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Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2020-11-09 · 84 added, 210 removed, 111 unchanged (73% of the section changed)

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The following discussion of the financial condition and results of operations of Compass Therapeutics, Inc.

should be read in conjunction with the financial statements and the notes to those statements included in this Quarterly Report on Form 10Q for the period ended September 30, 2020.

should be read in conjunction with the financial statements and the notes to those statements included in this Quarterly Report on Form 10-Q for the period ended March 31, 2021.

Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk, uncertainties and assumptions.

You should read the “Risk Factors” section of this Quarterly Report on Form 10Q 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.

You should read the “Risk Factors” section of this Quarterly Report on Form 10-Q and the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 , 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.

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.

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We plan to advance our product candidates through clinical development either as standalone therapies or in combination with existing therapies as long as its continued development is supported by clinical and nonclinical data.

Our lead product candidate, CTX-471, is a monoclonal antibody agonist of CD137, a key co-stimulatory receptor on immune cells.

In July 2019 we initiated a Phase 1 trial evaluating the safety and tolerability of CTX-471 as a monotherapy in oncology patients who were previously treated with PD-1 or PD-L1 immune checkpoint inhibitors and subsequently relapsed or progressed after a period of stable disease.

The design of this trial includes a dose escalation stage (Phase 1a) followed by a dose expansion stage (Phase 1b).

The dose escalation stage of the Phase 1 trial has been completed and CTX-471 was observed to be generally well-tolerated.

The dose expansion stage of the trial is currently ongoing and, as of April 23, 2021, 14 patients have received at least one dose of CTX-471.

Of the 14 patients treated so far, 11 patients have reached their first tumor evaluation at week 9, of which 6 had stable disease.

Subsequently, one of those patients who has advanced small cell lung cancer had a partial response at Week 17 and this response has been confirmed at week 25.

As of April 23, 2021, there have been no treatment-related serious adverse events (SAEs) in the Phase 1b dose expansion stage of the trial.

We expect to complete the Phase 1b stage of the trial during the first half of 2022 and to initiate a Phase 2/3 trial of CTX-471 in the second half of 2022.

Our second product candidate, CTX-8371, is a bispecific antibody that simultaneously targets both PD-1 and PD-L1, the targets of well-known and widely used checkpoint inhibitor antibodies.

IND-enabling studies with CTX-8371 were initiated in August 2020.

We are targeting an IND submission for CTX-8371 in the first half of 2022.

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 primarily with proceeds from the sale of our equity securities and borrowings from debt arrangements.

Through September 30, 2020, we have received $132.0 million in gross proceeds from the sale of Compass LLC equity securities, $15.0 million in term loan borrowings under a credit facility with Pacific Western Bank, or the 2018 Credit Facility, and $54.2 million in net proceeds from the sale of our common stock in a private placement in June 2020.

Through March 31, 2021, we have received $132.0 million in gross proceeds from the sale of equity securities, $15.0 million in term loan borrowings under a credit facility with Pacific Western Bank, or the Credit Facility, and $54.2 million in net proceeds from the sale of our common stock in a private placement in June 2020.

We have incurred significant operating losses since inception and have not generated any revenue from the sale of products and we 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 treatments and any future product candidates.

Our net losses were $9.1 million and $8.6 million for the three months ended September 30, 2020 and 2019 and $21.1 million and $28.1 million for the nine months ended September 30, 2020 and 2019, respectively.

We had an accumulated deficit of $143.0 million at September 30, 2020.

Our net losses were $7.4 million and $6.4 million for the three months ended March 31, 2021 and 2020, respectively.

We had an accumulated deficit of $158.8 million at March 31, 2021.

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.

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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 September 30, 2020, we had $55.5 million in cash and cash equivalents.

Based on our research and development plans, we expect that such cash resources will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2022.

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 March 31 , 2021, we had $ 39.7 million in cash and cash equivalents.

Based on our research and development plans, we expect that such cash resources will enable us to fund our operating expenses and capital expenditure 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.

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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.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Reverse Merger

Compass Therapeutics, Inc., was 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 Securities Exchange Act of 1934, as amended).

On June 17, 2020, we completed a merger (the “Merger”) of a wholly-owned subsidiary, Compass Therapeutics LLC (“Compass LLC”), pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among us, Olivia Ventures, Inc., Acquisition Sub, Compass Therapeutics, Blockers, Blockers Merger Subs and Blocker Holders and, as a result of, Compass LLC became a wholly-owned subsidiary.

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 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 our common stock to the security holders of Compass LLC 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 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.

Private Placement Offering

On June 19, 2020, we sold 12,096,442 shares of our common stock pursuant to the closing of a private placement offering, at a purchase price of $5.00 per share for approximately $54.2 million in net proceeds.

This offering is now closed.

Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

COVID-19 Update

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China.

As of September 2020, 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 have established a work-from-home policy for all employees since mid-March 2020, while ensuring essential staffing levels at our operations remain in place, including maintaining key personnel in our laboratory facilities.

For those employees, we have implemented stringent safety measures designed to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic.

For ongoing and planned clinical trials, we anticipate and have experienc ed 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 var ious 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 expect that COVID-19 precautions may directly or indirectly impact the timeline for our ongoing clinical trial and potential future trials.

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 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.

To date, we have been able to continue to pursue our Phase 1 clinical trial without significant delays.

However, we have experienced some temporary delays due to the COVID-19 pandemic from reduced patient enrollment in some of our hospitals and trial sites.

In addition, there have been delays in supplies for the manufacturing of material to be used in future clinical trials.

We expect that COVID-19 may continue to 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.

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Research and Development

Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, CTX-471, CTX-8371 and CTX-8573, and our NKp30 innate cell engager platform, as well as unrelated discovery program expenses.

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 discovery program expenses.

We expense research and development costs as incurred.

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costs related to compliance with quality and regulatory requirements

payments made under third-party licensing agreements.

facilities and equipment expenses

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.

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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:

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;

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 Food and Drug Administration, or 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;

establishing and maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidate is 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;

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.

This is due to the numerous risks and uncertainties associated with product development and commercialization.

General and administrative expenses

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We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations.

Interest income

Interest income consists primarily of interest income received on our cash, cash equivalents and restricted cash.

Interest expense

Other expense, net

Other expense consists of interest expense, interest income and realized loss on sale of furniture and equipment.

Interest expense consists primarily of cash interest under our 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.

Change in fair value of derivative liability

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 have been bifurcated from the 2018 Credit Facility, recorded at their estimated fair values and are re-measured at each reporting period until they are exercised, expire, or otherwise settled.

The success fee was settled in its entirety in June 2020.

Realized foreign exchange loss

We recognized foreign exchange losses for payment arrangements that are denominated in currencies other than the U.S.

Compass Therapeutics LLC, the business that we 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 LLC, 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.

Subsequent to the Merger, we have not recorded any income tax benefits for the net loss incurred as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating losses and tax credits will not be utilized.

Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019:

Three Months Ended September 30,

(in thousands)

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other Income (expense):

Interest income

Interest expense

Change in fair value of derivative liability

Realized foreign exchange loss

Total other income (expense), net

Loss before income tax expense

Income tax expense

Research and development expenses

Research and development expenses decreased by $2.3 million from $6.0 million for the three months ended September 30, 2019 to $3.7 million for the three months ended September 30, 2020.

The decrease was primarily attributable to a reduction in headcount which resulted in a decrease in salaries and related benefits of $0.7 million, and to $1.0 million related to a milestone payment we made under our collaboration agreement with Adimab LLC in 2019 while no such payments were made in 2020.

The reduced headcount resulted in an additional decrease in research and development expense related to lab supplies and general lab expense of $0.6 million.

We anticipate our research and development expenses to increase in future periods as we advance our IND-enabling studies for CTX-8371, advance CTX-8573 into IND-enabling studies and continue to further develop our other pre-clinical product candidates.

We track outsourced development, outsourced personnel costs and other external research and development costs of specific programs.

We do not track our internal research and development costs on a program-by-program basis.

Research and development expenses are summarized by program in the table below:

Three Months Ended September 30,

NKP30 cell engagement platform

Unallocated research and development expenses

Total research and development expenses

General and Administrative Expenses

General and administrative expenses increased by $2.9 million from $2.4 million for the three months ended September 30, 2019 to $5.3 million for the three months ended September 30, 2020.

The increase was primarily attributable to increased legal and professional fees in the amount of $1.0 million and the issuance of stock options in August 2020 which resulted in increased stock compensation expense of $2.0 million.

Facilities costs also increased by $0.4 million for the three months ended September 30, 2020 compared to the corresponding period in 2019.

These increases were partially offset by reduced salary and benefits costs of $0.5 million resulting from reduced headcount.

We anticipate our general and administrative expenses to increase in future periods as we expand our operations to support our research and development efforts and operate as a publicly traded company .

Interest income

We recognized interest income of $22,000 and $0.2 million during the three months ended September 30, 2020 and 2019, respectively.

The decrease in interest income is primarily attributable to the lower interest rates on our cash and cash equivalents.

Interest Expense

We recognized interest expense of $0.2 million and $0.3 million during each of the three months ended September 30, 2020 and 2019, respectively.

We began making principal payments in April 2020, reducing the average outstanding principal balance of our debt in the second quarter of 2020.

Change in fair value of derivative liability and loan success fee

We recognized a change in our derivative liability of $7,000 during the three months ended September 30, 2019.

The increase in fair value of the derivative liability during the 2019 period is primarily attributable to the increased likelihood of a liquidity event occurring whereby a success fee payment would be payable as required under our 2018 Credit Facility.

The success fee was paid in June 2020 following the Merger and as a result the balance of the derivative was zero.

Realized foreign exchange loss

Our realized foreign exchange losses were relatively small and unchanged during the three months ended September 30, 2020 and 2019 as we have a limited number of payment arrangements denominated in a currency other than the U.S.

Income tax expense

During the three months ended September 30, 2020 we did not recognize any income tax expenses.

During the three months ended September 30, 2019, we recognized income tax expenses of $26,000, which were primarily attributable to the services that our wholly-owned subsidiary, which is a C corporation, provided at cost plus a profit margin.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

(in thousands)

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Operating expenses:

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Loss from operations

Other income (expense):

Interest income

Interest expense

Change in fair value of derivative liability

Realized foreign exchange loss

Total other income (expense), net

Other expense, net

Loss before income tax expense

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Research and development expenses

Research and development expenses decreased by $8.6 million from $19.1 million for the nine months ended September 30, 2019 to $10.5 million for the nine months ended September 30, 2020.

The 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 product candidate CTX-471 and the related filing of our IND in February 2019.

We initiated efforts to reduce our research and development workforce in April 2019 which resulted in a decrease in salaries and related benefits of $3.4 million.

In addition, the transition of CTX-471 to the clinic and the completion of pre-clinical studies and filing of our IND resulted in research and development expenses decreasing additionally by $4.7 million, 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 $0.5 million.

We track outsourced development, outsourced personnel costs and other external research and development costs of specific programs.

We do not track our internal research and development costs on a program-by-program basis.

Research and development expenses increased by $1.1 million from $3.6 million for the three months ended March 31, 2020 to $4.7 million for the three months ended March 31, 2021.

The increase was primarily attributable to increased manufacturing costs related to CTX-8371 of $1.0 million.

We track outsourced development, outsourced personnel costs and other research and development costs of specific programs.

In 2021, we began tracking our internal personnel costs on a program-by-program basis.

Research and development expenses are summarized by program in the table below:

Nine Months Ended September 30,

Three Months Ended March 31,

NKP30 cell engagement platform

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General and administrative expenses

General and administrative expenses increased by $0.9 million from $8.5 million for the nine months ended September 30, 2019 to $9.4 million for the nine months ended September 30, 2020.

The increase was primarily attributable to the issuance of stock options in August 2020 which resulted in an increase in stock compensation expense of $2.1 million, as well as an increase in legal fees, professional fees, and facilities costs of $0.5 million.

These increases were partially offset by a reduction in headcount which resulted in a decrease in salaries and related benefits of $1.7 million.

Interest income

We recognized interest income of $70,000 and $0.6 million during the nine months ended September 30, 2020 and 2019, respectively.

The decrease in interest income is primarily attributable to the lower interest rates on our cash and cash equivalents.

Interest expense

We recognized interest expense of $0.7 million and $0.9 million during the nine months ended September 30, 2020 and 2019, respectively.

We began making principal payments in April 2020, reducing the average outstanding balance of our debt in the second quarter of 2020.

Change in fair value of derivative liability and success fee

We recognized a change in our derivative liability of $0.6 million and $0.1 million during the nine months ended September 30, 2020 and 2019, respectively.

The increase in fair value of the derivative liability is primarily attributable to the increased likelihood of a liquidity event occurring whereby a success fee payment would be payable as required under our 2018 Credit Facility.

The success fee was paid in June 2020 following the Merger.

Realized foreign exchange loss

Our realized foreign exchange losses were relatively small and unchanged during the nine months ended September 30, 2020 and 2019 as we have a limited number of payment arrangements denominated in a currency other that the U.S.

General and administrative expenses increased by $0.4 million from $2.3 million for the three months ended March 31, 2020 to $2.6 million for the three months ended March 31, 2021.

The increase was primarily attributable to the issuance of stock options in the second half of 2020 and first quarter of 2021, which resulted in increased stock compensation expense of $0.6 million.

This increase was partially offset by reduced salary and benefits costs of $0.3 million resulting from reduced headcount.

Other expense, net

We recognized interest expense of $0.1 million and $0.3 million during the three months ended March 31, 2021 and 2020, respectively.

A fair value of the derivative related to the Credit Facility was increased by $0.3 million as of March 31, 2020.

Following our reverse merger with Compass Therapeutics LLC in June 2020, or the Merger, the derivative was settled.

Income tax expense

During the nine months ended September 30, 2020 and 2019, we recognized income tax expenses of $32,000 and $81,000, respectively, and attributable to the services provided by the wholly-owned subsidiary of Compass Therapeutics LLC, prior to the closing of the Merger.

During the three months ended March 31, 2021, we did not recognize any income tax expense.

During the three months ended March 31, 2020, we recognized income tax expenses of $16 thousand, which were primarily attributable to the services that Compass Advisors, Inc., our wholly-owned subsidiary, provided at cost plus a profit margin.

Liquidity and Capital Resources

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To date, we have funded our operations primarily with proceeds from the sale of our equity securities and borrowings from debt arrangements.

Through September 30, 2020, we have received $132.0 million in gross proceeds from the sale of Compass LLC equity securities and $15.0 million in term loan borrowings under the Compass LLC credit facility.

Following the completion of the Merger, we completed a private placement of our common stock and in exchange for net proceeds of $54.2 million.

As of September 30, 2020, we had cash and cash equivalents of $55.5 million.

Through March 31, 2021, we have received $132.0 million in gross proceeds from the sale of equity securities and $15.0 million in term loan borrowings under the Credit Facility.

Following the completion of the Merger, we completed a private placement of our common stock and received net proceeds of $54.2 million.

As of March 31, 2021, we had cash and cash equivalents of $39.7 million.

Funding Requirements

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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements.

To the extent that we raise additional capital through the sale of equi ty or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder.

Debt financing and preferred equity financ ing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

If we raise additional fun ds 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 drug candidates, or grant li censes 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, limit, reduce or terminate our research, product development or fu ture commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, current stockholders’ interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights of common stockholders.

Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

If we raise additional 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 drug 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, limit, reduce or terminate our research, 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.

The following table shows a summary of our cash flows for the periods indicated:

Nine Months Ended September 30,

(in thousands)

Three months Ended March 31,

Cash used in operating activities

Cash provided by (used in) investing activities

Cash provided by financing activities

Net increase (decrease) in cash, cash

equivalents and restricted cash

Cash used in investing activities

Cash used in financing activities

Net decrease in cash, cash equivalents

and restricted cash

Operating Activities

During the nine months ended September 30, 2020, we used $20.2 million of cash in operating activities, resulting from our net loss of $21.1 million and the change in operating assets and liabilities of $4.0 million, offset by non‑cash charges of $4.9 million.

Our non‑cash charges were comprised of depreciation and amortization of $1.3 million, share-based compensation expense of $3.0 million, non-cash interest expense of $72,000, and a change in fair value of our derivative liability of $0.6 million.

The change in our operating assets was primarily related to 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 nine months ended September 30, 2019, we used $26.2 million of cash in operating activities, resulting from a net loss of $28.1 million and a change in operating assets and liabilities of $0.5 million, offset by non‑cash charges of $2.4 million.

Non‑cash charges were comprised of depreciation and amortization of $1.6 million, share-based compensation expense of $0.7 million, a change in fair value of our derivative liability of $96,000 and non-cash interest expense of $93,000.

The change in our operating assets was primarily related to the net decrease in our accounts payable and accrued expenses.

During the three months ended March 31, 2021, we used $5.6 million of cash in operating activities, resulting from our net loss of $7.4 million, offset by non‑cash charges of $1.3 million and the change in operating assets and liabilities of $0.5 million.

Our non‑cash charges were primarily comprised of depreciation and amortization of $0.2 million, share-based compensation expense of $0.9 million, offset by $44 thousand of gain on disposal of equipment.

The change in our operating assets was primarily related to an increase in prepaid expenses of $1.2 million offset by a decrease in our accrued expenses and lease liability of $0.7 million.

During the three months ended March 31, 2020, we used $7.8 million of cash in operating activities, resulting from net loss of $6.4 million and the change in operating assets and liabilities of $2.4 million, offset by non-cash charges of $1.1 million.

Our non-cash charges were comprised of depreciation and amortization of $0.5 million, stock-based compensation expense of $0.2 million, a change in fair value of our derivative liability of $0.3 million and noncash interest expense of $26 thousand.

The change in our operating assets was primarily related to the decrease in our accounts payable and accrued expenses and due to the timing in which we pay our vendors.

Investing Activities

During the nine months ended September 30, 2020 cash received from investing activities was $32,000 attributed to the sale of property and equipment for which we received $55,000, offset by $23,000 in purchases of property and equipment.

During the nine months ended September 30, 2019, cash used in investing activities was $0.3 million attributable to purchases of property and equipment.

During the three months ended March 31, 2021, cash used in investing activities was $13 thousand attributed to $0.1 million in leasehold improvements and purchases of equipment, partially offset by the sale of property and equipment.

During the three months ended March 31, 2020, cash used in investing activities was $12 thousand attributable to purchases of property and equipment.

Financing Activities

We had no financing activities during the nine months ended September 30, 2019.

During the nine months ended September 30, 2020 we received net cash proceeds of $50.4 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 $3.8 in principal payments under the 2018 Credit Facility.

Indebt edness

In March 2018, we entered into the 2018 Credit Facility with Pacific Western Bank, which consists of $15.0 million in term loans:

a $10.0 million Tranche 1, and a $5.0 million Tranche 2.

We borrowed the $10.0 million Tranche 1 term loan in March 2018 and borrowed the $5.0 million Tranche 2 term loan in September 2018.

Pursuant to the 2018 Credit Facility, we provided a first priority security interest in all existing and future acquired assets, excluding intellectual property and certain other assets, owned by us.

The 2018 Credit Facility contains a negative pledge on intellectual property owned by us and also contains customary indemnification obligations and customary events of default, including, among other things, (i) non‑payment, (ii) breach of warranty, (iii) non‑performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) key person event, (xi) regulatory matters, (xii) and key contracts.

In addition, we must maintain a minimum cash balance of $6.0 million beginning in April 2020.

In the event of default under the 2018 Credit Facility, we would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 5%.

The 2018 Credit Facility matures on March 1, 2022 and bears interest at a rate equal to the greater of 6.25% and 1.5% plus the prime rate as published by the Wall Street Journal.

We are required to make monthly interest and principal payments beginning March 2020 through March 1, 2022 when the 2018 Credit Facility matures.

Upon completion of the Merger, which qualified as a liquidity event under the 2018 Credit Facility, we paid a success fee of $1.1 million to the lender.

During the three months ended March 31, 2021, we had $1.9 million in principal payments under the Credit Facility.

We had no financing activities during the three months ended March 31, 2020.

In March 2018, we entered into the 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%.

As of March 31, 2021, the interest rate was 6.25%.

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.

Payments are scheduled through March 31, 2022.

As of March 31, 2021, $7.5 million was outstanding.

Future Funding Requirements

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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 September 30, 2020 will enable us to fund our operating expenses and capital expenditure requirements into first quarter of 2022, which we expect to enable us to complete Part 2 of our ongoing Phase 1 clinical trial of CTX-471, commence the planned Phase 1 development of CTX-8371, subject to satisfactory completion of IND-enabling activities for that product candidate, and to complete IND-enabling activities with respect to our NKp30 bispecific program.

We believe that our existing cash and cash equivalents as of March 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022, which we expect to enable us to complete Part 2 of our ongoing Phase 1 clinical trial of CTX-471 and commence the planned Phase 1 development of CTX-8371, subject to satisfactory completion of IND-enabling activities for that product candidate.

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, begin IND-enabling studies with CTX-8573, 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, CTX-8371, CTX-8573 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 ourselves.

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, 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 ourselves.

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.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis