Compass Therapeutics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. COMPASS THERAPEUTICS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) Report of Independent Registered Public Accounting Firm 118 Consolidated Financial Statements Consolidated Balance Sheets 119 Consolidated Statements of Operations 120 Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) 121 Consolidated Statements of Cash Flows 122 Notes to Consolidated Financial Statements 123 117 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Compass Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Compass Therapeutics, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, changes in convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ CohnReznick LLP We have served as the Company’s auditor since March 2020. Hartford, Connecticut March 5, 2021 118 Compass Therapeutics, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except par value per share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 47,076 $ 25,303 Prepaid expenses and other current assets 3,126 935 Total current assets 50,202 26,238 Property and equipment, net 1,126 3,751 Restricted cash 263 263 Other assets 320 129 Total assets $ 51,911 $ 30,381 Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $ 1,061 $ 629 Accrued expenses 1,571 3,122 Current portion of long-term debt 7,467 5,576 Derivative liability related to loan — 494 Total current liabilities 10,099 9,821 Long-term debt, net of current portion 1,867 9,293 Total liabilities 11,966 19,114 Commitments and Contingencies (Note 11) Convertible preferred stock - 207,164 authorized, issued, and outstanding as of December 31, 2019. No shares authorized, issued, and outstanding as of December 31, 2020. — 129,870 Stockholders' equity (deficit): Preferred stock, $0.0001 par value: 10,000 shares authorized; no shares issued and outstanding as of December 31, 2020 and 2019. — — Common stock, $0.0001 par value: 300,000 shares authorized; 52,117 and 9,073 shares issued at December 31, 2020 and 2019, respectively; 51,221 and 7,034 shares outstanding at December 31, 2020 and 2019, respectively. 5 1 Additional paid-in-capital 191,348 3,304 Accumulated deficit (151,408 ) (121,908 ) Total stockholders' equity (deficit) 39,945 (118,603 ) Total liabilities and stockholders' equity (deficit) $ 51,911 $ 30,381 The accompanying notes are an integral part of these consolidated financial statements. 119 Compass Therapeutics, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data) Year Ended December 31, 2020 2019 Operating expenses: Research and development $ 14,904 $ 22,449 General and administrative 12,908 11,603 Total operating expenses 27,812 34,052 Loss from operations (27,812 ) (34,052 ) Other income (expense): Interest expense (908 ) (1,228 ) Other income (expense), net (748 ) 627 Total other expense (1,656 ) (601 ) Loss before income tax expense (29,468 ) (34,653 ) Income tax expense (32 ) (91 ) Net loss $ (29,500 ) $ (34,744 ) Net loss per share - basic and diluted $ (0.96 ) $ (5.19 ) Basic and diluted weighted average shares outstanding 30,776 6,691 The accompanying notes are an integral part of these consolidated financial statements. 120 Compass Therapeutics, Inc. and Subsidiaries Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity (Deficit) Balance at January 1, 2019 207,164 $ 129,870 6,355 $ 1 $ 2,389 $ (87,164 ) $ (84,774 ) Vesting of share-based awards — — 679 — — — — Share-based compensation expense — — — — 915 — 915 Net loss — — — — — (34,744 ) (34,744 ) Balance at December 31, 2019 207,164 $ 129,870 7,034 $ 1 $ 3,304 $ (121,908 ) $ (118,603 ) Convertible Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity (Deficit) Balance at January 1, 2020 207,164 $ 129,870 7,034 $ 1 $ 3,304 $ (121,908 ) $ (118,603 ) Common shares issued to former shareholders of Olivia Ventures Inc. — — 1,000 — — — — Conversion of Compass Therapeutics LLC preferred shares into common shares upon consummation of the reverse merger (207,164 ) (129,870 ) 30,630 3 129,867 — 129,870 Common shares issued in private placement, net of issuance costs of $6.3 million — — 12,096 1 54,230 — 54,231 Payment to non-participating Compass Therapeutics LLC members upon consummation of Merger — — (13 ) — (69 ) — (69 ) Vesting of share-based awards — — 474 — — — — Stock-based compensation — — — — 4,016 — 4,016 Net loss — — — — — (29,500 ) (29,500 ) Balance at December 31, 2020 — $ — 51,221 $ 5 $ 191,348 $ (151,408 ) $ 39,945 The accompanying notes are an integral part of these consolidated financial statements. 121 Compass Therapeutics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (29,500 ) $ (34,744 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,404 2,120 Loss on disposal of equipment 281 — Noncash interest expense 90 116 Share-based compensation 4,016 915 Change in fair value of derivative liability 556 104 Changes in operating assets and liabilities: Prepaid expenses and other current assets (2,191 ) 435 Other long-term assets (290 ) (56 ) Accounts payable 432 (1,101 ) Accrued expenses (1,551 ) 509 Deferred rent — (39 ) Settlement of derivative liability (1,050 ) — Net cash used in operating activities (26,803 ) (31,741 ) Cash flows from investing activities: Purchases of property and equipment (106 ) (466 ) Proceeds from sale of equipment 144 — Net cash provided by (used in) investing activities 38 (466 ) Cash flows from financing activities: Proceeds from issuance of common stock 60,482 — Issuance costs from issuance of common stock (6,319 ) — Repayment of borrowings under loan (5,625 ) — Net cash provided by financing activities 48,538 — Net change in cash, cash equivalents and restricted cash 21,773 (32,207 ) Cash, cash equivalents and restricted cash at beginning of year 25,566 57,773 Cash, cash equivalents and restricted cash at end of year $ 47,339 $ 25,566 Supplemental disclosure of cash flow information Cash paid for interest $ 854 $ 1,115 Supplemental disclosure of financing activities Conversion of preferred units $ 129,870 $ — The accompanying notes are an integral part of these consolidated financial statements. 122 Compass Therapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Formation and Business of the Company Compass Therapeutics, Inc. (“Compass” or the “Company”) is a clinical-stage biopharmaceutical company developing proprietary antibody therapeutics intended to engage the immune system to treat both solid tumors and hematological malignancies. The Company’s immuno-oncology product candidates include a clinical-stage monoclonal antibody and a portfolio of bispecific antibodies. The Company was incorporated as Olivia Ventures, Inc. (“Olivia”) in the State of Delaware on March 20, 2018. Prior to the Merger (as defined below), Olivia was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). References to Compass or the Company herein include Compass Therapeutics, Inc. and its wholly-owned subsidiaries. On June 17, 2020, the Company’s Board of Directors and the Company’s pre-Merger (defined below) stockholders approved an amended and restated certificate of incorporation, which, among other things, increased authorized capital stock from 50,000,000 shares of common stock par value $0.0001 and 5,000,000 shares of preferred stock, par value $0.0001 per share, to 300,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. On June 17, 2020, the Company completed a merger (the “Merger”) of its wholly-owned subsidiary, Compass Therapeutics LLC, pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among Olivia Ventures, Inc., Compass Acquisition LLC, Compass Therapeutics LLC, and as a result, Compass Therapeutics LLC became a wholly-owned subsidiary of the Company. Additionally, certain of the Company’s wholly-owned subsidiaries (each, a “Blocker Merger Sub”) merged with and into the applicable blocker entity (“Blockers”) in transactions that are referred to as “Blocker Mergers.” At the effective time of the Merger and the applicable effective time of each Blocker Merger, (collectively, the “Effective Time”), an aggregate of 31,627,139 shares of the Company’s common stock were issued to holders of common membership interests of Compass Therapeutics LLC (including common membership interests issued upon the conversion of preferred membership interests) and 7,428,217 shares of its common stock were issued to the holders of equity interests of the Blockers. The issuances of shares of the Company’s common stock to the security holders of Compass Therapeutics LLC and the Blockers are collectively referred to as the Share Conversion. In addition, 2,930,836 shares of the Company’s common stock were reserved for issuance under the Company’s 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 the Company’s common stock held by pre-Merger stockholders of Olivia Ventures, Inc. were forfeited and surrendered for cancellation. No fractional shares of the Company’s common stock were issued in connection with the Merger, and holders of membership interests of Compass Therapeutics LLC received cash in lieu thereof. The Merger and the Blocker Mergers were treated as a recapitalization and reverse acquisition for financial reporting purposes. Compass Therapeutics LLC is considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger have been replaced with the historical financial statements of Compass Therapeutics LLC in filings with the SEC subsequent to the Merger. As a result, the vested and outstanding common membership interests of Compass Therapeutics LLC have been presented as outstanding shares of the Company’s common stock for all periods presented. All outstanding preferred membership interests of Compass Therapeutics LLC are presented as convertible preferred stock for all periods and until such interests were converted into shares of the Company’s common stock at the time of the Merger. 123 On June 19, 2020, the Company completed a private placement (“Private Placement”) and sold 12,096,442 shares of its common stock at a purchase price of $ 5.00 per share and received net proceeds of $ 54.2 million , after associated offering costs . The Company is subject to risks and uncertainties common to companies in the biotechnology and pharmaceutical industries. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants. 2. Liquidity, Uncertainties and Going Concern The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Since its inception, the Company has funded its operations primarily with proceeds from the sale of its equity securities and borrowings under the 2018 Credit Facility. The Company has incurred recurring losses since its inception and had an accumulated deficit of $151.4 million on December 31, 2020. The Company expects to continue to generate operating losses for the foreseeable future. The Company expects that its cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements into the second quarter of 2022. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. The Company is subject to risks common to early stage companies in the biotechnology industry including, but not limited to: having a limited operating history and no products approved for commercial sale; having a history of significant losses; its need to obtain additional financing; dependence on its ability to advance its current and future product candidates through clinical trials, marketing approval and commercialization; the lengthy and expensive nature and uncertain outcomes of the clinical development process; the lengthy, time consuming and unpredictable nature of the regulatory approval process; the results of preclinical studies and early stage clinical trials that may not be predictive of future results; dependence on its key personnel; risks related to patent protection and the Company’s pending patent applications; dependence on third party collaborators for the discovery, development and commercialization of current and future product candidates; and significant competition from other biotechnology and pharmaceutical companies. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. Due to the evolving and uncertain global impacts of the COVID-19 pandemic, we cannot precisely determine or quantify the impact this pandemic will have on our business operations in the future. We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19 community-wide. We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system. To date, we have been able to continue to pursue our Phase 1 clinical trial without significant delays or major difficulties despite the COVID-19 pandemic. 124 3. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements are presented in U.S. dollars and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). In June 2020, the Company completed the Merger, as discussed in Note 1. Upon the closing of the Merger, the common and convertible preferred units of Compass Therapeutics LLC were converted into the Company’s common stock. The Company effected a 0.15-for-one stock conversion ratio for its issued and outstanding convertible preferred units. Common units were converted using the same ratio after factoring in the relevant strike price of each grant. Subsequent to the Merger, there were no common or convertible preferred units outstanding. All of the share and per share information presented in the accompanying financial statements has been adjusted to reflect the stock split on a retroactive basis for all periods and as of all dates presented. Upon the closing of the Merger, the Company’s certificate of incorporation was amended and restated to provide for 10 million authorized shares of preferred stock with a par value of $0.0001 per share and 300 million authorized shares of common stock with a par value of $0.0001 per share. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Compass Therapeutics, Inc., and its wholly-owned subsidiaries, including Compass Therapeutics LLC and Compass Therapeutics Advisors Inc. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual of research and development expenses, the valuation of the embedded derivative, the valuation of common stock and estimates associated with stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from those estimates. Changes in estimates are recorded prospectively in the period that they become known. Segment Information Operating segments are defined as components of an enterprise for which separate and discrete information is available for evaluation by the chief operating decision-maker in deciding how to allocate resources and assess performance. The Company has one operating segment. The Company’s chief operating decision-maker, its chief executive officer, manages the Company’s operations on a consolidated basis for the purpose of allocating resources. All of the Company’s long-lived assets are held in the United States. 125 Cash and Cash Equivalents The Company considers all highly liquid investments that are readily convertible into cash with original maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in money market funds. Cash equivalents are stated at cost, which approximates market value. C ash equivalents consisted of money market funds of $43.6 million and $22.8 million on December 31, 2020 and 2019, respectively. Restricted Cash As of December 31, 2020 and 2019, the Company was required to maintain a separate cash balance of $0.2 million to collateralize corporate credit cards with a bank, which was classified as restricted cash on the consolidated balance sheets as a non-current asset. In connection with the Company’s lease agreement entered into July 2016 (see Note 11), the Company is required to maintain a letter of credit of $0.1 million for the benefit of the landlord. As of December 31, 2020 and 2019, the underlying cash balance securing this letter of credit was classified as restricted cash on the consolidated balance sheets as a non-current asset. Concentrations of Credit Risk Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash, cash equivalents and restricted cash with financial institutions that management believes to be of high-credit quality. The Company has not experienced any losses related to its cash, cash equivalents and restricted cash. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the related assets as follows: Asset Classification Estimated Useful Life Equipment 5 years Furniture and fixtures 7 years Software 5 years Leasehold improvements Lesser of estimated useful life or lease term Estimated useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statement of operations in the period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Assets held under capital leases are stated at the lesser of the present value of future minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization of assets held under capital leases is computed using the straight-line method over the shorter of the estimated useful life of the asset or the period of the related lease. Impairment of Long-Lived Assets Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the 126 carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in the consolidated statements of operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. The Company did not record any impairment losses on long-lived assets during the year ended December 31, 2020 and 2019. Fair Value Measurements Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: • Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data. • Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company’s cash equivalents are carried at fair value according to the fair value hierarchy described above and were determined based on Level 1 measurements (see Note 4). The Company’s restricted cash is carried at fair value according to the fair value hierarchy described above and were determined based on Level 2 measurements (see Note 4). The carrying values of other current assets and accounts payable approximate their fair value due to the short‑term nature of these assets and liabilities. The carrying values of the Company’s loan approximated its fair value as of December 31, 2020 and 2019 due to its variable interest rate. The fair value of the loan related embedded derivative (see Note 4) was determined based on Level 3 measurements. 127 Research and Development Costs Costs associated with internal research and development and external research and development services, including drug development and preclinical studies, are expensed as incurred. Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation and amortization, stock-based compensation, third-party license fees, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials, and other costs. The Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such prepaid expenses are recognized as an expense when the goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered, or the services rendered. Costs associated with licenses of technology acquired as part of collaborative arrangements are expensed as incurred and are generally included in research and development expense in the consolidated statements of operations if it is determined the license has no alternative future use. Accrued Research and Development Expenses The Company has entered into various research and development and other agreements with commercial firms, researchers, universities and others for provisions of goods and services. These agreements are generally cancelable, and the related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs. Debt Issuance Costs Debt issuance costs consist of payments made to secure commitments under certain debt financing arrangements. These amounts are recognized as interest expense over the period of the financing arrangement using the effective interest method. If the financing arrangement is canceled or forfeited, or if the utility of the arrangement to the Company is otherwise compromised, these costs are recognized as interest expense immediately. The Company’s consolidated financial statements present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability. Patent Costs All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expense in the consolidated statements of operations. 128 Stock-Based Compensation The Company recognizes the grant‑date fair value of stock‑based awards issued to employees and nonemployee board members as compensation expense on a straight‑line basis over the service period of the award. The Company uses the Black‑Scholes option pricing model to determine the grant‑date fair value of stock options and adjusts expense for forfeitures in the periods they occur. The fair value of each equity award was determined by the Company on the date of grant and by using the methods and assumptions discussed below. Certain of these inputs are subjective and generally require judgment to determine. Stock price: See below. Expected term : The expected term of the equity award represents the weighted average period the award is expected to be outstanding. The Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average time to vesting and the contractual life of the award. Expected volatility – Due to the Company’s limited operating history and lack of Company-specific historical or implied volatility, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available. Risk-free interest rate – The risk-free rate assumption is based on U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s equity award. Expected dividend – The Company has not paid and does not intend to pay dividends. Stock Price - Prior to the Merger The Company issued Class A and Class C common units to various employees, directors and consultants. The units constituted “profits interests” for tax purposes and were accounted for as share-based payment arrangements. Upon consummation of the Merger, all outstanding vested units were converted into shares of common stock and all outstanding unvested units were converted into shares of restricted stock that continue to vest over the remaining term of the original award. The estimated fair value was determined by our board of directors as of the date of each stock award, with input from management, considering our most recently available third-party valuation, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our stock awards as of each grant date, including: • the prices at which we sold preferred membership interests and the superior rights and preferences of the preferred membership interests relative to our membership interests at the time of each grant; • the progress of our commercialization efforts; • the progress of our research and development programs, including the status and results of preclinical studies for our product candidates; 129 • our stage of development and our business strategy; • external market conditions affecting the medical device industry and trends within the medical device industry; • our financial position, including cash on hand, and our historical and forecasted performance and operating results; • the lack of an active public market for our common and preferred membership interests; • the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, reverse merger, or sale of our Company in light of prevailing market conditions; and • the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry. In determining the estimated fair value, our board of directors considered the subjective factors discussed above in conjunction with the most recent valuations of our membership interests that were prepared by an independent third party. Stock Price - Subsequent to the Merger A public trading market for the Company’s common stock was not established between the closing of the Merger and December 31, 2020. For the valuation of the Company’s common stock at September 30, 2020 and December 31, 2020, the Company used $5.00 per share, which is the share price paid by outside investors in the Company’s Private Placement that closed in June 2020. Upon establishing a public market for the Company’s securities, the stock price of the Company’s common stock used to value equity awards will be based on the closing price of the Company’s common stock as reported on the date of the grant. Net Loss per Share Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock, stock options, unvested restricted stock and common stock warrants that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive. The following potentially dilutive securities outstanding as of December 31, 2020 and 2019 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive: December 31, 2020 2019 (000's) Convertible preferred stock — 30,630 Stock options 2,159 — Nonvested restricted stock 896 1,917 Common unit warrants — 3,114 Total 3,055 35,661 130 Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized. The Company files income tax returns in the U.S. Federal jurisdiction and in various states. The Company has tax net operating loss carryforwards that are subject to examination for a number of years beyond the year in which they were generated for tax purposes. Since a portion of these net operating loss carryforwards may be utilized in the future, many of these net operating loss carryforwards will remain subject to examination. Prior to the Merger, Compass Therapeutics LLC elected to be treated as a partnership for income tax reporting purposes and therefore, federal and Massachusetts and any other state income taxes are the responsibility of the individual members. As such, no federal or state income taxes related to the LLC are recorded in the consolidated financial statements. The Company’s wholly-owned subsidiary, Compass Therapeutics Advisors Inc., is organized as a C-corporation and is subject to federal and state income taxes. All such taxes have been recorded in the consolidated financial statements. Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016 02, Leases , which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. The standard continues to have two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases result in the recognition of a single lease expense on a straight-line basis over the lease term, similar to the treatment for operating leases under the old standard. Finance leases result in an accelerated expense similar to the accounting for capital leases under the old standard. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components of an arrangement. The Company adopted the new standard on January 1, 2021, using a modified retrospective approach and as a result did not adjust prior periods. Adoption of the standard resulted in the recording of $5.1 million of operating lease ROU assets and operating lease liabilities, but did not have a material impact on the Company’s net income or cash flows. Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018‑13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurements , which changes the fair value measurement disclosure requirements of ASC Topic 820. The goal of the ASU is to improve the effectiveness of ASC Topic 820’s disclosure requirements. The Company adopted this guidance on January 1, 2020 and was not material to its consolidated financial statements and related disclosures. 131 In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2022. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its financial position and results of operations upon adoption. 4. Fair Value Measurements The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values: Fair Value Measurements as of December 31, 2020 Using (000's): Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Fair Value Assets Cash equivalents - money market funds $ 43,631 $ — $ — $ 43,631 Total assets $ 43,631 $ — $ — $ 43,631 Fair Value Measurements as of December 31, 2019 Using (000's): Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Fair Value Assets Cash equivalents - money market funds $ 22,784 $ — $ — $ 22,784 Total assets $ 22,784 $ — $ — $ 22,784 Liabilities Derivative liability related to loan $ — $ — $ 494 $ 494 Total liabilities $ — $ — $ 494 $ 494 Valuation of Derivative Liability The Company’s derivative liability was comprised of the contingent interest rate reset features and a contingent feature to pay a success fee upon the occurrence of certain liquidity events, each of which met the definition of a derivative instrument, which terms are included in the loan and security agreement (see Note 7). The Company classified these instruments as a liability on the consolidated balance sheet because these features were not clearly and closely related to its host instrument and met the definition of a derivative. The derivative liability was initially recorded at fair value upon issuance of the loan and was being subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability were recognized as a component of other income (expense), net in the consolidated statements of operations. The success fee was paid in full following the closing of the Merger in June 2020. 132 The fair value of the derivative liability recognized was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using the probability-weighted expected return method, which considered as inputs the type, timing and probability of occurrence of a change-of-control event, the future equity financing and cash settlement of the loans; the potential amount of the payment under each of these potential settlement scenarios; and the risk-adjusted discount rate reflecting the expected risk profile for each of the potential settlement scenarios. The following table provides a roll forward of the aggregate fair values of the Company’s derivative liability: Derivative Liability (000"s) Balance at January 1, 2019 $ 390 Change in fair value 104 Balance at December 31, 2019 494 Change in fair value 556 Payment of success fee (1,050 ) Balance at December 31, 2020 $ — 5. Property and Equipment Property and equipment consist of the following: December 31, 2020 2019 (000's) Equipment $ 5,356 $ 7,230 Furniture and fixtures 629 629 Leasehold improvements 896 896 Software 180 669 Assets not yet placed in service — 230 Total property and equipment–at cost 7,061 9,654 Less: Accumulated depreciation (5,935 ) (5,903 ) Property and equipment, net $ 1,126 $ 3,751 Total depreciation and amortization expense for year ended December 31, 2020 and 2019, was $2.4 million and $2.1 million, respectively. 6 . Accrued Expenses Accrued expenses consist of the following: December 31, 2020 2019 (000's) Compensation and benefits $ 976 $ 1,759 Research and development expenses 212 249 Legal and professional fees 326 417 Use taxes — 554 Other 57 143 Total accrued expenses $ 1,571 $ 3,122 133 7. Debt The aggregate principal amount of debt outstanding consisted of the following: December 31, 2020 2019 (000's) Current portion of debt $ 7,500 $ 5,625 Less: unamortized debt discount (33 ) (49 ) Current portion of debt, net of debt discount $ 7,467 $ 5,576 Long-term debt, net of current portion $ 1,875 $ 9,375 Less: unamortized debt discount (8 ) (82 ) Long-term debt, net of current portion $ 1,867 $ 9,293 The Company entered into a loan and security agreement (“2018 Credit Facility”) with Pacific Western Bank, Inc. (“PWB”), and received $15.0 million debt proceeds in 2018. The loans bear interest at the greater of (i) 6.25% and (ii) the prime rate plus an applicable margin of 2.0%. The interest rate was 6.25% at December 31, 2020. In an event of default, as defined in the agreement, the interest rate applicable to borrowings would be increased by 5.0%. The Company made interest-only payments through March 31, 2020. Beginning in April 2020, the Company is obligated to make equal monthly principal payments of $625,000 through March 31, 2022 when the note matures. The 2018 Credit Facility allows for prepayment of the outstanding principal at any time, subject to a prepayment charge that is dependent on the prepayment date. The 2018 Credit Facility contained provisions whereby the Company was obligated to pay a success fee of $1.1 million upon the achievement of certain liquidity events. Upon consummation of the Merger, the Company success fee payment became due and was paid in its entirety in June 2020. The 2018 Credit Facility contains a negative pledge on the Company’s intellectual property and also contains customary indemnification obligations and customary events of default, including, among other things, (i) non‑payment, (ii) breach of warranty, (iii) non‑performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) key person event, (xi) regulatory matters, (xii) and key contracts. In addition, the Company must maintain a minimum cash balance of $6.0 million beginning in April 2020. The borrowings are collateralized by substantially all of the Company’s assets, excluding intellectual property, and contain affirmative and negative covenants including restrictions on the Company’s ability to incur additional indebtedness, pay dividends, encumber its property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. The Company was in compliance with its loan covenants as of December 31, 2020. The Company recognized interest expense of $0.9 million and $1.2 million during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the aggregate minimum future principal payments due in connection with the 2018 Credit Facility, as amended, are as follows: Year Ending December 31, (000's) 2021 $ 7,500 2022 1,875 $ 9,375 134 8 . Convertible Preferred Stock and Stockholders’ Equity (Deficit) Convertible Preferred Stock In connection with the Merger, as discussed in Note 1, the Company issued 30.6 million shares of its common stock to holders of convertible preferred interests of Compass Therapeutics LLC. No convertible preferred securities were outstanding as of December 31, 2020. As of December 31, 2019, convertible preferred stock consisted of the following shares outstanding: Shares Issued and Outstanding Preferred Stock (000's) Series A-1 64,705 Series A-2 36,783 Series A-3 23,467 Series A-4 15,253 Series A4B 22,216 Series A-5 44,740 207,164 Common Stock In connection with the Merger, as discussed in Note 1, the Company issued 1 million shares of common stock to the former shareholders of Olivia Ventures Inc. The Company paid $0.1 million to several nonaccredited investors of Compass Therapeutics LLC in lieu of issuing shares. In addition, 2.9 million shares of the Company’s common stock were reserved for issuance under the 2020 Stock Option and Incentive Plan. The Company sold 12 million shares of its common stock pursuant to the closing of a Private Placement offering at a purchase price of $5.00 per share in June 2020. 9. Stock-Based Compensation Stock-based compensation expense for the years ended December 31, 2020 and 2019 was classified in the consolidated statements of operations as follows: Year Ended December 31, 2020 2019 (000's) Research and development $ 605 $ 383 General and administrative 3,411 532 Total $ 4,016 $ 915 Restricted Stock Prior to the Merger, Compass Therapeutics LLC maintained an incentive pool of unit-based awards that were granted to board members, employees and consultants and accounted for as unit-based compensation. Upon consummation of the Merger, all outstanding vested profits interests units were converted into shares of the Company’s common stock. Unvested units were converted into restricted shares of the Company’s common stock and will continue to vest under the same terms as the original profits interests. 135 A summary of the Company’s restricted share activity during the year ended December 31, 2020 is as follows: Weighted Average Grant Date Fair Value Shares (000's) Estimated Fair Value Per Share Unvested, January 1, 2020 2,039 $ 2.04 Granted 1 $ 2.34 Vested (474 ) $ 1.66 Forfeited or canceled (670 ) $ 1.75 Unvested, December 31, 2020 896 $ 2.46 The weighted-average grant-date fair value for unvested restricted stock as of December 31, 2020 was $2.46 per share. No restricted share awards have been granted following the Merger. As of December 31, 2020, remaining unrecognized compensation cost related to unvested restricted stock awards to be recognized in future periods totaled $1.6 million, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of each restricted stock award was estimated on the date of grant using the weighted average assumptions in the table below: Year Ended December 31, 2020 2019 Expected term (in years) 6.0 6.0 Risk-free rate 0.36 % 1.61% - 2.43% Expected volatility 140 % 65% - 85% Stock Options In June 2020, the Company’s board of directors adopted the 2020 Plan and reserved 2.9 million shares of common stock for issuance under this plan. The 2020 Plan provides that the number of shares reserved and available for issuance under the 2020 Plan will automatically increase each January 1, beginning on January 1, 2021, by the lesser of (i) 4% of the outstanding number of shares of our common stock on the immediately preceding December 31 or (ii) such number of shares as determined by the plan administrator no later than the immediately preceding December 31. As of December 31, 2020, 772 thousand shares remain available for future grant. The 2020 Plan authorizes the board of directors or a committee of the board to grant incentive stock options, nonqualified stock options and restricted stock awards to eligible officers, employees, consultants and directors of the Company. Options generally vest over a period of four years and have a contractual life of ten years from the date of grant. 136 The following table summarizes the stock option activity for the 2020 Plan: Number of Nonvested Options (000's) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life (in years) Outstanding at January 1, 2020 — $ — Granted 2,175 $ 5.00 Exercise - $ — Forfeited/cancelled (16 ) $ 5.00 Outstanding at December 31, 2020 2,159 $ 5.00 9.69 Vested at December 31, 2020 890 $ 5.00 9.65 For the year ended December 31, 2020, the weighted average grant date fair value for options granted was $3.44. The aggregate intrinsic value for options vested and outstanding as of and for the year ended December 31, 2020 was de minimis. As of December 31, 2020, the unrecognized compensation cost related to outstanding options was $4.3 million, expected to be recognized over a weighted average period of approximately 2.5 years. The weighted average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options granted to employees and directors during the year ended December 31, 2020 were as follows: Expected term (in years) 5.28 - 6.11 Risk-free rate 0.21% - 0.51% Expected volatility 85% - 86% 10. License, Research and Collaboration Agreements Collaboration Agreements Adimab Agreement The Company entered into a collaboration agreement with Adimab, LLC on October 16, 2014. The agreement also includes provisions for payment of royalties at rates ranging in the single digits as a percentage of future net sales within a specified term from the first commercial sale. There were no milestone payments made during the year ended December 31, 2020. The Company made milestone payments of $1.5 million in research and development during the year ended December 31, 2019, upon filing an IND for its product candidates associated with this license and first dosing of patient. As of December 31, 2020, future potential milestone payments in connection with this agreement amounted to $2.0 million. Other Research Agreements FUJIFILM Diosynth Biotechnologies Agreement The Company entered into a scope of work (“SOW”) under a master services agreement with FUJIFILM Diosynth Biotechnologies on July 20, 2020. The Company made cash payments of $2.6 million and recorded $0.9 million in research and development expense during the year ended December 31, 2020. As of December 31, 2020, future payments in connection with this SOW amounted to $2.2 million. 137 Other Licenses and Research Agreement s From time to time, the Company enters into license agreements with academic and healthcare institutions to in-license certain intellectual property rights and know-how relevant to its programs. As part of the consideration related to these license agreements, the Company made cash payments of $0.3 million during the year ended December 31, 2020. The Company recorded research and development expense related to research agreements of $0.3 million and $0.4 million during the years ended December 31, 2020 and 2019, respectively. In addition, the Company also committed to make certain clinical and regulatory milestone payments in the aggregate of $80 thousand associated with certain in-licensed technologies. 11. Commitments and Contingencies Operating Leases The Company leases laboratory, office and vivarium space in Cambridge, MA which expires January 31, 2021. The Company executed a sublease for laboratory and office space in Boston, MA effective in December 2020 with rent beginning in January 2021. The lease expires May 19, 2025. Rental expense was $2.0 million and $1.8 million for the year ended December 31, 2020 and 2019, respectively. The future minimum rental payments under the leases as of December 31, 2020 are as follows: Amount Year Ending December 31, (000's) 2021 $ 1,440 2022 1,312 2023 1,345 2024 1,379 2025 589 $ 6,065 Additional commitments include a 2018 Credit Facility (Note 7) and collaboration agreements (Note 10). 12. Related Parties and Related-Party Transactions On October 16, 2014, the Company entered into a collaboration agreement with Adimab, LLC. The Company’s co-founder and former chief operation officer has a direct ownership interest in Adimab, LLC and beneficially owns more than 5% of the Company’s common stock. The Company recorded $1.5 in connection with this agreement during year ended December 31, 2019 and no expenses in 2020. 13. Other Income (Expense) Other income and expense consisted of the following: December 31, 2020 2019 (000's) Interest income $ 88 $ 743 Change in fair value of derivative liability (556 ) (104 ) Realized foreign exchange loss 1 (12 ) Realized loss on disposal of equipment (281 ) 0 Total other income (expenses) $ (748 ) $ 627 138 14. Defined Contribution Plan The Company has a 401(k) defined contribution plan (the “401(k) Plan”) for substantially all of its employees. Eligible employees may make pre-tax or post-tax (Roth) contributions to the 401(k) Plan up to statutory limits. Since January 1, 2020, the Company has been matching employee contributions to the plan up to 4% of salary. 15. Income Taxes Subsequent to the Merger, the Company is organized as a Delaware corporation, treated as a c-corporation for federal and state income taxes. Its wholly-owned subsidiaries are included in the consolidated corporate tax return. The Company has net operating losses, therefore does not have any current tax liability for the period after the Merger. The Company’s wholly-owned subsidiary, Compass Therapeutics Advisors Inc., was subject to federal and state income taxes prior to the Merger. Current income tax expense for the years ended December 31, 2020 and 2019 reflects pre-Merger activity. Income tax expense is summarized as follows: Year Ended December 31, 2020 2019 Current (000's) Federal $ 22 $ 61 State 10 30 Total $ 32 $ 91 Deferred Federal $ — $ — State — — Total income tax expense $ 32 $ 91 The effective tax rate of our provision for income taxes differs from the federal statutory rate for the periods presented as follows: December 31, 2020 2019 Statutory rate 21.0 % 21.0 % Income not subject to federal corporate income tax -8.0 % -22.9 % State taxes 6.4 % 6.3 % Nondeductible expenses -0.5 % -0.1 % Change in valuation allowance -19.0 % -4.6 % Total -0.1 % -0.3 % The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets will not be realizable, and therefore, a valuation allowance has been established. The valuation allowance for deferred 139 tax assets was approximately $ 6.6 million and $ 1. 5 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company has U.S. net operating loss carryforwards (“NOLs”) of approximately $14.4 million and research and development credit carryforwards (“R&D credits”) of approximately $2.0 million. For income tax purposes, these NOLs and R&D credits will expire in various amounts through 2030. NOLs generated after 2017 do not expire. The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss carryforwards and R&D credit carryforwards in the case of certain events including significant changes in ownership interests. The Merger may have resulted in a “change in ownership” as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended. Accordingly, a substantial portion of the R&D Credit carryforwards may be subject to annual limitations in reducing any future year’s tax. The Company did not generate any NOLs until after the Merger therefore these limitations do not apply. Significant components of the Company’s deferred tax assets are as follows: December 31, 2020 2019 Deferred tax assets (000's) Net operating loss carryforwards $ 3,938 $ — Research and development credits 2,038 1,511 Noncash compensation 609 — Other 50 — Deferred tax asset 6,635 1,511 Less valuation allowance (6,635 ) (1,511 ) Net deferred tax assets $ — $ — 16. Subsequent Events The Company performed a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements. 140 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable .