Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Compass Therapeutics, Inc. together with its wholly-owned subsidiaries, which we refer to as Compass Therapeutics.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis, the immune system, and tumor growth. Our pipeline of novel product candidates is designed to target multiple critical biological pathways required for an effective anti-tumor response. These include modulation of the microvasculature via angiogenesis-targeted agents, induction of a potent immune response via activators on effector cells in the tumor microenvironment, and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with proprietary pipeline antibodies based on supportive clinical and nonclinical data.
On June 25, 2021, we consummated a definitive merger agreement (the “Merger Agreement”) with Trigr Therapeutics, Inc. (“TRIGR”), a private biotechnology company. Pursuant to the Merger Agreement, through our wholly-owned subsidiaries and a two-step merger structure, we acquired all of the outstanding shares of TRIGR (the “TRIGR Merger”). Consideration payable to TRIGR shareholders at closing totaled an aggregate of 10,265,133 shares of our common stock (after giving effect to elimination of fractional shares that would otherwise be issued). In addition, TRIGR shareholders are eligible to receive up to $9 million, representing earnout payments which are dependent on certain events, including a $5 million earnout which is dependent on biologics license application approval of a product candidate acquired in the transaction, renamed CTX-009. As part of this $9 million in earnout payments to the TRIGR shareholders, $2 million represented a milestone payment that was due from a third party. This payment was received and remitted to TRIGR shareholders in the fourth quarter of 2021.
Financial Overview
Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. We have funded our operations primarily with proceeds from private placements of preferred and common equity, an underwritten public offering in the fourth quarter of 2021 and borrowings under the 2018 loan and security agreement with Pacific Western Bank (the "2018 Credit Facility", which as of December 31, 2021 has been terminated). Through December 31, 2021, we had received gross proceeds of $329.0 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering (as defined below) and $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined below).
We have incurred significant operating losses since inception. We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. Our ability to generate product revenue sufficient to achieve profitability will depend heavily
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on the successful development and eventual commercialization of our therapies and any future product candidates. Our net losses were $82.2 million and $29.5 million for the years ended December 31, 2021 and 2020, respectively, and as of December 31, 2021, we had an accumulated deficit of $233.6 million. We expect to continue to incur significant expenses for at least the next several years as we advance through clinical development, develop additional product candidates and seek regulatory approval of any product candidates that complete clinical development. In addition, if we obtain marketing approval for any product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through equity and debt financings, or other capital sources, which may include collaborations with other companies or other strategic transactions. As of December 31, 2021, we had $144.5 million in cash and cash equivalents. Based on our research and development plans, we expect that these cash resources will enable us to fund our operating expenses and capital expenditures requirements into the second half of 2024. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Listing on the Nasdaq Capital Market
On November 2, 2021, shares of our common stock were approved for trading on the Nasdaq Capital Market under the symbol “CMPX”.
Reverse Merger
We were originally incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Merger (as defined below), Olivia was a “shell company” (as defined in Rule 12b-2 of the Exchange Act).
On June 17, 2020, we completed a merger (the “Merger”) pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among us, Compass Acquisition LLC and Compass Therapeutics, and, as a result, Compass Therapeutics became a wholly-owned subsidiary of the Company. Additionally, certain of our wholly-owned subsidiaries, each, a Blocker Merger Sub, merged with and into the applicable blocker entity (the "Blockers"), in transactions which we refer to as the Blocker Mergers.
At the effective time of the Merger and the applicable effective time of each Blocker Merger, collectively, the Effective Time, an aggregate of 31,627,139 shares of its common stock were issued to holders of common membership interests of Compass Therapeutics (including common membership interests issued upon the conversion of preferred membership interests) and 7,428,217 shares of its common stock were issued to the holders of equity interests of the Blockers. The issuances of shares of
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our common stock to the security holders of Compass Therapeutics and the Blockers are collectively referred to as the Share Conversion.
In addition, 2,930,836 shares of our common stock were reserved for issuance under our 2020 Stock Option and Incentive Plan. Immediately prior to the Effective Time, an aggregate of 4,000,000 of the 5,000,000 shares of our common stock held by pre-Merger stockholders of Olivia Ventures, Inc. were forfeited and surrendered for cancellation (the "Stock Forfeiture").
The Merger and the Blocker Mergers were treated as a recapitalization and reverse acquisition by us for financial reporting purposes. Compass Therapeutics is considered the acquirer for accounting purposes, and the historical financial statements of Olivia before the Merger have been replaced with the historical financial statements of Compass Therapeutics in this and future filings with the SEC. The Merger is being treated as a tax-free reorganization under Section 368(a) of the Code.
The following discussion highlights Compass Therapeutics, Inc.’s consolidated results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operations and comprehensive loss presented herein. The following discussion and analysis are based on our consolidated financial statements contained in this Form 10-K, which we have prepared in accordance with United States generally accepted accounting principles. You should read this discussion and analysis together with such consolidated financial statements and the related notes thereto.
Private Placement Offering
On June 19, 2020, we sold 12,096,442 shares of our common stock pursuant to the Private Placement offering of our common stock at a purchase price of $5.00 per share. The aggregate gross proceeds from the Private Placement were approximately $60.5 million (before deducting placement agent fees and other expenses in connection with the Private Placement).
In connection with the Private Placement, we paid $6.3 million to the placement agents (and for other legal and accounting costs), for net proceeds of $54.2 million.
The Private Placement was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the Private Placement was sold to “accredited investors”, as defined in Regulation D, and was conducted on a “reasonable best efforts” basis.
Follow-On Public Offering
On November 2, 2021, we sold through an underwritten public offering, with SVB Leerink LLC, as representative of the underwriters, 35,715,000 shares of our common stock, at a price to the public of $3.50 per share, less underwriting discounts and commissions. We granted the underwriters a 30-day option to purchase up to an additional 5,357,250 shares of common stock, at the public offering price of $3.50, less any underwriting discounts and commissions. On December 2, 2021, pursuant to this 30-day option, we sold an additional 3,271,857 shares of our common stock, for a total of 38,986,857 shares of common stock sold as part of the Follow-On Public Offering. The aggregate gross proceeds from the Follow-On Public Offering were approximately $136.5 million (before deducting placement agent fees and other expenses in connection with the offering).
In connection with the Follow-On Public Offering, we paid $8.5 million to the underwriters (and for other legal and accounting costs), for net proceeds of $128.0 million.
The Follow-On Public Offering was made pursuant to our shelf registration statement on Form S-3 (File No. 333-257821), including a base prospectus that was declared effective by the U.S. Securities and
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Exchange Commission (the “SEC”) on July 20, 2021, as supplemented by a prospectus supplement dated November 1, 2021 that was filed with the SEC on November 3, 2021 (the “Prospectus Supplement”).
COVID-19 Update
In December 2019, a novel strain of coronavirus, COVID-19, was declared a pandemic by the World Health Organization. In an effort to contain the spread of COVID-19, the United States, Europe and Asia have implemented severe travel restrictions, social distancing requirements, stay-at-home or shelter-in-place orders and have delayed the commencement of non-COVID-19-related clinical trials, among other restrictions. As a result, the COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S. economy and in financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or mitigate its impact, and the economic impact on local, regional, national and international markets.
We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19 community-wide. We are ensuring that essential staffing levels at our operations remain in place, including maintaining key personnel in our laboratory facilities. We have implemented stringent safety measures designed to create a safe and clean environment for our employees as we continue to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic.
We have been able to continue to pursue Phase 1 clinical trials of CTX-009 and of CTX-471 without significant delays, however, we have experienced some temporary delays in the enrollment of patients into the second part of our CTX-471 Phase 1 trial due to the COVID-19 pandemic. In addition, our CDMO for CTX-8371 (Fuji) has been experiencing delays with its supply chain management and other challenges in part due to the ongoing COVID-19 pandemic, which led to delays in the initiation of our CTX-8371 GMP manufacturing campaign and delayed the projected date for CTX-8371 IND filing. We could experience some additional temporary delays or disruptions due to the ongoing COVID-19 pandemic, including limited or reduced patient access to trial investigators, hospitals and trial sites, delayed initiation of new clinical trial sites and limited on-site personnel support at various trial sites, which could adversely impact our development plans, including the initiation of planned clinical trials and our ability to conduct ongoing clinical trials. We also expect that COVID-19 precautions may directly or indirectly impact (i) our employees and business operations or personnel at third-party suppliers and other vendors in the U.S. and other countries, (ii) the availability, cost or supply of materials, and (iii) the timeline for our ongoing clinical trial and potential future trials. We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.
Components of Results of Operations
In-process R&D
In-process R&D expenses consists of the acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred,
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the cost of this acquisition was expensed. See Note 16 to the financial statements contained in this Form 10-K for further description of the accounting of this transaction.
Research and development
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, CTX-009, CTX-471 and CTX-8371, as well as unrelated preclinical and discovery program expenses. We expense research and development costs as incurred. These expenses include:
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development milestone payments due in connection with our product candidates;
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employee-related expenses, including salaries, related benefits and equity-based compensation expense, for employees engaged in research and development functions;
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Contract Research Organizations (“CROs”) that are primarily engaged to support the clinical development of our product candidates;
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Contract Development Manufacturing Organizations (“CDMOs”) that are primarily engaged to provide drug substance and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies and other scientific development services;
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cost of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;
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costs related to compliance with quality and regulatory requirements; and
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payments made under third-party licensing agreements.
Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any future product candidates.
Our clinical development costs may vary significantly based on factors such as:
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per patient trial costs;
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the number of trials required for approval;
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the number of sites included in the trials;
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the location where the trials are conducted;
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the length of time required to enroll eligible patients;
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the number of patients that participate in the trials;
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the number of doses that patients receive;
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the drop-out or discontinuation rates of patients;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in the trials and follow-up;
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the cost and timing of manufacturing our product candidates;
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the phase of development of our product candidates; and
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the efficacy and safety profile of our product candidates.
The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:
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the timing and progress of nonclinical and clinical development activities;
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the number and scope of nonclinical and clinical programs we decide to pursue;
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raising necessary additional funds;
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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
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our ability to maintain our current development program and to establish new ones;
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our ability to establish new licensing or collaboration arrangements;
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the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
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the receipt and related terms of regulatory approvals from applicable regulatory authorities;
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the availability of drug substance and drug product for use in production of our product candidate;
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establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
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our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
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our ability to protect our rights in our intellectual property portfolio;
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the commercialization of our product candidate, if and when approved;
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obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors;
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competition with other products;
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the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers, or other vendors resulting from the ongoing COVID-19 pandemic or similar public health crisis; and
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a continued acceptable safety profile of our therapies following approval.
A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses and other operating costs.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.
Other expense
The main component of other expense is interest expense related to cash interest under our 2018 Credit Facility that we entered into in March 2018, which as of December 31, 2021 has been terminated.
Other expense includes realized gains and losses on sale or disposal of furniture and equipment and interest income received on our cash equivalents. For the year ended December 31, 2020, other expense includes the change in fair value of derivative liability related to our 2018 Credit Facility.
Income taxes
We are organized as a Delaware corporation and treated as a c-corporation for federal and state income taxes. Our wholly-owned subsidiaries are included in the consolidated corporate tax return. Prior to the Merger in 2020, we were established as a Delaware limited liability company, and the business that was acquired in the Merger was treated as a partnership for income tax reporting purposes; therefore, federal and state income taxes were the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company were recorded in our consolidated financial statements. All such taxes have been recorded in our financial statements. As of December 31,2021 we recorded a net deferred income tax asset of $18.1 million primarily related to a net operating loss carryforward, research and development tax credit carryforward, capitalized licensing fees and right-of-use leases. The asset has a corresponding full deferred income tax valuation allowance. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the
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future as a result of shifts in our stock ownership, some of which are outside our control. See Note 15 to our financial statements appearing in this Form 10-K.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table summarizes the results of operations for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Operating expenses:
Income tax expense — (32 ) 32
Research and development expenses
Research and development expenses increased by $5.4 million from $14.9 million in 2020 to $20.3 million in 2021. This increase was primarily attributable to a $6.0 million milestone payment due to ABL Bio related to the completion of the CTX-009 Phase 1 clinical trial. In addition, program related costs increased by $1.0 million due to the clinical advancement of our pipeline, which was offset by lower depreciation expense of $1.5 million related to sale of selected lab equipment. Excluding the milestone due, research and development expenses were $0.5 million lower than 2020.
We track supplies, outsourced development, outsourced personnel costs and other external research and development costs of specific programs. Starting January 1, 2021, we started to track our internal labor costs by program. Facility and equipment costs are not allocated to programs. Research and development expenses are summarized by program in the table below:
Year Ended December 31,
Other research and development expenses 7,021 10,207
Total research and development expenses $ 20,337 $ 14,904
We decided to deprioritize our development efforts for our NKp30 innate cell engager platform in the first quarter of 2021.
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General and administrative expenses
General and administrative expenses decreased by $2.0 million from $12.9 million in 2020 to $10.9 million in 2021. The decrease was primarily attributable to lower legal fees of $0.9 million, lower facility costs of $0.9 million, and lower personnel cost of $0.5 million. The legal fees in 2020 included non-recurrent expense related to the transitioning of the company from a privately held company to a public company while such transition did not take place in 2021. The reduction in facilities expense is primarily related to the move from our prior facility in Cambridge, MA, to our new facility in Boston, MA, which is more cost-effective. We anticipate that our general and administrative expenses will increase in the future as we expand our operations to support our growing research and development efforts and continue to operate as a public company.
Other expense
Other expense decreased by $1.4 million from $1.7 million in 2020 to $0.3 million in 2021. Interest expense decreased $0.5 million during 2021, compared to 2020. We recognized a change in our derivative liability of $0.6 million in 2020 with no derivative in 2021. Additionally, there was a realized loss of $0.3 million from the sale of equipment in conjunction with the move to our new location compared with a realized gain of $42 thousand in 2021.
In-process R&D
In-process R&D expenses consists of the acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred, the cost of this acquisition was expensed. See Note 16 to the financial statements contained in this Form 10-K for further description of the accounting of this transaction.
Income tax expense
We did not have income tax expense in 2021. During the year ended December 31, 2020, we recognized income tax expense of $32 thousand, which was attributable to the services provided by a wholly-owned subsidiary of Compass Therapeutics, prior to the closing of the Merger.
Liquidity and Capital Resources
Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. We have funded our operations primarily with proceeds from private placements of preferred and common equity and an underwritten public offering in the fourth quarter of 2021. Through December 31, 2021, we had received gross proceeds of $329 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering (as defined above) and $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined above). In addition, we received $15 million in term loan borrowings under the 2018 Credit Facility, which was paid off and cancelled as of December 31, 2021. As of December 31, 2021, we had cash and cash equivalents of $144.5 million.
On July 9, 2021, we filed an S-3 registration statement which became effective July 20, 2021. Included in this registration statement was a shelf registration allowing us to sell securities up to $300 million. The Follow-On Public Offering was made pursuant to this registration statement. In addition, the S-3 registration statement included a sales agreement with B. Riley Securities, Inc. pursuant to which we may offer and sell shares of our common stock having an aggregate of up to $75 million.
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Indebtedness
In March 2018, we entered into a credit facility with Pacific Western Bank ("2018 Credit Facility") which matured on March 1, 2022 and consisted of $15.0 million in term loans. We made interest-only payments through March 31, 2020, and beginning in April 2020, we began to make monthly payments of $625 thousand toward principal plus interest. The 2018 Credit Facility included a success fee of $1.1 million to the lender which was paid upon completion of the Merger. We paid the balance of this loan in November 2021. See additional details of the 2018 Credit Facility in Note 7 to our financial statements appearing in this Form 10-K.
Funding Requirements
Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
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the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
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the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization;
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the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates;
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;
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our ability to establish additional collaborations on favorable terms, if at all;
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the costs required to scale up our clinical, regulatory and manufacturing capabilities;
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the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and
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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval.
We will need additional funds to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.
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Cash Flows
The following table shows a summary of our cash flows for the periods indicated:
Year ended December 31,
Cash used in operating activities $ (19,666 ) $ (26,803 )
Cash provided by (used in) investing activities (1,770 ) 38
Net increase in cash, cash equivalents and restricted cash $ 97,175 $ 21,773
Operating Activities
During the year ended December 31, 2021, we used $19.7 million of cash in operating activities, resulting from our net loss of $82.2 million and the change in operating assets and liabilities of $6.2 million, offset by non-cash charges of $56.3 million. Our non-cash charges were comprised of the write-off of in-process R&D of $50.6 million, depreciation and amortization of $0.6 million, gain on disposal of equipment of $42 thousand, share-based compensation expense of $4.0 million, non-cash interest expense of $41 thousand and amortization of ROU asset of $1.1 million. The change in our operating assets and liabilities was primarily related to an increase in accrued expenses primarily driven by the $6.0 million accrued milestone payment.
During the year ended December 31, 2020, we used $26.8 million of cash in operating activities, resulting from our net loss of $29.5 million and the change in operating assets and liabilities of $4.6 million, offset by non-cash charges of $7.3 million. Our non-cash charges were comprised of depreciation and amortization of $2.4 million, loss on disposal of equipment of $0.3 million, share-based compensation expense of $4.0 million, non-cash interest expense of $90 thousand, and a change in fair value of our derivative liability of $0.6 million. The change in our operating assets and liabilities was primarily related to an increase in prepaid manufacturing expenses, the settlement of a derivative liability and a decrease in our accrued expenses due to the timing in which we pay our vendors.
Investing Activities
During the year ended December 31, 2021 cash used in investing activities was $1.8 million, which was attributed to purchase of property and equipment of $1.6 million, primarily from leasehold improvements in our new facility, $0.3 million from asset acquisition costs related to the TRIGR transaction and $0.1 million in proceeds from the sale of equipment. During the year ended December 31, 2020 cash provided by investing activities was $38 thousand attributed to the sale of equipment for which we received $0.1 million, offset by $0.1 million in purchases of equipment.
Financing Activities
During the year ended December 31, 2021, we received net cash proceeds of $118.6 million from financing activities. This was primarily due to the closing of the Follow-on Public Offering in the fourth quarter of 2021, which resulted in net proceeds of $128.0 million that were partially offset by $9.4 million in payments under the 2018 Credit Facility. During the year ended December 31, 2020, we received net cash proceeds of $48.5 million from financing activities. This was primarily due to the closing of a Private Placement in June 2020, which resulted in net proceeds of $54.2 million that were partially offset by $5.6 million in payments under the 2018 Credit Facility.
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Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into their next clinical trial phases. The timing and amount of our operating expenditures will depend largely on:
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the initiation, progress, timing, costs and results of clinical trials for our current product candidates or any future product candidates we may develop;
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the initiation, progress, timing, costs and results of nonclinical studies for our product candidates or any future product candidates we may develop;
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our ability to maintain our relationships with key collaborators;
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the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more nonclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;
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the cost to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;
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the effect of competing technological and market developments;
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the costs of continuing to grow our business, including hiring key personnel and maintain or acquiring operating space;
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market acceptance of any approved product candidates, including product pricing, as well as product coverage and the adequacy of reimbursement by third-party payors;
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the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;
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the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing;
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the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval and that we determine to commercialize; and
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our need to implement additional internal systems and infrastructure, including financial and reporting systems.
We believe that our existing cash and cash equivalents as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of our product candidates, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.
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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
Payments due by Period (000's)(4)
Total Less than1 year 1 to 3years 3 to 5years More than5 years
Milestone commitments(1) $ 6,000 $ 6,000 $ — $ — $ —
Manufacturing commitments(3) 1,201 1,201 — — —
(1)
Reflects milestone payments deemed probable. The amount consists of a $6 million milestone payment due to ABL Bio related to the completion of CTX-009 Phase 1 clinical trial. See Notes 10 and 11 to the financial statements in this form 10-K for additional detail on milestone obligations related to CTX-009.
(2)
Reflects payments due for our leases of office and laboratory space in Boston, Massachusetts under an operating lease agreement that expires in May 2025.
(3)
Amounts in the table reflect the non-cancelable purchase commitments under an agreement with an external CDMO, which we have engaged to manufacture preclinical and clinical trial materials.
(4)
This table does not include (i) any milestone payments that are not deemed probable under license agreements as the timing and likelihood of such payments are not known with certainty, (ii) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known, and (iii) contracts that are entered into in the ordinary course of business that are not material in the aggregate in any period presented above.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
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While our significant accounting policies are described in more detail in Note 3 to our financial statements appearing in this Form 10-K, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred.
At the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion of the applicable research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that we estimate has been made as a result of the service provided, we may record net prepaid or accrued expenses relating to these costs. As of December 31, 2021, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock Awards and Unit-Based Compensation
The following table summarizes stock awards and unit-based compensation expense:
Year Ended December 31,
Research and development $ 658 $ 605
Total stock compensation expense $ 4,029 $ 4,016
See Notes 3 and 9 to our financial statements appearing in this Form 10-K for additional stock compensation information.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3 to our financial statements appearing in this Annual Report.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Under Section 107(b) of the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have made the election to delay the adoption of such accounting standards as provided in the JOBS Act. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company”, we are exempt from Sections 14A(a) and (b) of the Exchange Act that would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”, “say-on-frequency”, and “golden parachutes”; and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption
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from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our cash is held on deposit in demand accounts at a large financial institution in amounts in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance coverage limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. We have reviewed the consolidated financial statements of this institution and believe it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us. Financial instruments that potentially subject us to concentrations of credit risk principally consist of cash equivalents. We limit our credit risk associated with cash equivalents by placing investments in highly-rated money market funds. We also intend to invest a portion of our cash in various diversified fixed- and floating-rate securities consisting of cash equivalents, marketable debt securities, debt funds and corporate bonds related to our investment portfolio that are subject to interest rate risk. Changes in the general level of interest rates can affect the fair value of our investment portfolio. If interest rates in the general economy were to change, our holdings could change as a result.
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Item 8. Financial Statements and Supplementary Data.
COMPASS THERAPEUTICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Registered Public Accounting Firm 123
Consolidated Financial Statements
Consolidated Balance Sheets 124
Consolidated Statements of Operations 125
Consolidated Statements of Cash Flows 127
Notes to Consolidated Financial Statements 128
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Compass Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Compass Therapeutics, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in convertible preferred stock and stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Lease Accounting
As discussed in the notes to the consolidated financial statements, the Company changed its method of accounting for leases for the year ended December 31, 2021 due to the adoption of Accounting Standards Update 2016-02, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick LLP
We have served as the Company’s auditor since March 2020.
Melville, New York
March 18, 2022
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Compass Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except par value per share data)
December 31,
Assets
Current assets:
Prepaid expenses and other current assets 2,591 3,126
Restricted cash — 263
Operating lease, right-of-use ("ROU") asset 4,089 —
Liabilities and Stockholders' Equity
Current liabilities:
Operating lease obligations, current portion 989 —
Long-term debt, current portion — 7,467
Long-term debt, net of current portion — 1,867
Operating lease obligations, net of long-term portion 3,048 —
Commitments and Contingencies (Note 11)
Stockholders' equity:
Total liabilities and stockholders' equity $ 153,757 $ 51,911
The accompanying notes are an integral part of these consolidated financial statements.
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Compass Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
Operating expenses:
Income tax expense — (32 )
Net loss per share - basic and diluted $ (1.31 ) $ (0.96 )
Basic and diluted weighted average shares outstanding 62,870 30,776
The accompanying notes are an integral part of these consolidated financial statements.
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Compass Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity
(In thousands)
Shares Amount Shares Amount Capital Deficit Equity
Vesting of share-based awards — — 474 — — — —
Stock-based compensation — — — — 4,016 — 4,016
Vesting of share-based awards — — 359 — — — —
Stock-based compensation — — — — 4,029 — 4,029
The accompanying notes are an integral part of these consolidated financial statements.
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Compass Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 566 2,404
Loss (gain) on disposal of equipment (42 ) 281
Noncash interest expense 41 90
Write-off of in-process R&D 50,618 —
Change in fair value of derivative liability — 556
ROU asset amortization 1,058 —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 534 (2,191 )
Other long-term assets — (290 )
Operating lease liability (1,111 ) —
Settlement of derivative liability — (1,050 )
Net cash used in operating activities (19,666 ) (26,803 )
Cash flows from investing activities:
Purchases of property and equipment (1,568 ) (106 )
Asset acquisition costs (318 ) —
Proceeds from sale of equipment 116 144
Net cash provided by (used in) investing activities (1,770 ) 38
Cash flows from financing activities:
Issuance costs from issuance of common stock (281 ) (6,319 )
Repayment of borrowings under loan (9,375 ) (5,625 )
Net cash provided by financing activities 118,611 48,538
Net change in cash, cash equivalents and restricted cash 97,175 21,773
Cash, cash equivalents and restricted cash at beginning of year 47,339 25,566
Cash and cash equivalents at end of year $ 144,514 $ 47,339
Supplemental disclosure of cash flow information
Cash paid for interest $ 370 $ 854
Conversion of preferred units $ — $ 129,870
ROU asset acquired through operating leases $ 5,148 $ —
Fixed asset costs included in accrued expenses $ 187 $ —
The accompanying notes are an integral part of these consolidated financial statements.
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Compass Therapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
Formation and Business of the Company
Compass Therapeutics, Inc. (“Compass” or the “Company”) is a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis and the immune system. Our pipeline includes novel product candidates that leverage our understanding of the tumor microenvironment, including both angiogenesis-targeted agents and immune-oncology focused agents. These product candidates are designed to optimize critical components required for an effective anti-tumor response to cancer. These include modulation of the microvasculature via angiogenesis-targeted agents; induction of a potent immune response via activators on effector cells in the tumor microenvironment; and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with our proprietary drug candidates as long as their continued development is supported by clinical and nonclinical data. References to Compass or the Company herein include Compass Therapeutics, Inc. and its wholly-owned subsidiaries. The Company was incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Company’s reverse merger with Compass Therapeutics LLC (the “Merger”), Olivia was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).
On June 17, 2020, the Company completed the Merger of its wholly-owned subsidiary, Compass Therapeutics LLC, pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among Olivia Ventures, Inc., Compass Acquisition LLC, Compass Therapeutics LLC and as a result, Compass Therapeutics LLC became a wholly-owned subsidiary of the Company. Additionally, certain of the Company’s wholly-owned subsidiaries (each, a “Blocker Merger Sub”) merged with and into the applicable blocker entity (“Blockers”) in transactions that are referred to as “Blocker Mergers”.
At the effective time of the Merger and the applicable effective time of each Blocker Merger, (collectively, the “Effective Time”), an aggregate of 31,627,139 shares of the Company’s common stock were issued to holders of common membership interests of Compass Therapeutics LLC (including common membership interests issued upon the conversion of preferred membership interests) and 7,428,217 shares of its common stock were issued to the holders of equity interests of the Blockers. The issuances of shares of the Company’s common stock to the security holders of Compass Therapeutics LLC and the Blockers are collectively referred to as the Share Conversion.
The Company is subject to risks and uncertainties common to companies in the biotechnology and pharmaceutical industries. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants.
2.
Liquidity, Uncertainties and Going Concern
The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
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Since its inception, the Company has funded its operations primarily with proceeds from the sale of its equity securities and borrowings under the 2018 Credit Facility. The Company has incurred recurring losses since its inception and had an accumulated deficit of $233.6 million on December 31, 2021. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements into the second half of 2024. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.
The Company is subject to risks common to early stage companies in the biotechnology industry including, but not limited to: having a limited operating history and no products approved for commercial sale; having a history of significant losses; its need to obtain additional financing; dependence on its ability to advance its current and future product candidates through clinical trials, marketing approval and commercialization; the lengthy and expensive nature and uncertain outcomes of the clinical development process; the lengthy, time consuming and unpredictable nature of the regulatory approval process; the results of preclinical studies and early stage clinical trials that may not be predictive of future results; dependence on its key personnel; risks related to patent protection and the Company’s pending patent applications; dependence on third party collaborators for the discovery, development and commercialization of current and future product candidates; and significant competition from other biotechnology and pharmaceutical companies. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
Due to the evolving and uncertain global impacts of the ongoing COVID-19 pandemic, we cannot precisely determine or quantify the impact this pandemic will have on our business operations in the future. We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19 community-wide. We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system. To date, we have been able to continue to pursue our Phase 1 clinical trial with only minor delays despite the COVID-19 pandemic.
3.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are presented in U.S. dollars and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
In June 2020, the Company completed the Merger, as discussed in Note 1. Upon the closing of the Merger, the common and convertible preferred units of Compass Therapeutics LLC were converted into the Company’s common stock. The Company effected a 0.15-for-one stock conversion ratio for its issued and outstanding convertible preferred units. Common units were converted using the same ratio after factoring in the relevant strike price of each grant. Subsequent to the Merger, there were no common or convertible preferred units outstanding. All of the share and per share information presented in the accompanying consolidated financial statements for 2020 has been adjusted to reflect the stock split.
Upon the closing of the Merger, the Company’s certificate of incorporation was amended and restated to provide for 10 million authorized shares of preferred stock with a par value of $0.0001 per share and 300 million authorized shares of common stock with a par value of $0.0001 per share.
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Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Compass Therapeutics, Inc., and its wholly-owned subsidiaries, including Compass Therapeutics LLC, Compass Therapeutics Advisors Inc., Trigr Therapeutics, Inc. and Compass Therapeutics Securities Corporation. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual of research and development expenses, useful lives of equipment, interest rate and term operating lease ROU and liability, the percentage of completion of contractual arrangements, future cash expenditures for liquidity estimates, the valuation of common stock and estimates associated with stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates. Changes in estimates are recorded prospectively in the period that they become known.
Segment Information
Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company has one operating segment. The Company’s chief operating decision-maker, its chief executive officer, manages the Company’s operations on a consolidated basis for the purpose of allocating resources. All the Company’s long-lived assets are held in the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash with original maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in money market funds. Cash equivalents are stated at cost, which approximates market value. Cash equivalents consisted of money market funds of $130.0 million and $43.6 million on December 31, 2021 and 2020, respectively.
Restricted Cash
As of December 31, 2021, the Company did not have any restricted cash.
As of December 31, 2020, the Company had two items that were classified as restricted cash on the balance sheet. The first was cash of $0.2 million to collateralize corporate credit cards with a bank. The second was as part of the Company’s prior lease agreement in which the Company was required to maintain a letter of credit of $0.1 million for the benefit of the landlord.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash, cash equivalents and restricted cash with financial institutions that management believes to be of
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high-credit quality.The Company has not experienced any losses related to its cash, cash equivalents and restricted cash.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the related assets as follows:
Asset Classification Estimated Useful Life
Equipment 5 years
Furniture and fixtures 7 years
Software 5 years
Leasehold improvements Lesser of estimated useful life or lease term
Estimated useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statement of operations in the period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service.
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in the consolidated statements of operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. The Company did not record any impairment losses on long-lived assets during the years ended December 31, 2021 and 2020.
Fair Value Measurements
Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
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•
Level 2 – Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.
The Company’s cash equivalents are carried at fair value according to the fair value hierarchy described above and were determined based on Level 1 measurements (see Note 4). The Company’s restricted cash was carried at fair value according to the fair value hierarchy described above and were determined based on Level 2 measurements (see Note 4). The carrying values of other current assets and accounts payable approximate their fair value due to the short‐term nature of these assets and liabilities. The carrying values of the Company’s loan approximated its fair value as of December 31, 2020 due to its variable interest rate. The fair value of the loan related embedded derivative (see Note 4) was determined based on Level 3 measurements.
Research and Development Costs
Costs associated with internal research and development and external research and development services, including drug development and preclinical studies, are expensed as incurred. Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation and amortization, stock-based compensation, third-party license fees, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials, and other costs. The Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers.
Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such prepaid expenses are recognized as an expense when the goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered, or the services rendered.
Costs associated with licenses of technology acquired as part of collaborative arrangements are expensed as incurred and are generally included in research and development expense in the consolidated statements of operations if it is determined the license has no alternative future use.
Accrued Research and Development Expenses
The Company has entered into various research and development and other agreements with commercial firms, researchers, universities and others for provisions of goods and services. These agreements are generally cancelable, and the related costs are recorded as research and
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development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.
Debt Issuance Costs
Debt issuance costs consist of payments made to secure commitments under certain debt financing arrangements. These amounts are recognized as interest expense over the period of the financing arrangement using the effective interest method.
The Company’s consolidated financial statements present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expense in the consolidated statements of operations.
Stock-Based Compensation
The Company recognizes the grant‐date fair value of stock‐based awards issued to employees and nonemployee board members as compensation expense on a straight‐line basis over the service period of the award. The Company uses the Black‐Scholes option pricing model to determine the grant‐date fair value of stock options and adjusts expense for forfeitures in the periods they occur.
The fair value of each equity award was determined by the Company on the date of grant and by using the methods and assumptions discussed below. Certain of these inputs are subjective and generally require judgment to determine.
Stock price: See below.
Expected term: The expected term of the equity award represents the weighted average period the award is expected to be outstanding. The Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average time to vesting and the contractual life of the award.
Expected volatility – Due to the Company’s limited operating history and lack of Company-specific historical or implied volatility, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available.
Risk-free interest rate – The risk-free rate assumption is based on U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s equity award.
Expected dividend – The Company has not paid and does not intend to pay dividends.
Stock Price -Prior to the Merger
The Company issued Class A and Class C common units to various employees, directors and consultants. The units constituted “profits interests” for tax purposes and were accounted for as
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share-based payment arrangements. Upon consummation of the Merger, all outstanding vested units were converted into shares of common stock and all outstanding unvested units were converted into shares of restricted stock that continue to vest over the remaining term of the original award.
The estimated fair value was determined by our board of directors as of the date of each stock award, with input from management, considering our most recently available third-party valuation, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issuedas Compensation. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our stock awards as of each grant date, including:
•
the prices at which we sold preferred membership interests and the superior rights and preferences of the preferred membership interests relative to our membership interests at the time of each grant;
•
the progress of our commercialization efforts;
•
the progress of our research and development programs, including the status and results of preclinical studies for our product candidates;
•
our stage of development and our business strategy;
•
external market conditions affecting the medical device industry and trends within the medical device industry;
•
our financial position, including cash on hand, and our historical and forecasted performance and operating results;
•
the lack of an active public market for our common and preferred membership interests;
•
the likelihood of achieving a liquidity event, such as an initial public offering ("IPO"), reverse merger, or sale of our Company in light of prevailing market conditions; and
•
the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.
Stock Price - Subsequent to the Merger
Since the second quarter of 2021, when the Company started trading on a public market, the stock price of the Company’s common stock has been used to value equity awards based on the closing price of the Company’s common stock as reported on the date of the grant.
A public trading market for the Company’s common stock was not established between the closing of the Merger and the second quarter of 2021. For the valuation of the Company’s common stock for this period, the Company used $5.00 per share, which is the share price paid by outside investors in the Company’s Private Placement that closed in June 2020.
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Net Loss per Share
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock, stock options, restricted stock units, unvested restricted stock awards and common stock warrants that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.
The following potentially dilutive securities outstanding as of December 31, 2021 and 2020 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:
December 31,
Restricted stock units 1,200 —
Nonvested restricted stock 471 896
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the deferred tax benefits will not be realized.
The Company files income tax returns in the U.S. Federal jurisdiction and in various states. The Company has tax net operating loss carryforwards that are subject to examination for a number of years beyond the year in which they were generated for tax purposes. Since a portion of these net operating loss carryforwards may be utilized in the future, many of these net operating loss carryforwards will remain subject to examination.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016 02, Leases, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. The standard continues to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases result in the recognition of a single lease expense on a straight-line basis over the lease term, similar to the treatment for operating leases under the old standard. Finance leases result in an accelerated expense similar to the accounting for capital leases under the old standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement. The Company adopted the new standard on January 1, 2021, using a modified retrospective approach and as a
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result did not adjust prior periods. Adoption of the standard resulted in the recording of $5.1 million of operating lease ROU assets and operating lease liabilities, but did not have a material impact on the Company’s net loss or cash flows.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes(Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2022. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its financial position and results of operations upon adoption.
4.
Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
Fair Value Measurements as of December 31, 2021 (000's):
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Fair Value
Assets
Cash equivalents - money market funds $ 130,005 $ — $ — $ 130,005
Fair Value Measurements as of December 31, 2020 (000's):
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Fair Value
Assets
Cash equivalents - money market funds $ 43,631 $ — $ — $ 43,361
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5.
Property and Equipment
Property and equipment consist of the following:
December 31,
Furniture and fixtures 22 629
Total property and equipment–at cost 7,269 7,061
Less: Accumulated depreciation (5,026 ) (5,935 )
Property and equipment, net $ 2,243 $ 1,126
Total depreciation and amortization expense for years ended December 31, 2021 and 2020, was $0.6 million and $2.4 million, respectively.
6.
Accrued Expenses
Accrued expenses consist of the following:
December 31,
Compensation and benefits $ 1,601 $ 976
Accrued milestone 6,000 —
See Note 11 for further information on accrued milestone.
7.
Debt
The Company entered into a loan and security agreement (“2018 Credit Facility”) with Pacific Western Bank, Inc. (“PWB”), and received $15.0 million debt proceeds in 2018. The Company made interest-only payments through March 31, 2020. Beginning in April 2020, the Company was obligated to make monthly principal payments of $625,000 (plus interest) through March 31, 2022 when the note matures. The Company paid the total outstanding balance of the loan of $9.4 million during the year ended December 31, 2021 and terminated the 2018 Credit Facility.
The Company recognized interest expense of $0.4 million and $0.9 million during the years ended December 31, 2021 and 2020, respectively.
8.
Stockholders’ Equity
In connection with the Merger, as discussed in Note 1, the Company issued 1 million shares of common stock to the former shareholders of Olivia Ventures Inc. The Company paid $0.1 million to several nonaccredited investors of Compass Therapeutics LLC in lieu of issuing shares. In addition, 2.9 million shares of the Company’s common stock were reserved for issuance under the 2020 Stock Option and Incentive Plan.
The Company sold approximately 12 million shares of its common stock pursuant to the closing of a Private Placement offering at a purchase price of $5.00 per share in June 2020.
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In June 2021, the Company issued 10,265,133 million shares of its common stock related to the acquisition of TRIGR. See Note 16 for further information on the TRIGR transaction.
In November 2021, the Company sold through an underwritten public offering, 35,715,000 shares of the Company’s common stock, at a price to the public of $3.50 per share, less underwriting discounts and commissions. The Company granted the underwriters a 30-day option to purchase up to an additional 5,357,250 shares of Common Stock, at the public offering price of $3.50, less any underwriting discounts and commissions. In December 2021, pursuant to this 30-day option, the Company sold an additional 3,271,857 shares of our common stock, for a total of 38,986,857 shares of common stock sold as part of the Follow-On Public Offering. The aggregate gross proceeds from the Follow-On Public Offering were approximately $136.5 million (before deducting placement agent fees and other expenses in connection with the offering). In connection with the Follow-On Public Offering, we paid the underwriters (and other legal and accounting costs) of $8.5 million, for net proceeds of approximately $128.0 million.
9.
Stock-Based Compensation
Stock-based compensation expense for the years ended December 31, 2021 and 2020 was classified in the consolidated statements of operations as follows:
Year EndedDecember 31,
Research and development $ 658 $ 605
Restricted Stock
Prior to the Merger, Compass Therapeutics LLC maintained an incentive pool of unit-based awards that were granted to board members, employees and consultants and accounted for as unit-based compensation. Upon consummation of the Merger, all outstanding vested profit interest units were converted into shares of the Company’s common stock. Unvested units were converted into restricted shares of the Company’s common stock and will continue to vest under the same terms as the original profit interest units.
A summary of the Company’s restricted share activity during the years ended December 31, 2021 and 2020 is as follows:
Shares (000's) EstimatedFair ValuePer Share
Forfeited or canceled (670 ) $ 1.75
Granted — $ —
Forfeited or canceled (66 ) $ 1.70
The weighted average grant date fair value for unvested restricted stock as of December 31, 2021 was $1.76 per share. No restricted share awards have been granted following the Merger. As of December 31, 2021, remaining unrecognized compensation cost related to restricted stock awards
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to be recognized in future periods totaled $0.8 million, which is expected to be recognized over a weighted average period of 1.8 years.
No restricted share awards were granted for the year ended December 31, 2021. For the year ended December 31, 2020, the fair value of each restricted stock award was estimated on the date of grant using the weighted average assumptions in the table below:
Expected term (in years) 6.0
Risk-free rate 0.36 %
Expected volatility 140 %
2020 Plan
In June 2020, the Company’s board of directors adopted the 2020 Plan and reserved 2.9 million shares of common stock for issuance under this plan. The 2020 Plan provides that the number of shares reserved and available for issuance under the 2020 Plan will automatically increase each January 1, beginning on January 1, 2021, by the lesser of (i) 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or (ii) such number of shares as determined by the plan administrator no later than the immediately preceding December 31. As of December 31, 2021, 156 thousand shares remain available for future grant. On January 1, 2022, an additional 4.05 million shares became available for issuance based on 4% of the outstanding shares of common stock, for a total of 4.21 million shares available for issuance.
The 2020 Plan authorizes the board of directors or a committee of the board to grant incentive stock options, nonqualified stock options, restricted stock awards and restricted stock units ("RSUs") to eligible officers, employees, consultants and directors of the Company. Options generally vest over a period of four years and have a contractual life of ten years from the date of grant.
Stock Options:
The following table summarizes the stock option activity for the 2020 Plan:
Outstanding at December 31, 2019 — $ — $ —
Exercise - $ — $ —
Forfeited/cancelled (16 ) $ 5.00 $ —
Exercise — $ — — $ —
Forfeited/cancelled (322 ) $ 5.00 — $ —
For the year ended December 31, 2021, the weighted average grant date fair value for options granted was $5.01. There was no aggregate intrinsic value for options vested and outstanding as
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of December 31, 2021. As of December 31, 2021, the unrecognized compensation cost related to outstanding options was $7.1 million, expected to be recognized over a weighted average period of approximately 2.8 years.
The weighted average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted to employees and directors during the year ended December 31, 2021 were as follows:
Year Ended December 31,
Expected term (in years) 6.1 5.5
Expected volatility 91 % 86 %
RSUs:
The following table summarizes the RSU activity for the 2020 Plan:
Unvested, December 31, 2020 — $ — $ —
Vested — — —
Forfeited or canceled — — —
Weighted average price per share is the weighted grant price based on the closing market price of each of the stock grants. The weighted average fair value is the weighted average share price times the number of shares.
As of December 31, 2021, remaining unrecognized compensation cost related to RSUs to be recognized in future periods totaled $4.4 million, which is expected to be recognized over a weighted average period of 3.9 years.
As of December 31, 2021, the total unrecognized compensation cost from all plans to be recognized in future periods totaled approximately, $12.3 million.
10.
License, Research and Collaboration Agreements
Collaboration Agreements
ABL Bio Corporation ("ABL Bio") Agreements
Our wholly-owned subsidiary, TRIGR, and ABL Bio, a South Korean biotechnology company, entered into an exclusive global (excluding South Korea) license agreement (the “TRIGR License Agreement”) which granted TRIGR a license to ABL001, ABL Bio’s bispecific antibody targeting DLL4 and VEGF-A (renamed CTX-009). Under the terms of the agreement, ABL Bio and TRIGR would jointly develop CTX-009, with ABL Bio responsible for development of CTX-009 throughout the end of Phase 1 clinical trials and TRIGR responsible for the development of CTX-009 from Phase 2 and onward. ABL Bio received a $5 million upfront payment and is eligible to receive up to $110 million of development and regulatory milestone payments, up to $295 million of commercial milestone payments and tiered single-digit royalties on net sales of CTX-009 in Oncology. ABL Bio is also eligible to receive up to $185 million in development, regulatory and commercial milestone
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payments and tiered, single-digit royalties on net sales of CTX-009 in Ophthalmology. The financial terms of the agreement were amended in May 2021 but remain substantially similar to the terms in the TRIGR License Agreement. As a result of the TRIGR acquisition in 2021, the TRIGR License Agreement was assigned to the Company and the Company has assumed all the rights and liabilities of the agreement. See Note 16 for further information on the TRIGR transaction.
In May 2021, TRIGR and ABL Bio terminated license agreements to several preclinical assets. As a result of the return of these assets to ABL Bio and termination of the license agreements, the Company is eligible to receive royalty payments if ABL Bio develops or licenses two bispecific antibodies that were previously licensed to TRIGR.
Adimab Agreement