NOTE

STOCKHOLDERS' EQUITY

The Company is authorized to issue a total of

185,000,000

shares of stock consisting of

175,000,000

shares of common stock, par value

$0.18

per share, and

10,000,000

shares of preferred stock, par value

$0.001

per share. The Company has designated

750,000

shares of Series A junior participating preferred stock, par value

$0.001

per share,

4,000

shares of Series A convertible preferred stock, par value

$0.001

per share,

25,000

shares of Series B convertible preferred stock, par value

$0.001

and

5,425

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.

shares of Series A junior participating preferred stock,

shares of Series A convertible preferred stock and

shares of Series C convertible preferred stock are outstanding as of

December

31,

2020

and

December 31, 2019.

May 19, 2014,

the Company adopted a stockholder rights agreement which provides that all stockholders of record on

May 26, 2014,

received a non-taxable distribution of

one

preferred stock purchase right for each share of the Company's common stock held by such stockholder. Each right is attached to and trades with the associated share of common stock. The rights will become exercisable only if

one

of the following occurs: (

) a person becomes an “Acquiring Person” by acquiring beneficial ownership of

15%

or more of the Company's common stock (or, in the case of a person who beneficially owned

15%

or more of the Company's common stock on the date the stockholder rights agreement was executed, by acquiring beneficial ownership of additional shares representing

2.0%

of the Company's common stock then outstanding (excluding compensatory arrangements)), or (

) a person commences a tender offer that, if consummated, would result in such person becoming an Acquiring Person. If a person becomes an Acquiring Person, each right will entitle the holder, other than the Acquiring Person and certain related parties, to purchase a number of shares of the Company's common stock with a market value that equals twice the exercise price of the right. The initial exercise price of each right is

$15.00,

so each holder (other than the Acquiring Person and certain related parties) exercising a right would be entitled to receive

$30.00

worth of the Company's common stock. If the Company is acquired in a merger or similar business combination transaction at any time after a person has become an Acquiring Person, each holder of a right (other than the Acquiring Person and certain related parties) will be entitled to purchase a similar amount of stock of the acquiring entity.

Equity Distribution Agreement

February 7, 2020,

Atossa Therapeutics, Inc. entered into an equity distribution agreement with Oppenheimer & Co. Inc., ("Oppenheimer") acting as sales agent relating to the “at-the-market” (the "Oppenheimer ATM") offering and sale by Atossa of common shares, par value

$0.18

per share, having an aggregate gross sales price of up to

$5,000,000.

Sales of the shares were made at Atossa's sole discretion and by means of ordinary brokers' transactions through the facilities of the Nasdaq Capital Market at market prices, in block transactions or as otherwise agreed between Atossa and Oppenheimer. The distribution agreement provided that Oppenheimer was entitled to a commission of

3.0%

of the gross offering proceeds of the shares sold pursuant to the distribution agreement and reimbursement for certain specified expenses. Atossa had

obligation to offer or sell any shares under the agreement, and could at any time suspend offers and sales under the agreement. Oppenheimer could also suspend or terminate the offering of shares being made through them upon proper notice to the Company. During the year ended

December 31, 2020,

the Company sold

1,243,639

shares of common stock under the Oppenheimer ATM, for net proceeds of

$4,686,298.

Total issuance costs for the year ended

December 31, 2020

were

$313,702.

September

25,

2020,

Atossa Therapeutics, Inc. entered into an equity distribution agreement with Maxim Group, LLC., ("Maxim") acting as sales agent relating to the "at-the-market" offering and sale by Atossa of common shares, par value

$0.18

per share, having an aggregate gross sales price of up to

$10,000,000.

Sales of the shares, if any, will be made at Atossa's sole discretion and by means of ordinary brokers' transactions through the facilities of the Nasdaq Capital Market at market prices, in block transactions or as otherwise agreed between Atossa and Maxim. The distribution agreement provides that Maxim will be entitled to a commission of

3.0%

of the gross offering proceeds of the shares sold pursuant to the distribution agreement and reimbursement for certain specified expenses. Atossa has

obligation to offer or sell any shares under the agreement, and

may

at any time suspend offers and sales under the agreement. Maxim could also suspend or terminate the offering of common stock being made through them upon proper notice to the Company. Sales under the ATM with Maxim began in

October.

During the year ended

December 31, 2020,

the Company sold

84,016

shares of common stock under the Maxim ATM for gross proceeds to the Company of

$139,588.

Total issuance costs for the year ended

December 31, 2020

were

$160,939.

March 21, 2021,

we terminated the equity distribution agreement and as a result

further sales of common stock will be made thereunder.

2020

Offering of Consisting of Common Stock, Series C Convertible Preferred Stock and Warrants

December 8, 2020,

the Company entered into an underwriting agreement with Maxim Group, LLC, pursuant to which the Company agreed to issue and sell registered units consisting of an aggregate of: (i)

14,575,000

shares of the Company's common stock at

$1.00

per share; (ii)

5,425

Shares of Series C convertible preferred stock, par value

$0.001

per share at

$1,000.00

per share and (iii) warrants convertible into up to

15,000,000

shares of common stock. The warrants were immediately exercisable at a price of

$1.00

per share of common stock and expire

four

years from the date of issuance. On

December 28, 2020,

the Company also closed on the overallotment provision of the underwriting agreement which included the sale of an additional

3,000,000

shares of common stock and

2,250,000

warrants. Net proceeds in total were

$20,976,244,

after deducting expenses relating to the offering of

$2,023,756,

including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. Proceeds of

$16,749,926,

net of issuance costs of

$825,074

have been included in the statement of stockholders' equity under the caption Issuance of common stock and warrants. Proceeds from the sale of common stock and warrants of

$8,196,428

have been allocated to the common stock warrant liability. Proceeds of

$5,165,111,

net of issuance costs of

$259,889

have been included in the statement of stockholders' equity under the caption Issuance of Series C convertible preferred stock and warrants. Proceeds from the sale of Series C convertible preferred stock and warrants of

$2,474,080

have been allocated to the common stock warrant liability. Issuance costs of

$938,793

that were allocated to the warrant liabilities were expensed during

2020.

Accounting Treatment

The Company allocated the proceeds from the sale of the common stock and warrant units and preferred stock and warrant units to the separate securities issued. The Company determined that, on the date of issuance, the warrants include provisions that could require net-cash settlement and therefore, the warrants should be accounted for as liabilities. At the end of each reporting period, the changes in fair value of the warrants during the period were recorded in non-operating expense in the consolidated statement of operations.

The Company allocated the amount representing the fair value of the warrants at the date of issuance separately

first

to the warrant liability and recorded the remaining proceeds as common stock, in the case of the common stock and warrant units, or as Series C convertible preferred stock, in the case of the preferred stock and warrant units. Due to the allocation of a portion of the proceeds to the warrants, the Series C convertible preferred stock contained a beneficial conversion feature upon issuance, which was recorded in the amount of

$1,768,830

based on the intrinsic value of the beneficial conversion feature. The discount on the Series C convertible preferred stock of

$2,474,080

caused by allocation of the proceeds to the warrant and the issuance costs allocated to the convertible preferred stock of

$259,899

were recorded as a deemed dividend upon issuance of the Series C convertible preferred stock. As a result, total deemed dividends of

$4,502,799

were recorded upon issuance of the Series C convertible preferred stock, which is reflected as an addition to net loss in the consolidated statement of operations to arrive at net loss applicable to common shareholders.

Series C Convertible Preferred Stock

The terms and provisions of our Series C convertible preferred stock are:

Conversion.

Each share of Series C 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 C convertible preferred stock by a conversion price of

$1.00

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 C convertible preferred stock will

not

have the right to convert any portion of the Series C 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 C convertible preferred stock, the holders of the Series C 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 C convertible preferred stock.

Dividends.

Holders of Series C 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 C convertible preferred stock has

voting rights.

Liquidation Preference

Upon our liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series C 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 C 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 C convertible preferred stock. Shares of Series C convertible preferred stock are

not

otherwise entitled to any redemption rights, or mandatory sinking fund or analogous provisions.

2020

Liability Warrants

The terms and conditions of the warrants included in the

December 11, 2020

offering and exercise of related overallotment option are as follows:

Exercisability

. Each warrant is exercisable at any time and will expire

four

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 or, 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.

Cashless Exercise

. If at any time there is

effective registration statement registering, or the prospectus contained therein is

not

available for 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. The form of the warrant does

not

explicitly state that the warrants will

not

be settled in cash.

Exercise Price

. Each warrant represents the right to purchase

one

share of common stock at an exercise price of

$1.00

per share. 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

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 that 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.

Outstanding Liability Warrants

As of

December 31, 2020,

liability warrants to purchase

17,250,000

shares of common stock with an exercise price of

$1.00

which expire

December 11, 2024

and

December 28, 2024

were outstanding.

The fair value of liability warrants issued during the years ended

December 31, 2020,

was calculated using the Black-Scholes option-pricing model applying the following assumptions:


Initial Valuation
Common stock price	$	0.87 - 0.89
Exercise price	$	1.00
Risk-free interest rate		0.28	%
Expected term	4.0 years
Dividend yield		-
Expected volatility		107% - 124%

December 31, 2020 Valuation
Common stock price	$	0.95
Exercise price	$	1.00
Risk-free interest rate		0.27	%
Expected term	4.0 years
Dividend yield		-
Expected volatility		127	%

Conversion of Convertible Preferred Stock

During the years ended

December 31, 2020,

certain holders of the Series C convertible preferred stock exercised their conversion option and converted an aggregate of

5,425

shares, into

5,425,000

shares of the Company's common stock based on the conversion ratio of approximately

1,000

shares of common stock for each share of Series C convertible preferred stock.

During the years ended

December 31, 2020

and

December 31, 2019,

certain holders of the Series B convertible preferred stock exercised their conversion option and converted an aggregate of

and

1,708,

shares, respectively into

14,208

and

485,244

shares respectively, of the Company's common stock based on the conversion ratio of approximately

284

shares of common stock for each share of Series B convertible preferred stock.

2020

Offering Consisting of Common Stock and Warrants

December 17, 2020,

the Company entered into a securities purchase agreement with certain institutional and accredited investors relating to the offering and sale of

14,000,000

shares of Company common stock. Concurrently with the offering, the Company also commenced a private placement whereby it issued and sold warrants exercisable for an aggregate of up to

10,500,000

shares of common stock, which represents

75%

of the shares of common stock sold in the offering. The combined purchase price for

one

share of common stock and a purchase warrant to purchase

0.75

shares of Common Stock was

$1.00.

The warrants expire

4.5

years from the anniversary of the date of issuance. The offering closed on

December 21, 2020

with net proceeds of

$12,925,416,

after deducting expenses relating to the offering

$1,074,584,

including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. The net proceeds, net of issuance costs have been included in the statement of stockholders' equity under the caption Issuance of common stock and warrants.

2020

Warrants

The terms and conditions of the warrants included in the

December 21, 2020

offerings are as follows:

Exercisability

. Each warrant is exercisable at any time and will expire

4.5

Cashless Exercise

. If at any time there is

effective registration statement registering, or the prospectus contained therein is

not

available for issuance of, the shares issuable upon exercise of the warrant, the holder

may

Exercise Price

. Each warrant represents the right to purchase

one

share of common stock at an exercise price of

$1.00

not

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

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

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.

Outstanding Warrants

As of

December 31, 2020,

warrants to purchase

11,570,028

shares of common stock were outstanding including:

	Outstanding Warrants to Purchase Shares		Exercise Price		Expiration date
2018 warrants		1,070,028	$	4.05	May 30, 2022
2020 warrants		10,500,000	$	1.00	June 21, 2025
		11,570,028

March 2019,

the Company received approximately

$11.3

million from exercises of the

2018

Warrants. As a result of the warrant exercises, the Company cancelled approximately

2.8

million warrants and issued approximately

2.8

million shares of common stock.

Refer to

Note

Subsequent Events

that describes the issuance of common shares, warrants and the exercise of warrants.