Atossa Therapeutics(ATOS) - 2022 Q4 - Annual Report

PART I Business 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] - 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][49] - 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] 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 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] - 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][27] - 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][47] Our Programs Under Development 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] - 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] - 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] Other Programs; Immunotherapy/CAR-T Programs 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] Our Capital Resources 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] Government Regulation 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][72][75][76] - 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][91][93] - 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][119] - 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][116][118] Risk Factors 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][153] - 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][171] - 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] - 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][163] Unresolved Staff Comments Not applicable. The company has no unresolved staff comments from the SEC Properties 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] Legal Proceedings 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 Not applicable PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - The company has never declared or paid cash dividends and intends to retain future earnings to finance business growth[257] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations 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] Results of Operations 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] - 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] - 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] Liquidity and Capital Resources 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] - 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] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Atossa Therapeutics is not required to provide this information Financial Statements and Supplementary Data 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 None Controls and Procedures 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] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[313] Other Information None Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable PART III Directors, Executive Officers and Corporate Governance 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 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 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 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 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 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 None Financial Statements Report of Independent Registered Public Accounting Firm 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] - 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][334] Consolidated Financial Statements 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 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] - 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][380][381] - 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][422] - The company granted 4.079 million options in 2022 and recognized $6.8 million in total stock-based compensation expense for the year[431][434]