chunk) - No cash was used in financing activities during the six months ended June 30, 2023, or June 30, 2022[121](index=121&type=chunk) [Funding Requirements](index=24&type=section&id=Funding%20Requirements) This section discusses the company's anticipated need for additional capital to support ongoing operations and development - The company expects ongoing operating losses and will need to raise additional capital through equity offerings, debt financings, or collaborations, which may not be available on acceptable terms[122](index=122&type=chunk)[124](index=124&type=chunk) - Stockholders have not approved proposals to increase authorized common stock, which may limit the company's ability to raise capital when needed[126](index=126&type=chunk) [Contractual Obligation](index=25&type=section&id=Contractual%20Obligation) This section outlines the company's significant non-cancellable contractual commitments, such as CRO contracts - As of June 30, 2023, the company had an estimated non-cancellable commitment of **$903 thousand** related to one CRO contract[128](index=128&type=chunk) [Share Repurchase Program](index=25&type=section&id=Share%20Repurchase%20Program) This section details the board-authorized program for repurchasing common stock and its terms - The Board authorized a share repurchase program in June 2023 to buy back up to **$10,000 thousand** of common stock, expiring December 31, 2023[129](index=129&type=chunk) - The program does not obligate the company to acquire a specific number of shares, with timing, manner, price, and amount determined at the company's discretion[129](index=129&type=chunk) [Off-Balance Sheet Arrangements](index=25&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of any off-balance sheet arrangements or relationships with unconsolidated entities - The company does not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships[130](index=130&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=25&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) As a smaller reporting company, Atossa Therapeutics is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Atossa Therapeutics is exempt from providing quantitative and qualitative disclosures about market risk[131](index=131&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=25&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=25&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms management's conclusion on the effectiveness of disclosure controls and procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023[132](index=132&type=chunk)[134](index=134&type=chunk) [Changes in Internal Control Over Financial Reporting](index=25&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports on the absence of material changes in internal control over financial reporting during the quarter - There have been no material changes in internal control over financial reporting during the quarter ended June 30, 2023[134](index=134&type=chunk) PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other required disclosures not included in the financial statements [ITEM 1. LEGAL PROCEEDINGS](index=26&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is not currently a party to any material legal proceedings and believes that any existing claims will not have a material adverse effect on its financial position or operations - The company is not currently a party to any material legal proceedings and believes that existing claims will not materially affect its financial position, results of operations, or cash flows[135](index=135&type=chunk) [ITEM 1A. RISK FACTORS](index=26&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section outlines various risks that could adversely affect the company's business, including operational losses, funding challenges, clinical trial failures, regulatory hurdles, intellectual property issues, industry competition, and risks related to its securities and market listing [Summary of Risk Factors](index=26&type=section&id=Summary%20of%20Risk%20Factors) This section provides a concise overview of the key risks impacting the company's business, operations, and financial performance - The company's business is subject to risks including operating losses, funding needs, clinical trial success, regulatory approvals, intellectual property protection, third-party dependencies, competition, and stock market volatility[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk) [Risks Relating to our Business](index=28&type=section&id=Risks%20Relating%20to%20our%20Business) This section details operational and financial risks, including historical losses, funding needs, and dependencies on third parties - The company has a history of operating losses and has not established ongoing revenue sources, requiring substantial additional capital to fund future operations, which may not be available on acceptable terms[144](index=144&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) - Successful development and commercial market acceptance of products are uncertain, with potential delays or failures in clinical trials due to safety, efficacy, regulatory approvals, manufacturing, or patient enrollment issues[152](index=152&type=chunk)[159](index=159&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk) - The company is highly dependent on third-party service providers for manufacturing, testing, supply chain, and clinical trial activities, and any failure or delay by these parties could harm the business[167](index=167&type=chunk)[168](index=168&type=chunk)[169](index=169&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) [Risks Related to our Intellectual Property](index=34&type=section&id=Risks%20Related%20to%20our%20Intellectual%20Property) This section addresses challenges in protecting proprietary technology, potential infringement claims, and reliance on trade secrets - The company's commercial success depends on protecting its proprietary technology through patents and licenses, but obtaining and enforcing patents is uncertain, costly, and subject to challenges and changes in patent law[189](index=189&type=chunk)[190](index=190&type=chunk)[192](index=192&type=chunk)[193](index=193&type=chunk)[199](index=199&type=chunk) - Third-party claims of intellectual property infringement could prevent or delay drug development, incur substantial costs, and require licenses that may not be available on commercially reasonable terms[204](index=204&type=chunk)[206](index=206&type=chunk)[207](index=207&type=chunk) - The company relies on trade secret protection and confidentiality agreements, but cannot guarantee prevention of disclosure or independent development by competitors, which could impair its competitive position[210](index=210&type=chunk) [Risks Related to Our Industry](index=37&type=section&id=Risks%20Related%20to%20Our%20Industry) This section covers risks from legislative changes, regulatory compliance, and intense competition within the biopharmaceutical industry - Legislative or regulatory reforms, including changes in FDA policies or healthcare initiatives, could increase costs, lengthen review times, or make it more difficult to obtain approvals and commercialize products[211](index=211&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk)[227](index=227&type=chunk) - Failure to comply with complex government regulations concerning patient privacy (HIPAA, GDPR, UK GDPR) could result in significant fines, penalties, litigation, and reputational harm[215](index=215&type=chunk)[216](index=216&type=chunk)[217](index=217&type=chunk)[218](index=218&type=chunk)[219](index=219&type=chunk)[220](index=220&type=chunk)[221](index=221&type=chunk) - The company faces intense competition from larger biotechnology and pharmaceutical companies with greater resources and experience, which could limit market share, pricing, and commercial opportunities[228](index=228&type=chunk)[229](index=229&type=chunk) [Risks Related to the Securities Markets and Investment in our Securities.](index=40&type=section&id=Risks%20Related%20to%20the%20Securities%20Markets%20and%20Investment%20in%20our%20Securities.) This section discusses risks associated with stock market volatility, Nasdaq listing compliance, and anti-takeover provisions - The company faces risks of not satisfying Nasdaq listing standards, including minimum bid price and independent director requirements, which could lead to delisting and adverse consequences for its stock[233](index=233&type=chunk)[234](index=234&type=chunk)[235](index=235&type=chunk)[236](index=236&type=chunk) - The trading price of the common stock is highly volatile due to various factors, and substantial sales of shares could cause dilution and price decline[237](index=237&type=chunk)[238](index=238&type=chunk)[240](index=240&type=chunk) - Anti-takeover provisions in governing documents and Delaware law, along with a concentrated ownership, could delay or prevent a change in control or influence management and operations[243](index=243&type=chunk)[244](index=244&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=42&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section reports on the company's share repurchase activities for the three months ended June 30, 2023, detailing the number of shares purchased and the remaining value under the authorized program | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | April 1, 2023 to April 30, 2023 | — | — | — | $10,000,000 | | May 1, 2023 to May 31, 2023 | — | — | — | $10,000,000 | | June 1, 2023 to June 30, 2023| 119,382 | $1.27 | 119,382 | $9,847,597 | | Total | 119,382 | | 119,382 | | - All repurchases were made pursuant to the publicly announced Share Repurchase Program, authorized in June 2023 for up to **$10.0 million** of common stock, expiring December 31, 2023[248](index=248&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=42&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) The company reported no defaults upon senior securities for the period - There were no defaults upon senior securities[250](index=250&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=42&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[250](index=250&type=chunk) [ITEM 5. OTHER INFORMATION](index=42&type=section&id=ITEM%205.%20OTHER%20INFORMATION) The company reported no other information for the period - No other information was reported[250](index=250&type=chunk) [ITEM 6. EXHIBITS](index=43&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[252](index=252&type=chunk) - The filing also includes Inline XBRL Instance Document, Taxonomy Extension Schema Document, Calculation Linkbase Document, Definition Linkbase Document, Labels Linkbase Document, Presentation Linkbase Document, and Cover Page Interactive Data File[252](index=252&type=chunk) [SIGNATURES](index=44&type=section&id=SIGNATURES) The report is duly signed on behalf of the registrant by the President and Chief Executive Officer, Steven C. Quay, and the Executive Vice President, Chief Financial Officer, and Secretary, Greg Weaver - The report was signed on **August 14, 2023**, by Steven C. Quay, President and Chief Executive Officer, and Greg Weaver, Executive Vice President, Chief Financial Officer, and Secretary[253](index=253&type=chunk)

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 March 31, 2023 OR ☐ 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 ...

PART I [Business](index=8&type=section&id=Item%201.%20Business) Atossa Therapeutics is a clinical-stage biopharmaceutical company developing oral (Z)-endoxifen for breast cancer and mammographic breast density, alongside immunotherapy programs - The company's lead drug candidate is oral (Z)-endoxifen, being developed for two primary indications: neoadjuvant treatment of breast cancer and reduction of mammographic breast density (MBD)[20](index=20&type=chunk) - In December **2022**, Atossa invested **$4.7 million** in Dynamic Cell Therapies, Inc. (DCT), a developer of CAR-T therapies, acquiring approximately **19%** of DCT's outstanding capital stock[30](index=30&type=chunk)[49](index=49&type=chunk) - The company is in the research and development phase and does not anticipate generating revenue until its pharmaceutical programs are successfully developed, approved, and commercialized[57](index=57&type=chunk) Patent Portfolio Status (as of Jan 31, 2023) | Program | Issued U.S. Patents | Issued International Patents | Pending U.S. Applications | Pending International Applications | Approximate Expiry Date | | :--- | :--- | :--- | :--- | :--- | :--- | | (Z)-endoxifen programs | 1 | 1 | 8 | 27 | 2038 - 2044 | | Respiratory and viral programs | - | - | 3 | 8 | 2041 - 2043 | | Immunotherapy/CAR-T program | - | - | 5 | 21 | 2037 - 2044 | | Other therapies programs | - | - | 3 | - | 2043 - 2044 | [Overview and Leading Programs](index=8&type=section&id=Overview) Atossa is a clinical-stage biopharmaceutical company focused on oncology, developing oral (Z)-endoxifen for breast cancer and mammographic breast density, prioritizing these programs in **2023** - The Karisma-(Z)-endoxifen study, a Phase 2 trial, is evaluating oral (Z)-endoxifen to reduce MBD in premenopausal women, with enrollment expected to be complete by the end of **2023**[23](index=23&type=chunk) - The EVANGELINE study, a Phase 2 trial authorized by the FDA in October **2022**, is investigating (Z)-endoxifen as a neoadjuvant treatment for premenopausal women with ER+/HER2- breast cancer. The first patient was enrolled in February **2023**[26](index=26&type=chunk)[27](index=27&type=chunk) - Development of AT-H201, originally for COVID-19 and later pivoted to lung injury from cancer treatments, will not be advanced in **2023** as the company focuses resources on its (Z)-endoxifen programs[28](index=28&type=chunk)[47](index=47&type=chunk) [Our Programs Under Development](index=10&type=section&id=Our%20Programs%20Under%20Development) The company primarily focuses on its (Z)-endoxifen programs, developing this active tamoxifen metabolite to overcome limitations, with key Phase 2 trials ongoing for breast cancer and mammographic breast density - The company believes its proprietary oral (Z)-endoxifen may overcome shortcomings of tamoxifen because it is not a pro-drug and does not require liver metabolism to become active[33](index=33&type=chunk) - The EVANGELINE Phase 2 study is investigating neoadjuvant (Z)-endoxifen in premenopausal women with ER+/HER2- breast cancer and is expected to enroll approximately **175 patients** in the U.S[40](index=40&type=chunk) - The Karisma-Endoxifen Phase 2 study is evaluating oral (Z)-endoxifen in women with elevated MBD in Stockholm, Sweden, and is expected to enroll approximately **240 participants**[42](index=42&type=chunk) [Other Programs; Immunotherapy/CAR-T Programs](index=14&type=section&id=Other%20Programs%3B%20Immunotherapy%2FCAR-T%20Programs) Atossa is exploring immunotherapy and CAR-T programs, including a **$4.7 million** investment in Dynamic Cell Therapies and patent filings for novel CAR-T delivery methods for breast cancer - The company has filed patent applications for a novel method to deliver CAR-T cells or other immunotherapies directly into breast milk ducts, the origin site for most breast cancers, potentially reducing systemic toxicity and improving efficacy[51](index=51&type=chunk) [Our Capital Resources](index=14&type=section&id=Our%20Capital%20Resources) The company, lacking sustainable revenue, relies on capital raising to fund operations, holding approximately **$111 million** in cash and equivalents as of December 31, **2022** Financial Position | Metric | Amount (as of Dec 31, 2022) | | :--- | :--- | | Cash and cash equivalents | ~$111 million | - The company's ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until profitability is achieved[53](index=53&type=chunk) [Government Regulation](index=17&type=section&id=Government%20Regulation) Atossa is subject to extensive government regulation by the FDA and international agencies, requiring multi-phase clinical trials, stringent approval processes, and adherence to post-market compliance and data privacy laws - The drug development process in the U.S. requires extensive nonclinical testing, an Investigational New Drug (IND) application with the FDA, and a three-phase clinical trial process to establish safety and efficacy before an NDA can be submitted for marketing approval[71](index=71&type=chunk)[72](index=72&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) - In the European Union, marketing authorization can be obtained through centralized or decentralized procedures, with the European Medicines Agency (EMA) playing a key assessment role. All new applications must include a Risk Management Plan (RMP)[87](index=87&type=chunk)[91](index=91&type=chunk)[93](index=93&type=chunk) - The company is subject to data privacy and protection laws, including HIPAA in the U.S. and the General Data Protection Regulation (GDPR) in the E.U., which impose significant compliance obligations and penalties for non-compliance[111](index=111&type=chunk)[119](index=119&type=chunk) - Following Brexit, the company must comply with UK-specific regulations, including the Medicines and Medical Devices Act **2021** and the UK GDPR, creating a separate regulatory landscape from the E.U[115](index=115&type=chunk)[116](index=116&type=chunk)[118](index=118&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including limited operating history, lack of revenue, dependence on capital, clinical trial uncertainties, reliance on third parties, intellectual property challenges, and potential Nasdaq delisting - The company has a history of operating losses (**$27.0 million** net loss in **2022**) and an accumulated deficit of **$156.2 million**, with no established sources of ongoing revenue[149](index=149&type=chunk)[153](index=153&type=chunk) - Atossa is highly dependent on third-party service providers for critical activities, including manufacturing (cGMP), clinical trials (GCP), and supply chain operations. Any failure by these third parties could significantly harm the business[170](index=170&type=chunk)[171](index=171&type=chunk) - The company's common stock is at risk of being delisted from the Nasdaq Capital Market. On October 5, **2022**, Atossa received a notice of non-compliance for failing to maintain a minimum closing bid price of **$1.00 per share**[240](index=240&type=chunk) - There is a high degree of uncertainty in pharmaceutical development; promising early-stage compounds may fail in later stages due to lack of efficacy, safety issues, or manufacturing difficulties, and preliminary clinical data may differ from final results[162](index=162&type=chunk)[163](index=163&type=chunk) [Unresolved Staff Comments](index=60&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) Not applicable. The company has no unresolved staff comments from the SEC [Properties](index=60&type=section&id=Item%202.%20Properties) As of December 31, **2022**, the company leases approximately **202 square feet** of office space in Seattle, Washington. Management believes this facility is adequate for its needs for the next **12 months** - The company leases approximately **202 square feet** of office space in Seattle, Washington[252](index=252&type=chunk) [Legal Proceedings](index=60&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any material legal proceedings, with no current litigation expected to have a material adverse effect [Mine Safety Disclosures](index=60&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Not applicable PART II [Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=61&type=section&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the Nasdaq Capital Market under the symbol "ATOS", with approximately **40 stockholders** of record as of March 16, **2023**, and no cash dividends have been paid or are anticipated - The company's common stock is traded on the Nasdaq Capital Market under the symbol "ATOS"[256](index=256&type=chunk) - The company has never declared or paid cash dividends and intends to retain future earnings to finance business growth[257](index=257&type=chunk) [Reserved](index=61&type=section&id=Item%206.%20Reserved) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=61&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For **2022**, Atossa reported a net loss of **$27.0 million**, an increase from **2021**, driven by a **64%** rise in R&D expenses to **$15.1 million** and an **11%** increase in G&A expenses to **$12.6 million**, with **$110.9 million** in cash and equivalents at year-end Operating Expenses Comparison (in thousands) | Expense Category | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | **Research and Development** | **$15,083** | **$9,210** | **$5,873** | | Clinical trials | $10,225 | $4,656 | $5,569 | | Exclusivity agreements | ($700) | $1,000 | ($1,700) | | **General and Administrative** | **$12,608** | **$11,311** | **$1,297** | | Compensation | $3,034 | $2,371 | $663 | | Stock-based compensation | $4,395 | $3,676 | $719 | | Legal | $1,135 | $534 | $601 | | **Total Operating Expenses** | **$27,691** | **$20,521** | **$7,170** | Key Financial Metrics (Year Ended Dec 31, 2022) | Metric | Amount (in thousands) | | :--- | :--- | | Net Loss | $26,960 | | Net Cash Used in Operating Activities | $20,760 | | Cash and Cash Equivalents (End of Period) | $110,890 | | Working Capital (End of Period) | $112,629 | - The company believes its current cash position is sufficient to fund projected operating requirements for at least the next **12 months**[296](index=296&type=chunk) [Results of Operations](index=67&type=section&id=Results%20of%20Operations) Total operating expenses increased **35%** to **$27.7 million** in **2022**, with R&D expenses up **64%** to **$15.1 million** due to clinical trial costs, and G&A expenses rising **11%** to **$12.6 million** - R&D expenses increased by **$5.9 million (64%)** in **2022**, primarily due to a **$5.6 million** rise in clinical and non-clinical trial costs for the (Z)-endoxifen and AT-H201 programs[291](index=291&type=chunk) - G&A expenses increased by **$1.3 million (11%)** in **2022**, driven by higher compensation (**$0.7 million**), non-cash stock-based compensation (**$0.7 million**), and legal fees (**$0.6 million**), partially offset by lower professional fees[293](index=293&type=chunk) - A net decrease of **$1.7 million** in R&D expenses was attributed to exclusivity agreements, resulting from a **$1.0 million** refund received in **2022** compared to a **$1.0 million** fee paid in **2021**, and a new **$0.3 million** fee paid in **2022**[293](index=293&type=chunk) [Liquidity and Capital Resources](index=69&type=section&id=Liquidity%20and%20Capital%20Resources) The company used **$20.8 million** in cash from operations in **2022**, holding **$110.9 million** in cash and equivalents and **$112.6 million** in working capital as of December 31, **2022**, deemed sufficient for the next **12 months** Cash Flow Summary (Year Ended Dec 31, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($20,760) | ($16,472) | | Net Cash Used in Investing Activities | ($4,727) | ($9) | | Net Cash Provided by Financing Activities | $0 | $113,304 | - The increase in cash used for investing activities in **2022** was primarily due to the **$4.7 million** investment in the equity securities of DCT[297](index=297&type=chunk) - The company did not engage in financing activities in **2022**, whereas in **2021** it raised **$113.3 million** net from the sale of common stock and exercise of warrants[298](index=298&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=72&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, Atossa Therapeutics is not required to provide this information [Financial Statements and Supplementary Data](index=72&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The company's audited consolidated financial statements and supplementary data are included in the report, beginning on page **42** [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=72&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) None [Controls and Procedures](index=73&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, **2022**, management concluded that the company's disclosure controls and internal control over financial reporting were effective at a reasonable assurance level - Management concluded that as of December 31, **2022**, the company's disclosure controls and procedures were effective[312](index=312&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, **2022**[313](index=313&type=chunk) [Other Information](index=73&type=section&id=Item%209B.%20Other%20Information) None [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=73&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) Not applicable PART III [Directors, Executive Officers and Corporate Governance](index=74&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on executive officers is in Part I, Item 1, with other details incorporated by reference from the **2023** Proxy Statement, and the company has a Code of Business Conduct and Ethics [Executive Compensation](index=74&type=section&id=Item%2011.%20Executive%20Compensation) Information for this item is incorporated by reference from the "Executive Compensation" section of the company's **2023** Proxy Statement [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=74&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information for this item is incorporated by reference from the "Executive Compensation- Equity Compensation Plan Information" and "Beneficial Owners and Management" sections of the company's **2023** Proxy Statement [Certain Relationships and Related Transactions, and Director Independence](index=74&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information for this item is incorporated by reference from the "Certain Relationships and Related Party Transactions" and "Corporate Governance" sections of the company's **2023** Proxy Statement [Principal Accountant Fees and Services](index=74&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information for this item is incorporated by reference from the "Proposal No. 2 — Ratification of Selection of Independent Registered Public Accounting Firm" section of the company's **2023** Proxy Statement PART IV [Exhibits and Financial Statement Schedules](index=74&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists documents filed as part of the Annual Report, including financial statements and various exhibits, with all financial statement schedules omitted as not required or included elsewhere [Form 10-K Summary](index=75&type=section&id=Item%2016.%20Form%2010-K%20Summary) None Financial Statements [Report of Independent Registered Public Accounting Firm](index=77&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) BDO USA, LLP issued an unqualified opinion on Atossa Therapeutics' consolidated financial statements for **2022** and **2021**, identifying the accounting treatment of the equity investment as a critical audit matter - The auditor, BDO USA, LLP, issued an unqualified (clean) opinion on the company's consolidated financial statements[329](index=329&type=chunk) - The accounting treatment of the **$4.7 million** investment in equity securities (DCT) was identified as a Critical Audit Matter due to complexities in GAAP regarding the initial deposit and final investment[333](index=333&type=chunk)[334](index=334&type=chunk) [Consolidated Financial Statements](index=79&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements show total assets decreased from **$141.3 million** in **2021** to **$123.5 million** in **2022**, total liabilities increased, and the company reported a net loss of **$27.0 million** for **2022**, with an accumulated deficit of **$156.2 million** Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $110,890 | $136,377 | | Investment in equity securities | $4,700 | $0 | | Total Assets | $123,532 | $141,262 | | **Liabilities & Equity** | | | | Total Liabilities | $5,568 | $3,126 | | Total Stockholders' Equity | $117,964 | $138,136 | | Accumulated Deficit | ($156,194) | ($129,234) | Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Research and development | $15,083 | $9,210 | | General and administrative | $12,608 | $11,311 | | **Operating loss** | **($27,691)** | **($20,521)** | | **Net loss** | **($26,960)** | **($20,606)** | | Loss per share | ($0.21) | ($0.18) | Consolidated Statement of Cash Flows Data (in thousands) | Activity | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($20,760) | ($16,472) | | Net cash used in investing activities | ($4,727) | ($9) | | Net cash provided by financing activities | $0 | $113,304 | | **Net (decrease) increase in cash** | **($25,487)** | **$96,823** | [Notes to Consolidated Financial Statements](index=83&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, confirm sufficient liquidity, explain the **$4.7 million** DCT investment, describe equity structure, and disclose a full valuation allowance against **$99.0 million** deferred tax assets due to historical losses, including **4.1 million** options granted in **2022** - Management believes currently available funding is sufficient to finance operations for at least one year from the financial statement issuance date[359](index=359&type=chunk) - The **$4.7 million** investment in Dynamic Cell Therapies, Inc. (DCT) is accounted for at cost less impairment. An impairment assessment as of December 31, **2022**, concluded that the investment was not impaired[379](index=379&type=chunk)[380](index=380&type=chunk)[381](index=381&type=chunk) - As of December 31, **2022**, the company had federal net operating loss carryforwards of **$99.0 million**, which are subject to limitation under IRC Section **382**. A full valuation allowance has been recorded against net deferred tax assets[421](index=421&type=chunk)[422](index=422&type=chunk) - The company granted **4.079 million options** in **2022** and recognized **$6.8 million** in total stock-based compensation expense for the year[431](index=431&type=chunk)[434](index=434&type=chunk)

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited Q1 2022 financial statements, management's analysis, and market risk disclosures [Item 1. Condensed Consolidated Financial Statements](index=4&type=section&id=ITEM%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents the unaudited Q1 2022 financial statements, showing a net loss of $4.8 million and key balance sheet changes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows total assets of $137.5 million and a decrease in cash and stockholders' equity as of March 31, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $131,486 | $136,377 | | Total current assets | $136,848 | $141,240 | | **Total Assets** | **$137,478** | **$141,262** | | **Liabilities & Equity** | | | | Total current liabilities | $2,322 | $3,126 | | **Total Liabilities** | **$2,322** | **$3,126** | | **Total Stockholders' Equity** | **$135,156** | **$138,136** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a net loss of $4.8 million for Q1 2022, driven by a 34% increase in total operating expenses Condensed Consolidated Statements of Operations (Unaudited, in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Research and development | $1,499 | $1,379 | | General and administrative | $3,248 | $2,152 | | **Total operating expenses** | **$4,747** | **$3,531** | | **Operating loss** | **($4,747)** | **($3,531)** | | **Net loss** | **($4,786)** | **($3,538)** | | Loss per common share - basic and diluted | ($0.04) | ($0.04) | | Weighted average shares outstanding | 126,624 | 92,587 | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity decreased to $135.2 million, primarily due to the quarterly net loss offset by stock-based compensation - The primary drivers for the change in stockholders' equity during Q1 2022 were the **net loss of $4,786 thousand** and **stock-based compensation expense of $1,806 thousand**[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operations was $4.9 million, with no financing activities, resulting in an ending cash balance of $131.6 million Cash Flow Summary (Unaudited, in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,878) | ($4,408) | | Net cash used in investing activities | ($13) | $0 | | Net cash provided by financing activities | $0 | $102,428 | | **Net (decrease) increase in cash** | **($4,891)** | **$98,020** | | **Cash at end of period** | **$131,596** | **$137,684** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail the company's focus, liquidity, R&D rebates, and stock-based compensation policies - The company is focused on developing pharmaceuticals for COVID-19, breast cancer, and other breast conditions[19](index=19&type=chunk) - Management believes its current funding of **$131.5 million in cash and cash equivalents is sufficient** to finance operations for at least one year[20](index=20&type=chunk) - The company receives a **43.5% R&D cash rebate** from Australia for qualified activities, which reduced Q1 2022 R&D expenses by $140 thousand[37](index=37&type=chunk) - **Stock-based compensation expense increased to $1,806 thousand** in Q1 2022 from $640 thousand in Q1 2021, with the majority allocated to G&A expenses[76](index=76&type=chunk)[77](index=77&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses its clinical programs, a 34% rise in operating expenses, and its current liquidity position - The company's leading programs are **Endoxifen for breast cancer**, **AT-301 nasal spray** for at-home COVID-19 treatment, and **AT-H201 inhalation therapy** for hospitalized patients[85](index=85&type=chunk)[87](index=87&type=chunk)[94](index=94&type=chunk) Comparison of Operating Expenses (in thousands) | Expense Category | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Research & Development | $1,499 | $1,379 | +9% | | General & Administrative | $3,248 | $2,152 | +51% | | **Total Operating Expenses** | **$4,747** | **$3,531** | **+34%** | - The increase in R&D expense was mainly due to drug manufacturing costs, while G&A expense rose due to **non-cash stock-based compensation of $734 thousand** and higher legal fees[111](index=111&type=chunk)[112](index=112&type=chunk) - As of March 31, 2022, the company had **$131.5 million in cash and cash equivalents** and believes it has sufficient funds for at least the next twelve months of operations[113](index=113&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=32&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks are credit risk from its large cash balance and minor foreign currency exposure - The company holds **$131.5 million in cash and cash equivalents**, with the majority in a commercial money market account at one financial institution, exceeding FDIC insured limits[124](index=124&type=chunk) - The company is subject to foreign currency risk from its Australian subsidiary's cash and R&D rebate receivable, but did not recognize significant exchange rate losses[125](index=125&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal controls over financial reporting were effective - The CEO and CFO concluded that the company's **disclosure controls and procedures were effective** as of March 31, 2022[128](index=128&type=chunk) - There were **no material changes in internal control** over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[129](index=129&type=chunk) [PART II. OTHER INFORMATION](index=33&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part covers legal proceedings, risk factors, and other required disclosures for the reporting period [Item 1. Legal Proceedings](index=33&type=section&id=ITEM%201.%20Legal%20Proceedings) The company believes current legal matters will not have a material effect on its financial position or operations - The company believes that current legal proceedings and claims **will not have a material effect** on its financial position, results of operations, or cash flows[131](index=131&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=ITEM%201A.%20Risk%20Factors) The company faces significant risks related to its operating history, capital needs, clinical development, and the COVID-19 pandemic - The company has a **limited operating history**, a history of operating losses, and will need to raise substantial additional capital to fund operations[133](index=133&type=chunk)[136](index=136&type=chunk)[140](index=140&type=chunk) - Development of pharmaceutical products is **highly uncertain**, with risks of regulatory failure, clinical trial delays, and compound failure in later stages[145](index=145&type=chunk)[147](index=147&type=chunk) - The business is **dependent on third-party service providers** for manufacturing, testing, and clinical trial activities, and failure by these parties could harm the business[153](index=153&type=chunk)[154](index=154&type=chunk) - The COVID-19 pandemic could **adversely impact operations**, while its end could make the company's COVID-19 programs obsolete[203](index=203&type=chunk)[204](index=204&type=chunk) - The company faces risks related to **protecting its intellectual property**, potential infringement claims, and changes in U.S. patent law[165](index=165&type=chunk)[173](index=173&type=chunk)[179](index=179&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=51&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no unregistered sales of equity securities or use of proceeds during the period - This item is **not applicable** for the reporting period[217](index=217&type=chunk) [Item 3. Defaults upon Senior Securities](index=51&type=section&id=ITEM%203.%20Defaults%20upon%20Senior%20Securities) The company reports no defaults upon senior securities occurred during the period - This item is **not applicable** for the reporting period[217](index=217&type=chunk) [Item 4. Mine Safety Disclosures](index=51&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) The company reports this item as not applicable as it is not involved in mining operations - This item is **not applicable** for the reporting period[217](index=217&type=chunk) [Item 5. Other Information](index=51&type=section&id=ITEM%205.%20Other%20Information) The company reports no other material information was required to be disclosed during the period - This item is **not applicable** for the reporting period[217](index=217&type=chunk) [Item 6. Exhibits](index=52&type=section&id=ITEM%206.%20Exhibits) This section lists the required CEO/CFO certifications and Inline XBRL financial data files filed with the report - The exhibits filed with this report include **CEO and CFO certifications** pursuant to Sarbanes-Oxley Sections 302 and 906, and various Inline XBRL documents[220](index=220&type=chunk)[221](index=221&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk) [Signatures](index=53&type=section&id=SIGNATURES) The report was officially signed by the CEO and CFO on behalf of the company on May 9, 2022 - The report was **signed and authorized on May 9, 2022**, by the company's CEO and CFO[229](index=229&type=chunk)