Compass Therapeutics, Inc. (CMPX)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Compass Therapeutics, Inc. together with its wholly-owned subsidiaries, which we refer to as Compass Therapeutics.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis, the immune system, and tumor growth. Our pipeline of novel product candidates is designed to target multiple critical biological pathways required for an effective anti-tumor response. These include modulation of the microvasculature via angiogenesis-targeted agents, induction of a potent immune response via activators on effector cells in the tumor microenvironment, and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with proprietary pipeline antibodies based on supportive clinical and nonclinical data.

Financial Overview

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. We have funded our operations primarily with proceeds from the sale of equity securities of $430 million through December 31, 2024.

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 $49.4 million and $42.5 million for the years ended December 31, 2024 and 2023, respectively, and as of December 31, 2024, we had an accumulated deficit of $365 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.

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, 2024, we had $126.7 million in cash, cash equivalents and marketable securities. 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 first quarter of 2027. 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.

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Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Listing on the Nasdaq Capital Market

On November 2, 2021, shares of our common stock were approved for trading on the Nasdaq Capital Market under the symbol “CMPX”.

Private Investment in Public Entity (“PIPE”) Offering

On November 2, 2023, we entered into a securities purchase agreement ("the "Securities Purchase Agreement") with certain accredited investors (the "Investors") pursuant to which we agreed to sell and issue to the Investors in a PIPE financing an aggregate of 25,000,000 shares of our common stock at a purchase price of $3.21 per share. The 25,000,000 shares were issued on November 4, 2023. The gross proceeds to us from the PIPE are $80.3 million (before deducting placement agent fees and other expenses in connection with the offering).

In connection with the PIPE offering, we paid $4.5 million to the underwriters and for other legal and accounting costs, for net proceeds of $75.8 million.

The PIPE offering was made pursuant to our registration statement on Form S-3 (File No. 333-268652), filed with the SEC on December 2, 2023, and declared effective by the SEC on January 20, 2024, including a prospectus thereto that was filed with the SEC on January 24, 2024.

The PIPE offering was exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the PIPE offering was sold to “accredited investors”, as defined in Regulation D.

At-The-Market (“ATM”) Offering

In the first quarter of 2024, we sold, through our Open Market Sale AgreementSM with Jefferies LLC, 9,790,577 shares of common stock at an average price of $1.85 for total proceeds of $18.1 million and net proceeds of $17.6 million.

In the second quarter of 2023, we sold, through our Open Market Sale AgreementSM with Jefferies LLC, 951,873 shares of common stock at an average price of $3.28 for total proceeds of $3.1 million and net proceeds of $3.0 million.

Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax on adjusted financial statement income. To date, the IRA has not had a material impact on our consolidated financial statements.

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Components of Results of Operations

Research and development

Research and development expenses consist primarily of costs incurred in connection with the development of our clinical product candidates, tovecimig, 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:

Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any future product candidates.

Our clinical development costs may vary significantly based on factors such as:

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The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

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A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.

Other income

In 2024 and 2023, the only component of other income was interest income from marketable securities.

Income taxes

We are organized as a Delaware corporation and treated as a c-corporation for federal and state income taxes. Our wholly-owned subsidiaries are included in the consolidated corporate tax return. Prior to the Merger in 2020, we were established as a Delaware limited liability company, and the business that was acquired in the Merger was treated as a partnership for income tax reporting purposes; therefore, federal and state income taxes were the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company were recorded in our consolidated financial statements. All such taxes have been recorded in our financial statements. As of December 31, 2024 we recorded a deferred tax asset of $59.5 million primarily related to a net operating loss carryforward, section 174 capitalization, research and development tax credit carryforward, and capitalized licensing fees. The asset has a corresponding full deferred tax valuation allowance. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of shifts in our stock ownership, some of which are outside our control. See Note 13 to our consolidated financial statements appearing in this Form 10-K.

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Results of Operations

Comparison of the Years Ended December 31, 2024 and 2023

The following table summarizes the results of operations for the years ended December 31, 2024 and 2023:

Licensing revenue

Licensing revenue was $850 thousand for the year ended December 31, 2024. There was no licensing revenue for the year ended December 31, 2023. The licensing revenue consisted of a $1 million milestone payment from Elpiscience for completing a Phase 1 trial in China. This license revenue is reported net of a 15% sublicense royalty due ABL Bio (see Note 10 of the consolidated financial statements appearing in this Form 10-K for further information on this sublicense agreement).

Research and development expenses

Research and development expenses increased by $4.2 million from $38.1 million in 2023 to $42.3 million in 2024. This increase was primarily attributable to a $2.4 million increase in clinical and manufacturing costs related to our lead program, tovecimig, and $1.3 million from our second program, CTX-471, as described below.

We track supplies, outsourced development, personnel costs and other research and development costs of specific programs. Facility and equipment costs are not allocated to programs. Research and development expenses are summarized by program in the table below:

General and administrative expenses

General and administrative expenses increased by $2.9 million from $12.2 million in 2023 to $15.1 million in 2024. The increase was primarily attributable to higher personnel expense, including stock compensation of $2.3 million, driven by the CEO transition during the year. We anticipate that our general and administrative expenses will increase in the future as we expand our operations to support our growing research and development efforts, as well as potential commercial operations.

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Other income

Other income consists only of interest income which decreased by $0.6 million from $7.9 million in 2023 to $7.3 million in 2024.

Income tax expense

We did not have income tax expense in 2024 or 2023.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. We have funded our operations primarily with proceeds from private placements of preferred and common equity and an underwritten public offering in the fourth quarter of 2021. Through December 31, 2024, we received gross proceeds of $430.5 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering, $60.5 million in gross proceeds from the sale of our common stock in the Private Placement, $80.3 million in gross proceeds from a PIPE financing and $21.2 million in gross proceeds from sales through our ATM facility. As of December 31, 2024, we had cash, cash equivalents and marketable securities of $126.7 million.

On July 9, 2021, we filed an S-3 registration statement which became effective July 20, 2021. Included in this registration statement was a shelf registration allowing us to sell securities up to $300 million. The Follow-On Public Offering was made pursuant to this registration statement. In addition, the S-3 registration statement included a sales agreement with B. Riley Securities, Inc., pursuant to which we could offer and sell shares of our common stock having an aggregate of up to $75 million. We terminated the sales agreement with B. Riley effective July 29, 2022.

On August 1, 2022, we entered into an Open Market Sale AgreementSM with Jefferies LLC, pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock.

On December 2, 2022, we filed an S-3 registration statement which was declared effective by the SEC on January 20, 2023, for the shares issued through the PIPE offering.

On August 30, 2024, we filed an S-3 registration statement which was declared effective by the SEC on September 6, 2024. This registration statement includes (i) a base prospectus that covers the offering, issuance and sale by us of up to $300,000,000 of our common stock, preferred stock, debt securities, warrants and/or units and (ii) a sale agreement prospectus supplement that covers the offer and sale, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $55 million pursuant to our Open Market Sale AgreementSM with Jefferies LLC.

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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:

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 trials.

Cash Flows

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

Operating Activities

During the year ended December 31, 2024, we used $44.9 million of cash in operating activities, resulting from our net loss of $49.4 million and the change in operating assets and liabilities of $4.1 million, offset by non-cash charges of $8.7 million. Our non-cash charges primarily consisted of stock-based compensation expense of $8.6 million.

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During the year ended December 31, 2023, we used $40.6 million of cash in operating activities, resulting from our net loss of $42.5 million and the change in operating assets and liabilities of $2.9 million, offset by non-cash charges of $4.8 million. Our non-cash charges primarily consisted of stock-based compensation expense of $6.1 million.

Investing Activities

During the year ended December 31, 2024, cash provided by investing activities was $46.8 million, which was primarily attributed to the net proceeds from the sale of marketable securities of $46.8 million. During the year ended December 31, 2023 cash provided by investing activities was $27.0 million, which was primarily attributed to the net proceeds from the sale of marketable securities of $27.0 million.

Financing Activities

During the year ended December 31, 2024, cash provided by financing activities was $17.3 million. This was primarily from the issuance of stock pursuant to our ATM program for net proceeds of $17.6 million. During the year ended December 31, 2023, cash provided by financing activities was $2.9 million. This was primarily from the issuance of stock pursuant to our ATM program for net proceeds of $3.0 million.

Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into their next clinical trial phases. The timing and amount of our operating expenditures will depend largely on:

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We believe that our existing cash, cash equivalents and marketable securities as of December 31, 2024 will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2027. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of our product candidates, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.

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, 2024 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3 to our consolidated 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.

Stock Awards and Unit-Based Compensation

The following table summarizes stock awards and unit-based compensation expense:

See Notes 3 and 9 to our consolidated financial statements appearing in this Form 10-K for additional stock compensation information.

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 consolidated financial statements appearing in this Annual Report.

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JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Under Section 107(b) of the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have made the election to delay the adoption of such accounting standards as provided in the JOBS Act. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company”, we are exempt from Sections 14A(a) and (b) of the Exchange Act that would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”, “say-on-frequency”, and “golden parachutes”; and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption 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 $1.235 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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Compass Therapeutics, Inc. together with its wholly-owned subsidiaries, which we refer to as Compass Therapeutics.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis, the immune system, and tumor growth. Our pipeline of novel product candidates is designed to target multiple critical biological pathways required for an effective anti-tumor response. These include modulation of the microvasculature via angiogenesis-targeted agents, induction of a potent immune response via activators on effector cells in the tumor microenvironment, and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with proprietary pipeline antibodies based on supportive clinical and nonclinical data.

Financial Overview

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. We have funded our operations primarily with proceeds from the sale of equity securities of $412 million through December 31, 2023.

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 $42.5 million and $39.2 million for the years ended December 31, 2023 and 2022, respectively, and as of December 31, 2023, we had an accumulated deficit of $315.3 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.

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, 2023, we had $152.5 million in cash, cash equivalents and marketable securities. 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 mid-2026. 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.

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Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Listing on the Nasdaq Capital Market

On November 2, 2021, shares of our common stock were approved for trading on the Nasdaq Capital Market under the symbol “CMPX”.

Private Investment in Public Entity (“PIPE”) Offering

On November 2, 2022, we entered into a securities purchase agreement ("the "Securities Purchase Agreement") with certain accredited investors (the "Investors") pursuant to which we agreed to sell and issue to the Investors in a PIPE financing an aggregate of 25,000,000 shares of our common stock at a purchase price of $3.21 per share. The 25,000,000 shares were issued on November 4, 2022. The gross proceeds to us from the PIPE are $80.3 million (before deducting placement agent fees and other expenses in connection with the offering).

In connection with the PIPE offering, we paid $4.5 million to the underwriters and for other legal and accounting costs, for net proceeds of $75.8 million.

The PIPE offering was made pursuant to our registration statement on Form S-3 (File No. 333-268652), filed with the SEC on December 2, 2022, and declared effective by the SEC on January 20, 2023, including a prospectus thereto that was filed with the SEC on January 24, 2023.

The PIPE offering was exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the PIPE offering was sold to “accredited investors”, as defined in Regulation D.

At-The-Market (“ATM”) Offering

In June 2023, we sold, through our Open Market Sale AgreementSM with Jefferies LLC, 951,873 shares of common stock at an average price of $3.28 for total proceeds of $3.1 million and net proceeds of $3.0 million.

Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax on adjusted financial statement income. To date, the IRA has not had a material impact on our consolidated financial statements.

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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-009, CTX-471 and CTX-8371, as well as unrelated preclinical and discovery program expenses. We expense research and development costs as incurred. These expenses include:

Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any future product candidates.

Our clinical development costs may vary significantly based on factors such as:

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The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

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A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.

Other income

In 2023 and 2022, the main component of other income was interest income from marketable securities.

Income taxes

We are organized as a Delaware corporation and treated as a c-corporation for federal and state income taxes. Our wholly-owned subsidiaries are included in the consolidated corporate tax return. Prior to the Merger in 2020, we were established as a Delaware limited liability company, and the business that was acquired in the Merger was treated as a partnership for income tax reporting purposes; therefore, federal and state income taxes were the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company were recorded in our consolidated financial statements. All such taxes have been recorded in our financial statements. As of December 31, 2023 we recorded a deferred tax asset of $44.3 million primarily related to a net operating loss carryforward, section 174 capitalization, research and development tax credit carryforward, and capitalized licensing fees. The asset has a corresponding full deferred tax valuation allowance. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of shifts in our stock ownership, some of which are outside our control. See Note 13 to our consolidated financial statements appearing in this Form 10-K.

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Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes the results of operations for the years ended December 31, 2023 and 2022:

Research and development expenses

Research and development expenses increased by $8.1 million from $30.0 million in 2022 to $38.1 million in 2023. This increase was primarily attributable to a $10.7 million increase in clinical and manufacturing costs related to our lead program, CTX-009 described below.

We track supplies, outsourced development, personnel costs and other research and development costs of specific programs. Facility and equipment costs are not allocated to programs. Research and development expenses are summarized by program in the table below:

General and administrative expenses

General and administrative expenses increased by $0.6 million from $11.7 million in 2022 to $12.2 million in 2023. The increase was primarily attributable to higher stock compensation expense of $1.0 million offset by lower insurance costs of $0.3 million. We anticipate that our general and administrative expenses will increase in the future as we expand our operations to support our growing research and development efforts.

Other income

Other income increased by $5.4 million from $2.4 million in 2022 to $7.9 million in 2023. The change was from an increase in interest income of $5.4 million as a result of higher interest rates as compared to 2022.

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Income tax expense

We did not have income tax expense in 2023 or 2022.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. We have funded our operations primarily with proceeds from private placements of preferred and common equity and an underwritten public offering in the fourth quarter of 2021. Through December 31, 2023, we received gross proceeds of $412 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering, $60.5 million in gross proceeds from the sale of our common stock in the Private Placement, $80.3 million in gross proceeds from a PIPE financing and $3.1 million in gross proceeds from sales through our ATM facility. As of December 31, 2023, we had cash, cash equivalents and marketable securities of $152.5 million. Additionally, we received an additional $17.6 million in net proceeds in the first quarter of 2024 from sales through our ATM facility.

On July 9, 2021, we filed an S-3 registration statement which became effective July 20, 2021. Included in this registration statement was a shelf registration allowing us to sell securities up to $300 million. The Follow-On Public Offering was made pursuant to this registration statement. In addition, the S-3 registration statement included a sales agreement with B. Riley Securities, Inc., pursuant to which we could offer and sell shares of our common stock having an aggregate of up to $75 million. We terminated the sales agreement with B. Riley effective July 29, 2022.

On August 1, 2022, we entered into an Open Market Sale AgreementSM with Jefferies LLC, pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $75 million.

On December 2, 2022, we filed an S-3 registration statement which was declared effective by the SEC on January 20, 2023, for the shares issued through the PIPE offering.

Funding Requirements

Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

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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 trials.

Cash Flows

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

Operating Activities

During the year ended December 31, 2023, we used $40.6 million of cash in operating activities, resulting from our net loss of $42.5 million and the change in operating assets and liabilities of $2.9 million, offset by non-cash charges of $4.8 million. Our non-cash charges primarily consisted of stock-based compensation expense of $6.1 million and amortization of ROU asset of $1.2 million offset by the amortization of premiums and discounts on marketable securities of $3.2 million. The change in our operating assets and liabilities of $2.9 million was related to the decrease in accrued expenses of $9.2 million offset by an increase in prepaid expenses of $6.8 million, primarily related to the decrease in minimum obligations related to CTX-009 manufacturing contracts.

During the year ended December 31, 2022, we used $34.1 million of cash in operating activities, resulting from our net loss of $39.2 million and the change in operating assets and liabilities of $1.4 million, offset by non-cash charges of $6.4 million. Our non-cash charges primarily consisted of stock-based compensation expense of $5.3 million and amortization of ROU asset of $1.1 million. The change in our operating assets and liabilities of $1.4 million was related to the increase in prepaid expenses of $5.6 million, primarily from prepaid manufacturing expenses related to CTX-009, partially offset by an increase in short term liabilities of $4.3 million, primarily related to manufacturing expenses related to CTX-009.

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Investing Activities

During the year ended December 31, 2023 cash provided by investing activities was $27.0 million, which was primarily attributed to the net proceeds of marketable securities of $27.0 million. During the year ended December 31, 2022, cash used in investing activities was $151.2 million, which was primarily attributed to the net purchase of marketable securities of $151.1 million.

Financing Activities

During the year ended December 31, 2023, cash provided by financing activities was $2.9 million. This was primarily from the issuance of stock utilizing our ATM program for net proceeds of $3.0 million. During the year ended December 31, 2022, we had $75.8 million of net cash provided by financing activities. This was primarily due to the closing of the PIPE Offering in the fourth quarter of 2022, which resulted in net proceeds of $75.7 million.

Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into their next clinical trial phases. The timing and amount of our operating expenditures will depend largely on:

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We believe that our existing cash, cash equivalents and marketable securities as of December 31, 2023 will enable us to fund our operating expenses and capital expenditure requirements into mid-2026. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of our product candidates, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.

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, 2023 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3 to our consolidated 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.

Stock Awards and Unit-Based Compensation

The following table summarizes stock awards and unit-based compensation expense:

See Notes 3 and 9 to our consolidated financial statements appearing in this Form 10-K for additional stock compensation information.

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 consolidated financial statements appearing in this Annual Report.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Under Section 107(b) of the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have made the election to delay the adoption of such accounting standards as provided in the JOBS Act. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company”, we are exempt from Sections 14A(a) and (b) of the Exchange Act that would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”, “say-on-frequency”, and “golden parachutes”; and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption 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 $1.235 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Compass Therapeutics, Inc. together with its wholly-owned subsidiaries, which we refer to as Compass Therapeutics.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis, the immune system, and tumor growth. Our pipeline of novel product candidates is designed to target multiple critical biological pathways required for an effective anti-tumor response. These include modulation of the microvasculature via angiogenesis-targeted agents, induction of a potent immune response via activators on effector cells in the tumor microenvironment, and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with proprietary pipeline antibodies based on supportive clinical and nonclinical data.

On June 25, 2021, we consummated a definitive merger agreement (the “Merger Agreement”) with Trigr Therapeutics, Inc. (“TRIGR”), a private biotechnology company. Pursuant to the Merger Agreement, through our wholly-owned subsidiaries and a two-step merger structure, we acquired all of the outstanding shares of TRIGR (the “TRIGR Merger”). Consideration payable to TRIGR shareholders at closing totaled an aggregate of 10,265,133 shares of our common stock (after giving effect to elimination of fractional shares that would otherwise be issued). In addition, TRIGR shareholders are eligible to receive up to $9 million, representing earnout payments which are dependent on certain events, including a $2 million earnout payment which was paid in 2021 and a $5 million earnout which is dependent on biologics license application approval of a product candidate acquired in the transaction, renamed CTX-009.

Financial Overview

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. We have funded our operations primarily with proceeds from private placements of preferred and common equity, an underwritten public offering in the fourth quarter of 2021 and borrowings under the 2018 loan and security agreement with Pacific Western Bank (the "2018 Credit Facility", which was paid off and cancelled as of November 2021). Through December 31, 2022, we had received gross proceeds of $409 million from the sale of equity securities, including $80.3 million in gross proceeds from our additional common stock issued pursuant to a private investment in public equity (“PIPE”) (see Note 11 to our consolidated financial statements).

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 $39.2 million and $82.2 million for the years ended December 31, 2022 and 2021, respectively, and as of December 31, 2022, we had an accumulated deficit of $273 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.

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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 December 31, 2022, we had $186.6 million in cash, cash equivalents and marketable securities. 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 2026. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Listing on the Nasdaq Capital Market

On November 2, 2021, shares of our common stock were approved for trading on the Nasdaq Capital Market under the symbol “CMPX”.

Reverse Merger

We were originally incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Merger (as defined below), Olivia was a “shell company” (as defined in Rule 12b-2 of the Exchange Act).

On June 17, 2020, we completed a merger (the “Merger”) pursuant to an Agreement and Plan of Merger and Reorganization, by and among us, Compass Acquisition LLC and Compass Therapeutics, and, as a result, Compass Therapeutics became a wholly-owned subsidiary of the Company. Additionally, certain of our wholly-owned subsidiaries, each, a Blocker Merger Sub, merged with and into the applicable blocker entity (the "Blockers"), in transactions which we refer to as the Blocker Mergers.

At the effective time of the Merger and the applicable effective time of each Blocker Merger, collectively, the Effective Time, an aggregate of 31,627,139 shares of its common stock were issued to holders of common membership interests of Compass Therapeutics (including common membership interests issued upon the conversion of preferred membership interests) and 7,428,217 shares of its common stock were issued to the holders of equity interests of the Blockers. The issuances of shares of our common stock to the security holders of Compass Therapeutics and the Blockers are collectively referred to as the Share Conversion.

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In addition, 2,930,836 shares of our common stock were reserved for issuance under our 2020 Stock Option and Incentive Plan. Immediately prior to the Effective Time, an aggregate of 4,000,000 of the 5,000,000 shares of our common stock held by pre-Merger stockholders of Olivia Ventures, Inc. were forfeited and surrendered for cancellation (the "Stock Forfeiture").

The Merger and the Blocker Mergers were treated as a recapitalization and reverse acquisition by us for financial reporting purposes. Compass Therapeutics is considered the acquirer for accounting purposes, and the historical financial statements of Olivia before the Merger have been replaced with the historical financial statements of Compass Therapeutics in this and future filings with the SEC. The Merger is being treated as a tax-free reorganization under Section 368(a) of the Code.

The following discussion highlights Compass Therapeutics, Inc.’s consolidated results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operations and comprehensive loss presented herein. The following discussion and analysis are based on our consolidated financial statements contained in this Form 10-K, which we have prepared in accordance with United States generally accepted accounting principles. You should read this discussion and analysis together with such consolidated financial statements and the related notes thereto.

Private Placement Offering

On June 19, 2020, we sold 12,096,442 shares of our common stock pursuant to the Private Placement offering of our common stock at a purchase price of $5.00 per share. The aggregate gross proceeds from the Private Placement were approximately $60.5 million (before deducting placement agent fees and other expenses in connection with the Private Placement).

In connection with the Private Placement, we paid $6.3 million to the placement agents (and for other legal and accounting costs), for net proceeds of $54.2 million.

The Private Placement was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the Private Placement was sold to “accredited investors”, as defined in Regulation D, and was conducted on a “reasonable best efforts” basis.

Follow-On Public Offering

On November 2, 2021, we sold through an underwritten public offering, with SVB Leerink LLC, as representative of the underwriters, 35,715,000 shares of our common stock, at a price to the public of $3.50 per share, less underwriting discounts and commissions. We granted the underwriters a 30-day option to purchase up to an additional 5,357,250 shares of common stock, at the public offering price of $3.50, less any underwriting discounts and commissions. On December 2, 2021, pursuant to this 30-day option, we sold an additional 3,271,857 shares of our common stock, for a total of 38,986,857 shares of common stock sold as part of the Follow-On Public Offering. The aggregate gross proceeds from the Follow-On Public Offering were approximately $136.5 million (before deducting placement agent fees and other expenses in connection with the offering).

In connection with the Follow-On Public Offering, we paid $8.5 million to the underwriters (and for other legal and accounting costs), for net proceeds of $128.0 million.

The Follow-On Public Offering was made pursuant to our shelf registration statement on Form S-3 (File No. 333-257821), including a base prospectus that was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on July 20, 2021, as supplemented by a prospectus supplement dated November 1, 2021 that was filed with the SEC on November 3, 2021 (the “Prospectus Supplement”).

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Private Investment in Public Entity (“PIPE”) Offering

On November 2, 2022, we entered into a securities purchase agreement ("the "Securities Purchase Agreement") with certain accredited investors (the "Investors") pursuant to which we agreed to sell and issue to the Investors in a PIPE financing an aggregate of 25,000,000 shares of our common stock at a purchase price of $3.21 per share. The 25,000,000 shares were issued on November 4, 2022. The gross proceeds to us from the PIPE are $80.3 million (before deducting placement agent fees and other expenses in connection with the offering).

In connection with the PIPE offering, we paid $4.5 million to the underwriters and for other legal and accounting costs, for net proceeds of $75.8 million.

The PIPE offering was made pursuant to our registration statement on Form S-3 (File No. 333-268652), filed with the SEC on December 2, 2022, and declared effective by the SEC on January 20, 2023, including a prospectus thereto that was filed with the SEC on January 24, 2023.

The PIPE offering was exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the PIPE offering was sold to “accredited investors”, as defined in Regulation D.

COVID-19 Update

In December 2019, COVID-19, was declared a pandemic by the World Health Organization. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or mitigate its impact, and the economic impact on local, regional, national and international markets.

We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19 community-wide. We are ensuring that essential staffing levels at our operations remain in place, including maintaining key personnel in our laboratory facilities. We have implemented stringent safety measures designed to create a safe and clean environment for our employees as we continue to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic.

We have been able to continue to pursue clinical trials of CTX-009 and of CTX-471 without significant delays, however, we have experienced some temporary delays in the enrollment of patients due to the COVID-19 pandemic. We could experience some additional temporary delays or disruptions due to the ongoing COVID-19 pandemic, including limited or reduced patient access to trial investigators, hospitals and trial sites, delayed initiation of new clinical trial sites and limited on-site personnel support at various trial sites, which could adversely impact our development plans, including the initiation of planned clinical trials and our ability to conduct ongoing clinical trials. We also expect that COVID-19 precautions may directly or indirectly impact (i) our employees and business operations or personnel at third-party suppliers and other vendors in the U.S. and other countries, (ii) the availability, cost or supply of materials, and (iii) the timeline for our ongoing clinical trial and potential future trials. We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.

Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax on adjusted financial statement income.  We do not expect the IRA to have a material impact on our consolidated financial statements.

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Components of Results of Operations

In-process R&D

In-process R&D expenses consists of the 2021 acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred, the cost of this acquisition was expensed in 2021. See Note 16 to the consolidated financial statements contained in this Form 10-K for further description of the accounting of this transaction. There were no In-process R&D expenses in 2022.

Research and development

Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, CTX-009, CTX-471 and CTX-8371, as well as unrelated preclinical and discovery program expenses. We expense research and development costs as incurred. These expenses include:

Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any future product candidates.

Our clinical development costs may vary significantly based on factors such as:

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The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

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A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.

Other income (expense)

In 2022, the main component of other income was interest income from marketable securities. In 2021, the main component was interest expense related to cash interest under our 2018 Credit Facility that we entered into in March 2018, which as of December 31, 2021 had been terminated. In addition, other income and expenses include realized gains and losses on sale or disposal of equipment.

Income taxes

We are organized as a Delaware corporation and treated as a c-corporation for federal and state income taxes. Our wholly-owned subsidiaries are included in the consolidated corporate tax return. Prior to the Merger in 2020, we were established as a Delaware limited liability company, and the business that was acquired in the Merger was treated as a partnership for income tax reporting purposes; therefore, federal and state income taxes were the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company were recorded in our consolidated financial statements. All such taxes have been recorded in our financial statements. As of December 31, 2022 we recorded a net deferred tax asset of $28.0 million primarily related to a net operating loss carryforward, section 174 capitalization, research and development tax credit carryforward, and capitalized licensing fees. The asset has a corresponding full deferred tax valuation allowance. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of shifts in our stock ownership, some of which are outside our control. See Note 15 to our consolidated financial statements appearing in this Form 10-K.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes the results of operations for the years ended December 31, 2022 and 2021:

Research and development expenses

Research and development expenses increased by $9.7 million from $20.3 million in 2021 to $30.0 million in 2022. This increase was primarily attributable to a $10.3 million increase in clinical, manufacturing, toxicology studies and other costs related to our three main programs describe below.

We track supplies, outsourced development, personnel costs and other research and development costs of specific programs. Facility and equipment costs are not allocated to programs. Research and development expenses are summarized by program in the table below:

General and administrative expenses

General and administrative expenses increased by $0.7 million from $10.9 million in 2021 to $11.7 million in 2022. The increase was primarily attributable to higher stock compensation expense of $1.2 million offset by lower legal costs of $0.5 million. We anticipate that our general and administrative expenses will increase in the future as we expand our operations to support our growing research and development efforts.

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Other income (expense)

Other income (expense) increased by $2.7 million from $0.3 million of expense in 2021 to $2.4 million of income in 2022. The primary change was an increase in interest income of $2.3 million and a decrease of interest expense of $0.4 million.

In-process R&D

In-process R&D expenses consists of the acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred, the cost of this acquisition was expensed in 2021. See Note 16 to the consolidated financial statements contained in this Form 10-K for further description of the accounting of this transaction.

Income tax expense

We did not have income tax expense in 2022 or 2021.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. We have funded our operations primarily with proceeds from private placements of preferred and common equity and an underwritten public offering in the fourth quarter of 2021. Through December 31, 2022, we had received gross proceeds of $409 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering (as defined above), $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined above) and $80.3 million in gross proceeds from a PIPE financing. In addition, we received $15 million in term loan borrowings under the 2018 Credit Facility, which was paid off and cancelled as of November 2021. As of December 31, 2022, we had cash, cash equivalents and marketable securities of $186.6 million.

On July 9, 2021, we filed an S-3 registration statement which became effective July 20, 2021. Included in this registration statement was a shelf registration allowing us to sell securities up to $300 million. The Follow-On Public Offering was made pursuant to this registration statement. In addition, the S-3 registration statement included a sales agreement with B. Riley Securities, Inc., pursuant to which we could offer and sell shares of our common stock having an aggregate of up to $75 million. We terminated the sales agreement with B. Riley effective July 29, 2022.

On August 1, 2022, we entered into an Open Market Sale AgreementSM with Jefferies LLC, pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $75 million.

On December 2, 2022, we filed an S-3 registration statement which was declared effective by the SEC on January 20, 2023, for the shares issued through the PIPE offering.

Indebtedness

In March 2018, we entered into a credit facility with Pacific Western Bank ("2018 Credit Facility") which matured on March 1, 2022 and consisted of $15.0 million in term loans. We made interest-only payments through March 31, 2020, and beginning in April 2020, we began to make monthly payments of $625 thousand toward principal plus interest. The 2018 Credit Facility included a success fee of $1.1 million to the lender which was paid upon completion of the Merger. We paid the balance of this loan in November 2021. As of December 31, 2021 and 2022, the Company had no loan obligations.

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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:

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 trials.

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Cash Flows

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

Operating Activities

During the year ended December 31, 2022, we used $34.1 million of cash in operating activities, resulting from our net loss of $39.2 million and the change in operating assets and liabilities of $1.4 million, offset by non-cash charges of $6.4 million. Our non-cash charges primarily consisted of stock-based compensation expense of $5.3 million and amortization of ROU asset of $1.1 million. The change in our operating assets and liabilities of $1.4 million was related to the increase in prepaid expenses of $5.6 million, primarily from prepaid manufacturing expenses related to CTX-009, partially offset by an increase in short term liabilities of $4.3 million, primarily related to manufacturing expenses related to CTX-009.

During the year ended December 31, 2021, we used $19.7 million of cash in operating activities, resulting from our net loss of $82.2 million and the change in operating assets and liabilities of $6.2 million, offset by non-cash charges of $56.3 million. Our non-cash charges were comprised of the write-off of in-process R&D of $50.6 million, depreciation and amortization of $0.6 million, gain on disposal of equipment of $42 thousand, stock-based compensation expense of $4.0 million, non-cash interest expense of $41 thousand and amortization of ROU asset of $1.1 million. The change in our operating assets and liabilities was primarily related to an increase in accrued expenses primarily driven by the $6.0 million accrued milestone payment.

Investing Activities

During the year ended December 31, 2022 cash used in investing activities was $151.2 million, which was primarily attributed to the purchase of marketable securities of $200.1 million offset by the sale or maturity or marketable securities of $49.0 million. We did not have marketable securities in 2021. During the year ended December 31, 2021 cash used in investing activities was $1.8 million, which was attributed to purchase of property and equipment of $1.6 million, primarily from leasehold improvements in our new facility, $0.3 million from asset acquisition costs related to the TRIGR transaction and $0.1 million in proceeds from the sale of equipment.

Financing Activities

During the year ended December 31, 2022, we had $75.8 million of net cash provided by financing activities. This was primarily due to the closing of the PIPE Offering in the fourth quarter of 2022, which resulted in net proceeds of $75.7 million. During the year ended December 31, 2021, we had $118.6 million of net cash provided by financing activities. This was primarily due to the closing of the Follow-on Public Offering in the fourth quarter of 2021, which resulted in net proceeds of $128.0 million that were partially offset by $9.4 million in payments under the 2018 Credit Facility.

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Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into their next clinical trial phases. The timing and amount of our operating expenditures will depend largely on:

We believe that our existing cash, cash equivalents and marketable securities as of December 31, 2022 will enable us to fund our operating expenses and capital expenditure requirements into 2026. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of our product candidates, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.

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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

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Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 3 to our consolidated 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.

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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, 2022, we have $6.4 million of accrued and prepaid manufacturing expenses for the purchase and manufacture of drug product for CTX-009 related to minimum contractual obligations with two CDMO’s.

Stock Awards and Unit-Based Compensation

The following table summarizes stock awards and unit-based compensation expense:

See Notes 3 and 9 to our consolidated financial statements appearing in this Form 10-K for additional stock compensation information.

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 consolidated financial statements appearing in this Annual Report.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Under Section 107(b) of the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have made the election to delay the adoption of such accounting standards as provided in the JOBS Act. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company”, we are exempt from Sections 14A(a) and (b) of the Exchange Act that would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”, “say-on-frequency”, and “golden parachutes”; and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless otherwise stated or the context otherwise indicates, references to the “Company”, “we”, “our”, “us” or similar terms refer to Compass Therapeutics, Inc. together with its wholly-owned subsidiaries, which we refer to as Compass Therapeutics.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” elsewhere in this Form 10-K. You should review the disclosure under the heading “Risk Factors” in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage, oncology-focused biopharmaceutical company developing proprietary antibody-based therapeutics to treat multiple human diseases. Our scientific focus is on the relationship between angiogenesis, the immune system, and tumor growth. Our pipeline of novel product candidates is designed to target multiple critical biological pathways required for an effective anti-tumor response. These include modulation of the microvasculature via angiogenesis-targeted agents, induction of a potent immune response via activators on effector cells in the tumor microenvironment, and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance. We plan to advance our product candidates through clinical development as both standalone therapies and in combination with proprietary pipeline antibodies based on supportive clinical and nonclinical data.

On June 25, 2021, we consummated a definitive merger agreement (the “Merger Agreement”) with Trigr Therapeutics, Inc. (“TRIGR”), a private biotechnology company. Pursuant to the Merger Agreement, through our wholly-owned subsidiaries and a two-step merger structure, we acquired all of the outstanding shares of TRIGR (the “TRIGR Merger”). Consideration payable to TRIGR shareholders at closing totaled an aggregate of 10,265,133 shares of our common stock (after giving effect to elimination of fractional shares that would otherwise be issued). In addition, TRIGR shareholders are eligible to receive up to $9 million, representing earnout payments which are dependent on certain events, including a $5 million earnout which is dependent on biologics license application approval of a product candidate acquired in the transaction, renamed CTX-009. As part of this $9 million in earnout payments to the TRIGR shareholders, $2 million represented a milestone payment that was due from a third party. This payment was received and remitted to TRIGR shareholders in the fourth quarter of 2021.

Financial Overview

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. We have funded our operations primarily with proceeds from private placements of preferred and common equity, an underwritten public offering in the fourth quarter of 2021 and borrowings under the 2018 loan and security agreement with Pacific Western Bank (the "2018 Credit Facility", which as of December 31, 2021 has been terminated). Through December 31, 2021, we had received gross proceeds of $329.0 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering (as defined below) and $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined below).

We have incurred significant operating losses since inception. We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. Our ability to generate product revenue sufficient to achieve profitability will depend heavily

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on the successful development and eventual commercialization of our therapies and any future product candidates. Our net losses were $82.2 million and $29.5 million for the years ended December 31, 2021 and 2020, respectively, and as of December 31, 2021, we had an accumulated deficit of $233.6 million. We expect to continue to incur significant expenses for at least the next several years as we advance through clinical development, develop additional product candidates and seek regulatory approval of any product candidates that complete clinical development. In addition, if we obtain marketing approval for any product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through equity and debt financings, or other capital sources, which may include collaborations with other companies or other strategic transactions. As of December 31, 2021, we had $144.5 million in cash and cash equivalents. Based on our research and development plans, we expect that these cash resources will enable us to fund our operating expenses and capital expenditures requirements into the second half of 2024. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Listing on the Nasdaq Capital Market

On November 2, 2021, shares of our common stock were approved for trading on the Nasdaq Capital Market under the symbol “CMPX”.

Reverse Merger

We were originally incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Merger (as defined below), Olivia was a “shell company” (as defined in Rule 12b-2 of the Exchange Act).

On June 17, 2020, we completed a merger (the “Merger”) pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among us, Compass Acquisition LLC and Compass Therapeutics, and, as a result, Compass Therapeutics became a wholly-owned subsidiary of the Company. Additionally, certain of our wholly-owned subsidiaries, each, a Blocker Merger Sub, merged with and into the applicable blocker entity (the "Blockers"), in transactions which we refer to as the Blocker Mergers.

At the effective time of the Merger and the applicable effective time of each Blocker Merger, collectively, the Effective Time, an aggregate of 31,627,139 shares of its common stock were issued to holders of common membership interests of Compass Therapeutics (including common membership interests issued upon the conversion of preferred membership interests) and 7,428,217 shares of its common stock were issued to the holders of equity interests of the Blockers. The issuances of shares of

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our common stock to the security holders of Compass Therapeutics and the Blockers are collectively referred to as the Share Conversion.

In addition, 2,930,836 shares of our common stock were reserved for issuance under our 2020 Stock Option and Incentive Plan. Immediately prior to the Effective Time, an aggregate of 4,000,000 of the 5,000,000 shares of our common stock held by pre-Merger stockholders of Olivia Ventures, Inc. were forfeited and surrendered for cancellation (the "Stock Forfeiture").

The Merger and the Blocker Mergers were treated as a recapitalization and reverse acquisition by us for financial reporting purposes. Compass Therapeutics is considered the acquirer for accounting purposes, and the historical financial statements of Olivia before the Merger have been replaced with the historical financial statements of Compass Therapeutics in this and future filings with the SEC. The Merger is being treated as a tax-free reorganization under Section 368(a) of the Code.

The following discussion highlights Compass Therapeutics, Inc.’s consolidated results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operations and comprehensive loss presented herein. The following discussion and analysis are based on our consolidated financial statements contained in this Form 10-K, which we have prepared in accordance with United States generally accepted accounting principles. You should read this discussion and analysis together with such consolidated financial statements and the related notes thereto.

Private Placement Offering

On June 19, 2020, we sold 12,096,442 shares of our common stock pursuant to the Private Placement offering of our common stock at a purchase price of $5.00 per share. The aggregate gross proceeds from the Private Placement were approximately $60.5 million (before deducting placement agent fees and other expenses in connection with the Private Placement).

In connection with the Private Placement, we paid $6.3 million to the placement agents (and for other legal and accounting costs), for net proceeds of $54.2 million.

The Private Placement was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the Private Placement was sold to “accredited investors”, as defined in Regulation D, and was conducted on a “reasonable best efforts” basis.

Follow-On Public Offering

On November 2, 2021, we sold through an underwritten public offering, with SVB Leerink LLC, as representative of the underwriters, 35,715,000 shares of our common stock, at a price to the public of $3.50 per share, less underwriting discounts and commissions. We granted the underwriters a 30-day option to purchase up to an additional 5,357,250 shares of common stock, at the public offering price of $3.50, less any underwriting discounts and commissions. On December 2, 2021, pursuant to this 30-day option, we sold an additional 3,271,857 shares of our common stock, for a total of 38,986,857 shares of common stock sold as part of the Follow-On Public Offering. The aggregate gross proceeds from the Follow-On Public Offering were approximately $136.5 million (before deducting placement agent fees and other expenses in connection with the offering).

In connection with the Follow-On Public Offering, we paid $8.5 million to the underwriters (and for other legal and accounting costs), for net proceeds of $128.0 million.

The Follow-On Public Offering was made pursuant to our shelf registration statement on Form S-3 (File No. 333-257821), including a base prospectus that was declared effective by the U.S. Securities and

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Exchange Commission (the “SEC”) on July 20, 2021, as supplemented by a prospectus supplement dated November 1, 2021 that was filed with the SEC on November 3, 2021 (the “Prospectus Supplement”).

COVID-19 Update

In December 2019, a novel strain of coronavirus, COVID-19, was declared a pandemic by the World Health Organization. In an effort to contain the spread of COVID-19, the United States, Europe and Asia have implemented severe travel restrictions, social distancing requirements, stay-at-home or shelter-in-place orders and have delayed the commencement of non-COVID-19-related clinical trials, among other restrictions. As a result, the COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S. economy and in financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or mitigate its impact, and the economic impact on local, regional, national and international markets.

We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19 community-wide. We are ensuring that essential staffing levels at our operations remain in place, including maintaining key personnel in our laboratory facilities. We have implemented stringent safety measures designed to create a safe and clean environment for our employees as we continue to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic.

We have been able to continue to pursue Phase 1 clinical trials of CTX-009 and of CTX-471 without significant delays, however, we have experienced some temporary delays in the enrollment of patients into the second part of our CTX-471 Phase 1 trial due to the COVID-19 pandemic. In addition, our CDMO for CTX-8371 (Fuji) has been experiencing delays with its supply chain management and other challenges in part due to the ongoing COVID-19 pandemic, which led to delays in the initiation of our CTX-8371 GMP manufacturing campaign and delayed the projected date for CTX-8371 IND filing. We could experience some additional temporary delays or disruptions due to the ongoing COVID-19 pandemic, including limited or reduced patient access to trial investigators, hospitals and trial sites, delayed initiation of new clinical trial sites and limited on-site personnel support at various trial sites, which could adversely impact our development plans, including the initiation of planned clinical trials and our ability to conduct ongoing clinical trials. We also expect that COVID-19 precautions may directly or indirectly impact (i) our employees and business operations or personnel at third-party suppliers and other vendors in the U.S. and other countries, (ii) the availability, cost or supply of materials, and (iii) the timeline for our ongoing clinical trial and potential future trials. We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.

Components of Results of Operations

In-process R&D

In-process R&D expenses consists of the acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred,

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the cost of this acquisition was expensed. See Note 16 to the financial statements contained in this Form 10-K for further description of the accounting of this transaction.

Research and development

Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, CTX-009, CTX-471 and CTX-8371, as well as unrelated preclinical and discovery program expenses. We expense research and development costs as incurred. These expenses include:

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development milestone payments due in connection with our product candidates;

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employee-related expenses, including salaries, related benefits and equity-based compensation expense, for employees engaged in research and development functions;

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Contract Research Organizations (“CROs”) that are primarily engaged to support the clinical development of our product candidates;

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Contract Development Manufacturing Organizations (“CDMOs”) that are primarily engaged to provide drug substance and drug product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies and other scientific development services;

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cost of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;

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costs related to compliance with quality and regulatory requirements; and

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payments made under third-party licensing agreements.

Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any future product candidates.

Our clinical development costs may vary significantly based on factors such as:

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per patient trial costs;

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the number of trials required for approval;

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the number of sites included in the trials;

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the location where the trials are conducted;

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the length of time required to enroll eligible patients;

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the number of patients that participate in the trials;

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the number of doses that patients receive;

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the drop-out or discontinuation rates of patients;

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potential additional safety monitoring requested by regulatory agencies;

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the duration of patient participation in the trials and follow-up;

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the cost and timing of manufacturing our product candidates;

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the phase of development of our product candidates; and

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the efficacy and safety profile of our product candidates.

The successful development and commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

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the timing and progress of nonclinical and clinical development activities;

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the number and scope of nonclinical and clinical programs we decide to pursue;

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raising necessary additional funds;

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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;

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our ability to maintain our current development program and to establish new ones;

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our ability to establish new licensing or collaboration arrangements;

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the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

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the receipt and related terms of regulatory approvals from applicable regulatory authorities;

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the availability of drug substance and drug product for use in production of our product candidate;

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

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our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;

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our ability to protect our rights in our intellectual property portfolio;

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the commercialization of our product candidate, if and when approved;

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obtaining and maintaining third-party insurance coverage and adequate reimbursement;

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•
the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors;

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competition with other products;

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the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers, or other vendors resulting from the ongoing COVID-19 pandemic or similar public health crisis; and

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a continued acceptable safety profile of our therapies following approval.

A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; marketing expenses and other operating costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our business operations. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs, as well as investor and public relations expenses associated with being a public company.

Other expense

The main component of other expense is interest expense related to cash interest under our 2018 Credit Facility that we entered into in March 2018, which as of December 31, 2021 has been terminated.

Other expense includes realized gains and losses on sale or disposal of furniture and equipment and interest income received on our cash equivalents. For the year ended December 31, 2020, other expense includes the change in fair value of derivative liability related to our 2018 Credit Facility.

Income taxes

We are organized as a Delaware corporation and treated as a c-corporation for federal and state income taxes. Our wholly-owned subsidiaries are included in the consolidated corporate tax return. Prior to the Merger in 2020, we were established as a Delaware limited liability company, and the business that was acquired in the Merger was treated as a partnership for income tax reporting purposes; therefore, federal and state income taxes were the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company were recorded in our consolidated financial statements. All such taxes have been recorded in our financial statements. As of December 31,2021 we recorded a net deferred income tax asset of $18.1 million primarily related to a net operating loss carryforward, research and development tax credit carryforward, capitalized licensing fees and right-of-use leases. The asset has a corresponding full deferred income tax valuation allowance. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the

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future as a result of shifts in our stock ownership, some of which are outside our control. See Note 15 to our financial statements appearing in this Form 10-K.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes the results of operations for the years ended December 31, 2021 and 2020:

Research and development expenses

Research and development expenses increased by $5.4 million from $14.9 million in 2020 to $20.3 million in 2021. This increase was primarily attributable to a $6.0 million milestone payment due to ABL Bio related to the completion of the CTX-009 Phase 1 clinical trial. In addition, program related costs increased by $1.0 million due to the clinical advancement of our pipeline, which was offset by lower depreciation expense of $1.5 million related to sale of selected lab equipment. Excluding the milestone due, research and development expenses were $0.5 million lower than 2020.

We track supplies, outsourced development, outsourced personnel costs and other external research and development costs of specific programs. Starting January 1, 2021, we started to track our internal labor costs by program. Facility and equipment costs are not allocated to programs. Research and development expenses are summarized by program in the table below:

We decided to deprioritize our development efforts for our NKp30 innate cell engager platform in the first quarter of 2021.

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General and administrative expenses

General and administrative expenses decreased by $2.0 million from $12.9 million in 2020 to $10.9 million in 2021. The decrease was primarily attributable to lower legal fees of $0.9 million, lower facility costs of $0.9 million, and lower personnel cost of $0.5 million. The legal fees in 2020 included non-recurrent expense related to the transitioning of the company from a privately held company to a public company while such transition did not take place in 2021. The reduction in facilities expense is primarily related to the move from our prior facility in Cambridge, MA, to our new facility in Boston, MA, which is more cost-effective. We anticipate that our general and administrative expenses will increase in the future as we expand our operations to support our growing research and development efforts and continue to operate as a public company.

Other expense

Other expense decreased by $1.4 million from $1.7 million in 2020 to $0.3 million in 2021. Interest expense decreased $0.5 million during 2021, compared to 2020. We recognized a change in our derivative liability of $0.6 million in 2020 with no derivative in 2021. Additionally, there was a realized loss of $0.3 million from the sale of equipment in conjunction with the move to our new location compared with a realized gain of $42 thousand in 2021.

In-process R&D

In-process R&D expenses consists of the acquisition of TRIGR, whose primary asset is CTX-009, an anti-DLL4 x VEGF-A bispecific antibody. As we expense research and development costs as incurred, the cost of this acquisition was expensed. See Note 16 to the financial statements contained in this Form 10-K for further description of the accounting of this transaction.

Income tax expense

We did not have income tax expense in 2021. During the year ended December 31, 2020, we recognized income tax expense of $32 thousand, which was attributable to the services provided by a wholly-owned subsidiary of Compass Therapeutics, prior to the closing of the Merger.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. We have funded our operations primarily with proceeds from private placements of preferred and common equity and an underwritten public offering in the fourth quarter of 2021. Through December 31, 2021, we had received gross proceeds of $329 million from the sale of equity securities, including $136.5 million in gross proceeds from our Follow-On Public Offering (as defined above) and $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined above). In addition, we received $15 million in term loan borrowings under the 2018 Credit Facility, which was paid off and cancelled as of December 31, 2021. As of December 31, 2021, we had cash and cash equivalents of $144.5 million.

On July 9, 2021, we filed an S-3 registration statement which became effective July 20, 2021. Included in this registration statement was a shelf registration allowing us to sell securities up to $300 million. The Follow-On Public Offering was made pursuant to this registration statement. In addition, the S-3 registration statement included a sales agreement with B. Riley Securities, Inc. pursuant to which we may offer and sell shares of our common stock having an aggregate of up to $75 million.

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Indebtedness

In March 2018, we entered into a credit facility with Pacific Western Bank ("2018 Credit Facility") which matured on March 1, 2022 and consisted of $15.0 million in term loans. We made interest-only payments through March 31, 2020, and beginning in April 2020, we began to make monthly payments of $625 thousand toward principal plus interest. The 2018 Credit Facility included a success fee of $1.1 million to the lender which was paid upon completion of the Merger. We paid the balance of this loan in November 2021. See additional details of the 2018 Credit Facility in Note 7 to our financial statements appearing in this Form 10-K.

Funding Requirements

Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

•
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;

•
the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;

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our ability to establish additional collaborations on favorable terms, if at all;

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the costs required to scale up our clinical, regulatory and manufacturing capabilities;

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the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and

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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval.

We will need additional funds to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.

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Cash Flows

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

Operating Activities

During the year ended December 31, 2021, we used $19.7 million of cash in operating activities, resulting from our net loss of $82.2 million and the change in operating assets and liabilities of $6.2 million, offset by non-cash charges of $56.3 million. Our non-cash charges were comprised of the write-off of in-process R&D of $50.6 million, depreciation and amortization of $0.6 million, gain on disposal of equipment of $42 thousand, share-based compensation expense of $4.0 million, non-cash interest expense of $41 thousand and amortization of ROU asset of $1.1 million. The change in our operating assets and liabilities was primarily related to an increase in accrued expenses primarily driven by the $6.0 million accrued milestone payment.

During the year ended December 31, 2020, we used $26.8 million of cash in operating activities, resulting from our net loss of $29.5 million and the change in operating assets and liabilities of $4.6 million, offset by non-cash charges of $7.3 million. Our non-cash charges were comprised of depreciation and amortization of $2.4 million, loss on disposal of equipment of $0.3 million, share-based compensation expense of $4.0 million, non-cash interest expense of $90 thousand, and a change in fair value of our derivative liability of $0.6 million. The change in our operating assets and liabilities was primarily related to an increase in prepaid manufacturing expenses, the settlement of a derivative liability and a decrease in our accrued expenses due to the timing in which we pay our vendors.

Investing Activities

During the year ended December 31, 2021 cash used in investing activities was $1.8 million, which was attributed to purchase of property and equipment of $1.6 million, primarily from leasehold improvements in our new facility, $0.3 million from asset acquisition costs related to the TRIGR transaction and $0.1 million in proceeds from the sale of equipment. During the year ended December 31, 2020 cash provided by investing activities was $38 thousand attributed to the sale of equipment for which we received $0.1 million, offset by $0.1 million in purchases of equipment.

Financing Activities

During the year ended December 31, 2021, we received net cash proceeds of $118.6 million from financing activities. This was primarily due to the closing of the Follow-on Public Offering in the fourth quarter of 2021, which resulted in net proceeds of $128.0 million that were partially offset by $9.4 million in payments under the 2018 Credit Facility. During the year ended December 31, 2020, we received net cash proceeds of $48.5 million from financing activities. This was primarily due to the closing of a Private Placement in June 2020, which resulted in net proceeds of $54.2 million that were partially offset by $5.6 million in payments under the 2018 Credit Facility.

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Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into their next clinical trial phases. The timing and amount of our operating expenditures will depend largely on:

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the initiation, progress, timing, costs and results of clinical trials for our current product candidates or any future product candidates we may develop;

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the initiation, progress, timing, costs and results of nonclinical studies for our product candidates or any future product candidates we may develop;

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our ability to maintain our relationships with key collaborators;

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the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more nonclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;

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the cost to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;

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the effect of competing technological and market developments;

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the costs of continuing to grow our business, including hiring key personnel and maintain or acquiring operating space;

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market acceptance of any approved product candidates, including product pricing, as well as product coverage and the adequacy of reimbursement by third-party payors;

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the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;

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the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial-scale manufacturing;

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the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval and that we determine to commercialize; and

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our need to implement additional internal systems and infrastructure, including financial and reporting systems.

We believe that our existing cash and cash equivalents as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into the second half of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of our product candidates, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for our any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.

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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2021 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

(1)
Reflects milestone payments deemed probable. The amount consists of a $6 million milestone payment due to ABL Bio related to the completion of CTX-009 Phase 1 clinical trial. See Notes 10 and 11 to the financial statements in this form 10-K for additional detail on milestone obligations related to CTX-009.

(2)
Reflects payments due for our leases of office and laboratory space in Boston, Massachusetts under an operating lease agreement that expires in May 2025.

(3)
Amounts in the table reflect the non-cancelable purchase commitments under an agreement with an external CDMO, which we have engaged to manufacture preclinical and clinical trial materials.

(4)
This table does not include (i) any milestone payments that are not deemed probable under license agreements as the timing and likelihood of such payments are not known with certainty, (ii) any royalty payments to third parties as the amounts, timing and likelihood of such payments are not known, and (iii) contracts that are entered into in the ordinary course of business that are not material in the aggregate in any period presented above.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

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While our significant accounting policies are described in more detail in Note 3 to our financial statements appearing in this Form 10-K, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred.

At the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion of the applicable research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that we estimate has been made as a result of the service provided, we may record net prepaid or accrued expenses relating to these costs. As of December 31, 2021, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Stock Awards and Unit-Based Compensation

The following table summarizes stock awards and unit-based compensation expense:

See Notes 3 and 9 to our financial statements appearing in this Form 10-K for additional stock compensation information.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recently Issued and Adopted Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3 to our financial statements appearing in this Annual Report.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") was enacted. Under Section 107(b) of the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have made the election to delay the adoption of such accounting standards as provided in the JOBS Act. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company”, we are exempt from Sections 14A(a) and (b) of the Exchange Act that would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”, “say-on-frequency”, and “golden parachutes”; and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption

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from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

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