Compass Therapeutics, Inc. 10-K

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. (formerly named Olivia Ventures, Inc.) together with its wholly-owned subsidiaries, including Compass Therapeutics LLC, 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 biopharmaceutical company developing proprietary antibody therapeutics intended to engage the immune system to treat both solid tumors and hematological malignancies. Our immuno-oncology product candidates include a clinical-stage monoclonal antibody targeting solid tumors, a novel bispecific targeting PD-1 and PD-L1, and a portfolio of bispecific and monoclonal antibodies at various stages of pre-clinical development. These product candidates are designed to address three critical components required for an effective immune response to cancer: induction of a potent innate immune response; activation of the adaptive immune system; and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance and activation. We plan to advance our product candidates through clinical development, either as standalone therapies or in combination with existing therapies as long as their continued development is supported by clinical and nonclinical data. 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. To date, we have funded our operations to date primarily with proceeds from private placements of preferred and common equity and borrowings under the 2018 loan and security agreement with Pacific Western Bank, or 2018 Credit Facility. Through December 31, 2020, we had received gross proceeds of $192.5 million from the sale of equity securities, including $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined below), and $15.0 million under the 2018 Credit Facility. 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 on the successful development and eventual commercialization of our therapies and any future product candidates. Our net losses were $29.5 million and $34.7 million for the years ended December 31, 2020 and 2019, respectively, and as of December 31, 2020, we had an accumulated deficit of $151.4 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. 102 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 , 2020, we had $ 47. 1 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 quarter of 2022. 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 OTCQB Market On March 4, 2021, shares of our common stock were approved for trading on the OTCQB Venture 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, or 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 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, or 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 103 historical financial statements of Compass Therapeutics in this and future filings with the SEC. The Merger is intended to be 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 agreed to pay the placement agents, Raymond James & Associates, Inc., B. Riley FBR, Inc. and Katalyst Securities LLC and other legal and accounting private placement costs of $6.3 million, 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. COVID-19 Update In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. As of February 2021, COVID-19 has spread to Europe, the United States and many other countries, and has been 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. 104 To date, we have been able to continue to pursue our Phase 1 clinical trial without significant delays or major difficulties despite the COVID-19 pandemic. Nevertheless, we could experience some temporary delays or disruptions due to the 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. W e 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 Research and development Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, 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: • employee-related expenses, including salaries, related benefits and equity-based compensation expense, for employees engaged in research and development functions; • Contract Research Organizations (“CROs”) that are primarily engaged to support the clinical development of our product candidates; • Contract Manufacturing Organizations (“CMOs”) 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; • the cost of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches; • costs related to compliance with quality and regulatory requirements; and • 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. 105 Our clinical development costs may vary significantly based on factors such as: • per patient trial costs; • the number of trials required for approval; • the number of sites included in the trials; • the location where the trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the trials; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients; • potential additional safety monitoring requested by regulatory agencies; • the duration of patient participation in the trials and follow-up; • the cost and timing of manufacturing our product candidates; • the phase of development of our product candidates; and • 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: • the timing and progress of nonclinical and clinical development activities; • the number and scope of nonclinical and clinical programs we decide to pursue; • raising necessary additional funds; • the progress of the development efforts of parties with whom we may enter into collaboration arrangements; • our ability to maintain our current development program and to establish new ones; • our ability to establish new licensing or collaboration arrangements; • 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; • the receipt and related terms of regulatory approvals from applicable regulatory authorities; • the availability of drug substance and drug product for use in production of our product candidate; 106 • establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved; • our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally; • our ability to protect our rights in our intellectual property portfolio; • the commercialization of our product candidate, if and when approved; • obtaining and maintaining third-party insurance coverage and adequate reimbursement; • the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors; • competition with other products; • 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 COVID-19 pandemic or similar public health crisis; and • 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. Interest expense Interest expense consists primarily of cash interest under our 2018 Credit Facility that we entered into in March 2018 and the related non-cash interest attributable to the amortization of deferred financing costs incurred in connection with this facility. Other income (expense) Other income (expense) consists of the change in fair value of derivative liability, realized loss on sale of furniture and equipment and interest income received on our cash equivalents. Our 2018 Credit Facility includes contingent interest rate reset features and a contingent feature to pay a success fee upon the occurrence of certain liquidity events as defined in the credit agreement. These features had been bifurcated from the 2018 Credit Facility, recorded at their estimated fair values 107 and re-measured at each reporting period until they were exercised, expire, or otherwise settled. The success fee was settled in its entirety in June 2020 in connection with the Merger . Income taxes Compass Therapeutics, a Delaware limited liability company and the business that was acquired in the Merger, is treated as a partnership for income tax reporting purposes and therefore, federal and state income taxes are the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company are recorded in our condensed consolidated financial statements. The wholly-owned subsidiary of Compass Therapeutics, Compass Therapeutics Advisors Inc., is organized as a C corporation and is subject to federal and state income taxes. All such taxes have been recorded in our consolidated financial statements. The Company recorded a deferred income tax asset of $6.6 million primarily related to a net operating loss carryforward and research and development tax credit carryforward. The asset has a corresponding full deferred income tax valuation allowance. Under 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 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, 2020 and 2019 The following table summarizes the results of operations for the years ended December 31, 2020 and 2019, respectively: Year Ended December 31, 2020 2019 Change (000's) Operating expenses: Research and development $ 14,904 $ 22,449 $ (7,545 ) General and administrative 12,908 11,603 1,305 Total operating expenses 27,812 34,052 (6,240 ) Loss from operations (27,812 ) (34,052 ) 6,240 Other income (expense): Interest expense (908 ) (1,228 ) 320 Other income (expense), net (748 ) 627 (1,375 ) Total other expense (1,656 ) (601 ) (1,055 ) Loss before income tax expense (29,468 ) (34,653 ) 5,185 Income tax expense (32 ) (91 ) 59 Net loss $ (29,500 ) $ (34,744 ) $ 5,244 Research and development expenses Research and development expenses decreased by $7.5 million from $22.4 million for the year ended December 31, 2019 to $14.9 million for the year ended December 31, 2020. This decrease was primarily attributable to a reduction in our research and development personnel and related expenses, and the completion of our preclinical efforts for our lead product candidate, CTX-471. We initiated efforts to reduce our research and development workforce in April 2019 which resulted in a decrease in salaries and related benefits of $3.2 million. In addition, the transition of CTX-471 to the clinic and the completion of pre-clinical studies and filing of our IND in 2019 resulted in research and development expenses 108 decreasing by $ 4. 5 million for the year ended December 31, 2020 , of which $1.5 million was due to a milestone payment we made under our collaboration agreement with Adimab LLC in 2019 while no such payments were made in 2020. Other research and development expenses decreased by $0. 3 million. The decrease was partially offset by $0.5 million in increased manufacturing fees resulting from initiating a manufacturing campaign for our product candi d ate CTX-8371. We track supplies, outsourced development, outsourced personnel costs and other external research and development costs of specific programs. We do not track our internal labor or facility costs on a program-by-program basis. Research and development expenses are summarized by program in the table below: Year Ended December 31, 2020 2019 (000's) CTX-471 $ 3,102 $ 5,587 CTX-8371 1,487 34 NKp30 cell engagement platform 108 849 Other research and development expenses 10,207 15,979 Total research and development expenses $ 14,904 $ 22,449 We recently decided to deprioritize our development efforts for our NKp30 innate cell engager platform. General and administrative expenses General and administrative expenses increased by $1.3 million from $11.6 million for the year ended December 31, 2019 to $12.9 million for the year ended December 31, 2020. The increase was primarily attributable to the issuance of stock options which resulted in an increase in stock-based compensation expense of $2.9 million, as well as an increase in legal and professional fees of $1.6 million associated with transitioning to operating as a public company. These increases were partially offset by a decrease in salaries and related benefits of $2.3 million related to reduced headcount and we began allocating employee benefits to research and development according to headcount in 2020. In addition, the increases were offset by decreased legal costs associated with our intellectual property of $0.7 million and decreased facilities costs of $0.2 million. The reduced headcount was the result of efforts we initiated in April 2019 which resulted in a decrease in salaries and related benefits. We anticipate that our general and administrative expenses will continue to increase in future periods as we expand our operations to support our research and development efforts and operate as a public company. Interest expense Interest expense was $0.9 million during the year ended December 31, 2020, compared to $1.2 million during the year ended December 31, 2019. Pursuant to our 2018 Credit Facility, we began making principal payments in April 2020, reducing the average outstanding balance of our debt in the second quarter of 2020. Other income (expense) Interest income decreased by $0.6 million during the year ended December 31, 2020 compared to 2019 and was primarily attributable lower interest rates on our cash and cash equivalents. We recognized an increase in our derivative liability of $0.4 million. The increase in fair value of the derivative liability was attributable to a liquidity event occurring whereby a success fee payment became payable pursuant to our 2018 Credit Facility. This fee was paid in June 2020 following the Merger. There was a realized loss of $0.3 million from the sale of equipment in conjunction with our move to a new location. 109 Income tax expense During the years ended December 31, 2020 and 2019, we recognized income tax expense of $32 thousand and $91 thousand, respectively, which were 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. To date, we have funded our operations to date primarily with proceeds from private placements of preferred and common equity and borrowings under the 2018 Credit Facility. Through December 31, 2020, we had received gross proceeds of $192.5 million from the sale of equity securities, including $60.5 million from the sale of our common stock in the Private Placement (as described above). In addition, we received $15.0 million in term loan borrowings under the 2018 Credit Facility, of which $9.3 million was outstanding as of December 31, 2020. As of December 31, 2020, we had cash and cash equivalents of $47.1 million. Indebtedness In March 2018, we entered into the 2018 Credit Facility with Pacific Western Bank which matures on March 1, 2022 and consists of $15.0 million in term loans. The term loans bear interest at the greater of (i) 6.25% and (ii) the prime rate plus an applicable margin of 2.0%. On December 31, 2020, the interest rate was 6.25%. In an event of default, as defined in the agreement, the interest rate applicable to borrowings would increase by 5.0%. We made interest-only payments through March 31, 2020, and beginning in April 2020, we began to make equal monthly principal payments of $625 thousand, which we are required to be made through March 31, 2022. The 2018 Credit Facility allows us to prepay the outstanding principal at any time, subject to a 0.5% prepayment charge on the then-outstanding principal amount. As of December 31, 2020, $9.3 million was outstanding. The 2018 Credit Facility included a success fee of $1.1 million to the lender which was paid upon completion of the Merger. 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: • the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates; • the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization; • the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; 110 • the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies; • our ability to establish additional collaborations on favorable terms, if at all; • the costs required to scale up our clinical, regulatory and manufacturing capabilities; • 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 • 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. Cash Flows The following table shows a summary of our cash flows for the periods indicated: Year ended December 31, 2020 2019 (000's) Cash used in operating activities $ (26,803 ) $ (31,741 ) Cash provided by (used in) investing activities 38 (466 ) Cash provided by financing activities 48,538 — Net increase (decrease) in cash, cash equivalents and restricted cash $ 21,773 $ (32,207 ) Operating Activities 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 $0.5 million. The change in our operating assets 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. During the year ended December 31, 2019, we used $31.7 million of cash in operating activities, resulting from net loss of $34.7 million and the change in operating assets and liabilities of $0.3 million, offset by non-cash charges of $3.3 million. Our non-cash charges were comprised of depreciation and amortization of $2.1 million, unit-based compensation expense of $0.9 million, a change in fair value of our derivative liability of $0.1 million and non-cash interest expense of $0.1 million. The change in our operating assets was primarily related to the decrease in our accounts payable offset by the decrease in prepaid expenses and the increase in accrued expenses. 111 Investing Activities 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. During the year ended December 31, 2019, cash used in investing activities was $0.5 million and is for the purchase of property and equipment. Financing Activities 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. We had no financing activities during the year ended December 31, 2019. Future Funding Requirements We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our lead product candidate into the expansion stage of our Phase 1 trial and our second product candidate to IND-enabling studies. The timing and amount of our operating expenditures will depend largely on: • the initiation, progress, timing, costs and results of clinical trials for our product candidate or any future product candidates we may develop; • the initiation, progress, timing, costs and results of nonclinical studies for our product candidates or any future product candidates we may develop; • our ability to maintain our relationships with key collaborators; • 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; • 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; • the effect of competing technological and market developments; • the costs of continuing to grow our business, including hiring key personnel and maintain or acquiring operating space; • market acceptance of any approved product candidates, including product pricing, as well as product coverage and the adequacy of reimbursement by third-party payors; • the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies; • the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing; 112 • 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 • 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, 2020 will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022. 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 CTX-471, initiate clinical development of CTX-8371, 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 CTX-471 and CTX-8371 or other 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. 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, 2020 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 than 1 year 1 to 3 years 3 to 5 years More than 5 years Principal and interest payments on long-term debt ( 1) $ 9,771 $ 7,876 $ 1,895 $ — $ — Operating lease commitments ( 2) 6,065 1,440 2,658 1,967 — Manufacturing commitments ( 3) 2,195 2,195 — — — Total $ 18,031 $ 11,511 $ 4,553 $ 1,967 $ — (1) Interest payable reflects the rate in effect as of December 31, 2020. The interest rate on borrowings under the 2018 Credit Facility is variable and resets monthly. (2) Reflects payments due for our leases of office and laboratory space in Cambridge, Massachusetts under an operating lease agreement that expired in January 2021 and 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 CMO, which we have engaged to manufacture preclinical and clinical trial materials. 113 ( 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, or 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. 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, 2020, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Valuation of Derivative Liability Our derivative liability is comprised of the contingent interest rate reset features and a contingent feature to pay a success fee upon the occurrence of certain liquidity events under the 2018 Credit Facility. At issuance and at each reporting period, we are required to estimate the fair value of the derivative liability using a probability-weighted expected return method. This method requires judgment when estimating the timing and probability of future events, such as a change in control event, future liquidity events, and repayment of our debt obligation under the 2018 Credit Facility. We then apply a risk-adjusted discount rate reflecting the expected risk profile for each of the potential settlement scenarios and relating timing. Due to the nature of and inputs in the model used to assess the fair value of the future tranche rights, it is not abnormal to experience significant fluctuations during each remeasurement period. The contingent success fee derivative was settled at the time of the Merger in June 2020. 114 Stock Awards and Unit-Based Compensation The following table summarizes stock awards and unit-based compensation expense: Year Ended December 31, 2020 2019 (000's) Research and development $ 605 $ 383 General and administrative 3,411 532 Total unit-based compensation $ 4,016 $ 915 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, or 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 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. 115 Item 7A. Quantitative and Qualitati ve 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, or 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. As discussed above under “ —Liquidity and Capital Resources—Indebtedness ”, the 2018 Credit Facility bears interest at a floating interest rate, which resets monthly and is equal to the greater of 6.25% and 1.5%, plus the prime rate as published by The Wall Street Journal. As a result, we are exposed to risks from changes in interest rates. A 1.0% increase in interest rates would have resulted in a $0.1 million increase to our interest expense for the year ended December 31, 2020. 116