Compass Therapeutics, Inc. 10-Q

Item 1. Financial Statements Compass Therapeutics, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except per share data) March 31, 2021 December 31, 2020 Assets (unaudited) (Note 1) Current assets: Cash and cash equivalents $ 39,695 $ 47,076 Prepaid expenses and other current assets 1,952 3,126 Total current assets 41,647 50,202 Property and equipment, net 1,188 1,126 Restricted cash 151 263 Operating lease, right-of-use asset 4,892 — Other assets 320 320 Total assets $ 48,198 $ 51,911 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,061 $ 1,061 Accrued expenses 1,290 1,571 Operating lease obligations, current portion 1,025 — Current portion of long-term debt 7,474 7,467 Total current liabilities 10,850 10,099 Long-term debt, net of current portion — 1,867 Operating lease obligations, long-term portion 3,877 — Total liabilities 14,727 11,966 Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, $0.0001 par value; 10,000 shares authorized and no shares issued and outstanding as of March 31, 2021 and December 31, 2020 — — Common stock, $0.0001 par value: 300,000 shares authorized; 52,081 and 52,117 shares issued at March 31, 2021 and December 31, 2020, respectively; 51,313 and 51,221 shares outstanding at March 31, 2021 and December 31, 2020, respectively 5 5 Additional paid-in-capital 192,296 191,348 Accumulated deficit (158,830 ) (151,408 ) Total stockholders' equity 33,471 39,945 Total liabilities and stockholders' equity $ 48,198 $ 51,911 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Compass Therapeutics, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (In thousands, except per share data) Three Months Ended March 31, 2021 2020 Operating expenses: Research and development $ 4,704 $ 3,571 General and administrative 2,635 2,260 Total operating expenses 7,339 5,831 Loss from operations (7,339 ) (5,831 ) Other expense, net (83 ) (555 ) Loss before income tax expense (7,422 ) (6,386 ) Income tax expense — (16 ) Net loss $ (7,422 ) $ (6,402 ) Net loss per share - basic and diluted $ (0.14 ) $ (0.90 ) Basic and diluted weighted average shares outstanding 51,313 7,122 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Compass Therapeutics, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) (unaudited) (In thousands) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balance at December 31, 2020 — $ — 51,221 $ 5 $ 191,348 $ (151,408 ) $ 39,945 Vesting of share-based awards — — 92 — — — — Stock-based compensation — — — — 948 — 948 Net loss — — — — — (7,422 ) (7,422 ) Balance at March 31, 2021 — $ — 51,313 $ 5 $ 192,296 $ (158,830 ) $ 33,471 Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity (Deficit) Balance at December 31, 2019 207,164 $ 129,870 7,034 $ 1 $ 3,304 $ (121,908 ) $ (118,603 ) Vesting of share-based awards — — 88 — — — — Stock-based compensation — — — — 247 — 247 Net loss — — — — — (6,402 ) (6,402 ) Balance at March 31, 2020 207,164 $ 129,870 7,122 $ 1 $ 3,551 $ (128,310 ) $ (124,758 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Compass Therapeutics, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (In thousands) For the Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net loss $ (7,422 ) $ (6,402 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 157 463 Gain on disposal of equipment (44 ) — Noncash interest expense 15 26 Share-based compensation 948 247 Change in fair value of derivative liability — 320 ROU asset amortization 256 — Changes in operating assets and liabilities: Prepaid expenses and other current assets 1,173 (24 ) Other long-term assets — (34 ) Accounts payable — (285 ) Accrued expenses (442 ) (2,072 ) Operating lease liability (246 ) — Net cash used in operating activities (5,605 ) (7,761 ) Cash flows from investing activities: Purchases of property and equipment (128 ) (12 ) Proceeds from sale of equipment 115 — Net cash used in investing activities (13 ) (12 ) Cash flows from financing activities: Repayment of borrowings under loan (1,875 ) — Net cash used in financing activities (1,875 ) — Net change in cash, cash equivalents and restricted cash (7,493 ) (7,773 ) Cash, cash equivalents and restricted cash at beginning of period 47,339 25,566 Cash, cash equivalents and restricted cash at end of period $ 39,846 $ 17,793 Supplemental disclosure of cash flow information Cash paid for interest $ 137 256 Supplemental disclosure of financing activities Acquisition of equipment included in accrued expenses $ 161 $ 15 Deferred offering costs included in accrued expenses $ — $ 64 ROU asset acquired through operating leases $ 5,148 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Compass Therapeutics, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements 1. Nature of Business and Basis of Presentation Compass Therapeutics, Inc. (“Compass” or the “Company”) is a clinical-stage biopharmaceutical company developing proprietary antibody therapeutics intended to engage the immune system to treat both solid tumors and hematological malignancies. The Company’s immuno-oncology product candidates include a clinical-stage monoclonal antibody and a portfolio of bispecific antibodies. References to Compass or the Company herein include Compass Therapeutics, Inc. and its wholly-owned subsidiaries. The Company was incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Company’s reverse merger with Compass Therapeutics LLC (the “Merger”), Olivia was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). The Company is subject to risks and uncertainties common to companies in the biotechnology and pharmaceutical industries. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2021 and its results of operations and changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2021 and 2020. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The unaudited condensed consolidated financial statements include the accounts of Compass Therapeutics, Inc. and its subsidiaries, and have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”). 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 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. 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 for the next 12 months as of the filing of this Quarterly Report on Form 10-Q. 5 COVID-19 Update 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. 2 . Summary of Significant Accounting Policies There have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report, except as noted below. Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑02, Leases , which requires a lessee to record a right‑of‑use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the condensed consolidated financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The Company adopted this standard on January 1, 2021. See Note 12 for additional details on the Company’s accounting for leases. Recent Accounting Pronouncements In December 2019, the FASB issued ASU No. 2020-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2020-12"), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2022. The Company does not expect the adoption of ASU 2020-12 to have a material impact on its financial position and results of operations upon adoption. 6 3 . Fair Value Measurements The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands): Fair Value Measurements as of March 31, 2021 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Assets Cash equivalents - money market funds $ 38,453 $ — $ — $ 38,453 Total assets $ 38,453 $ — $ — $ 38,453 Fair Value Measurements as of December 31, 2020 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Assets Cash equivalents - money market funds $ 43,631 $ — $ — $ 43,631 Total assets $ 43,631 $ — $ — $ 43,631 4 . Property and Equipment Property and equipment consist of the following (in thousands): March 31, 2021 December 31, 2020 Equipment $ 5,349 $ 5,356 Furniture and fixtures 22 629 Leasehold improvements 284 896 Software 184 180 Total property and equipment–at cost 5,839 7,061 Less: Accumulated depreciation (4,651 ) (5,935 ) Property and equipment, net $ 1,188 $ 1,126 Total depreciation and amortization expense for three months ended March 31, 2021 and 2020, was $0.2 million and $0.5 million, respectively. 5 . Accrued Expenses Accrued expenses consist of the following (in thousands): March 31, December 31, 2021 2020 Compensation and benefits $ 365 $ 976 Research and development expenses 477 212 Legal and professional fees 196 326 Other 252 57 Total accrued expenses $ 1,290 $ 1,571 7 6 . Debt The aggregate principal amount of debt outstanding consisted of the following (in thousands): March 31, December 31, 2021 2020 Current portion of debt $ 7,500 $ 7,500 Less: unamortized debt discount (26 ) (33 ) Current portion of debt, net of debt discount $ 7,474 $ 7,467 Long-term debt, net of current portion $ — $ 1,875 Less: unamortized debt discount — (8 ) Long-term debt, net of current portion $ — $ 1,867 The Company entered into, and subsequently amended, a term loan facility with Pacific Western Bank, Inc. (the “Credit Facility”), and received $15.0 million debt proceeds. The loans bear interest at the greater of (i) 6.25% and (ii) the prime rate plus an applicable margin of 2.0%. The interest rate was 6.25% at March 31, 2021. In an event of default, as defined in the Credit Facility, the interest rate applicable to borrowings would be increased by 5.0%. The Company made interest-only payments through March 31, 2020. In April 2020, the Company became obligated to make equal monthly principal payments of $625,000 through March 31, 2022 when the notes mature. The Credit Facility allows for prepayment of the outstanding principal at any time, subject to a prepayment charge that is dependent on the prepayment date. The Credit Facility agreement contains a provision whereby the Company was obligated to pay a success fee of $1.1 million upon the achievement of certain liquidity events. Upon consummation of the Merger, the Company success fee payment became due and was paid in its entirety in June 2020. The Credit Facility contains a negative pledge on the Company’s intellectual property 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, and (xii) key contracts. In addition, the Company must maintain a minimum cash balance of $6.0 million beginning in April 2020. In the event of default under the Credit Facility, the Company would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 5%. The borrowings are collateralized by substantially all of the Company’s assets, excluding intellectual property, and contains affirmative and negative covenants including restrictions on the Company’s ability to incur additional indebtedness, pay dividends, encumber its property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. The Company was in compliance with its covenants as of March 31, 2021. The Company recognized interest expense of $0.1 million and $0.3 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the aggregate minimum future principal payments due in connection with the Credit Facility, as amended, are as follows (in thousands): Year Ending December 31, 2021 $ 5,625 2022 1,875 $ 7,500 7 . Leases The Company adopted ASU 2016-02, Leases (Topic 842) , or ASU 2016-02, effective January 1, 2021, using the modified retrospective transition method, in which the new standard is applied as of the date of initial adoption. The Company recognized and measured agreements executed prior to the date of initial adoption that were considered 8 leases on January 1, 20 21 . No cumulative effect adjustment of initially applying the standard to the opening balance of retained earnings was made upon adoption. The Company elected the package of practical expedients permitted under the transition guidance that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. In addition, the Company elected the accounting policy of not recording short-term leases with a lease term at the commencement date of 12 months or less on the condensed consolidated balance sheet as permitted by the new standard. The Company has evaluated its leases and determined that it has one lease that is classified as an operating lease. The classification of this lease is consistent with the Company’s determination under the previous accounting standard. When available, the Company will use the rate implicit in the lease to discount lease payments to present value; however, the Company’s current lease does not provide an implicit rate. Therefore, the Company used its incremental borrowing rate to discount the lease payments based on the date of the lease commencement. The Company has one operating lease for its corporate office and laboratory facility (“Facility”) that was signed in December 2020. The Company moved into the Facility in January 2021. The Facility lease has an initial term of four years and five months, beginning on January 1, 2021. The Facility lease contains scheduled rent increases over the lease term. The discount rate used for the Facility lease is 6.25%, and the remaining lease term of the Facility lease is four years and two months as of March 31, 2021. Minimum lease payments The table below presents the undiscounted cash flows for the lease term. The facility lease, the undiscounted cash flows are reconciled to the operating lease liabilities recorded on the condensed consolidated balance sheet: (000's) Remainder of 2021 $ 1,070 Years ending December 31, 2022 1,315 2023 1,348 2024 1,382 2025 426 Total minimum lease payments 5,541 Less: amount of lease payments representing interest (639 ) Present value of future minimum lease payments 4,902 Less: operating lease obligations, current portion (1,025 ) Operating lease obligations, long-term portion $ 3,877 8 . Stock-Based Compensation In June 2020, the Company’s board of directors adopted the 2020 Stock Option and Incentive Plan (the “2020 Plan”) and reserved 2.93 million shares of common stock for issuance under this plan. The 2020 Plan includes automatic annual increases. The increase on January 1, 2021 was 2.08 million shares. As of March 31, 2021, 1.78 million shares remain available for future grant. The 2020 Plan authorizes the board of directors or a committee of the board to grant incentive stock options, nonqualified stock options and restricted stock awards to eligible officers, employees, consultants and directors of the Company. Options generally vest over a period of four years and have a contractual life of ten years from the date of grant. 9 Stock-based compensation expense for the three months en ded March 31 , 2021 and 2020 was classified in the condensed consolidated statement of operations as follows: Three Months Ended March 31, 2021 2020 (000’s) Research and development $ 139 $ 81 General and administrative 809 166 Total $ 948 $ 247 Restricted Stock Prior to the adoption of the 2020 Plan, the Company issued restricted stock. A summary of the Company’s restricted stock activity during the three months ended March 31, 2021 is as follows: Shares Fair Value Weighted Average Fair Value (000’s) Per Share Unvested, December 31, 2020 896 $ 2.46 Granted — $ — Vested (93 ) $ 1.88 Forfeited or canceled (36 ) $ 1.39 Unvested, March 31, 2021 767 $ 1.79 As of March 31, 2021, remaining unrecognized compensation cost related to unvested restricted stock awards to be recognized in future periods totaled $1.4 million, which is expected to be recognized over a weighted average period of 2.3 years. 10 Stock Options The following table summarizes the stock option activity for the 2020 Plan: Weighted Weighted Number of Average Average Unvested Exercise Remaining Options Price Contractual (000’s) Per Share Life (in years) Outstanding at December 31, 2020 2,159 $ — 9.7 Granted 1,100 $ 5.00 9.9 Exercise — $ — Forfeited/cancelled (21 ) $ 5.00 Outstanding at March 31, 2021 3,238 $ 5.00 9.6 Vested at March 31, 2021 1,020 $ 5.00 9.4 For the three months ended March 31, 2021, the weighted average grant date fair value for options granted was $3.58. There was no aggregate intrinsic value for options vested and outstanding as of and for the three months ended March 31, 2021. As of March 31, 2021, the unrecognized compensation cost related to outstanding options was $7.5 million, and is expected to be recognized over a weighted average period of approximately 3.0 years. There were no stock options granted for the three months ended Mach 31, 2020. The assumptions used in the Black-Scholes pricing model to determine the fair value of stock options granted during the three months ended March 31, 2021 were as follows: Expected term (in years) 6.1 Risk-free rate 0.66 % Expected volatility 85.9 % 9 . License, Research and Collaboration Agreements Collaboration Agreements Adimab Agreement The Company entered into a collaboration agreement with Adimab, LLC on October 16, 2014. The agreement includes provisions for payment of royalties at rates ranging in the single digits as a percentage of future net sales within a specified term from the first commercial sale. There were no milestone payments made during the first quarter of 2021. As of March 31, 2021, future potential milestone payments in connection with this agreement amounted to $2.0 million. Other License and Research Agreements FUJIFILM Diosynth Biotechnologies Agreement The Company entered into a scope of work (“SOW”) under a master services agreement with FUJIFILM Diosynth Biotechnologies on July 20, 2020. The Company made cash payments of $0.2 million and recorded $1.0 million in research and development expense during the quarter ended March 31, 2021. As of March 31, 2021, future payments in connection with this SOW amounted to $2.0 million. 11 10 . Related Parties and Related-Party Transactions On October 16, 2014, the Company entered into a collaboration agreement with Adimab, LLC. The Company’s co-founder has a direct ownership interest in Adimab, LLC. The Company recorded no research and development expenses in connection with this agreement during the three months ended March 31, 2021 and 2020. 11. Other Expense Other income and expense consisted of the following: March 31, 2021 2020 (000's) Interest income $ 15 $ 41 Interest expense (142 ) (276 ) Change in fair value of derivative liability — (320 ) Realized gain (loss) on disposal of equipment 44 — Total other income (expenses) $ (83 ) $ (555 ) 12