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Item 1. Financial Statements

2021-04-30 compared with 2020-11-09 · 146 added, 338 removed, 151 unchanged (76% of the section changed)

Financial Statements (Unaudited).

Financial Statements

Compass Therapeutics, Inc.

1 unchanged sentence

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

September 30,

(In thousands, except per share data)

Current assets:

4 unchanged sentences

Restricted cash

Liabilities and Stockholders' Equity (Deficit)

Operating lease, right-of-use asset

Liabilities and Stockholders' Equity

Current liabilities:

Current portion of long-term debt

Accounts payable

Accrued expenses

Derivative liability related to loan

Operating lease obligations, current portion

Current portion of long-term debt

Total current liabilities

Long-term debt, net of current portion

Operating lease obligations, long-term portion

Total liabilities

Commitments and contingencies (Note 11)

Convertible preferred stock - 207,164,404 authorized, issued, and

outstanding as of December 31, 2019.

No shares authorized, issued, and

outstanding as of September 30, 2020.

Stockholders' equity (deficit):

Stockholders' equity:

Preferred stock, $0.0001 par value;

10,000,000 shares authorized and

no shares issued and outstanding as of September 30, 2020;

shares issued and outstanding as of December 31, 2019

10,000 shares authorized and no shares issued and outstanding as of March 31, 2021 and December 31, 2020

Common stock, $0.0001 par value:

300,000 shares authorized;

52,120,062 and 9,073,002 shares

issued at September 30, 2020 and December 31, 2019, respectively;

51,024,270 and 7,034,047 shares outstanding at September 30, 2020

52,081 and 52,117 shares issued at March 31, 2021 and December 31,

2020, respectively;

51,313 and 51,221 shares outstanding at March 31,

2021 and December 31, 2020, respectively

1 unchanged sentence

Accumulated deficit

Total stockholders' equity (deficit)

Total liabilities and stockholders' equity (deficit)

Total stockholders' equity

Total liabilities and stockholders' equity

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

Condensed Consolidated Statements of Operations (unaudited)

(In thousands, except share and per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands, except per share data)

Three Months Ended

Operating expenses:

3 unchanged sentences

Loss from operations

Other income (expense):

Interest income

Interest expense

Change in fair value of derivative liability

Realized foreign exchange loss

Total other expense

Other expense, net

Loss before income tax expense

1 unchanged sentence

Net loss per share - basic and diluted

Basic and diluted weighted average shares

Basic and diluted weighted average shares outstanding

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) (unaudited)

(In thousands, except share data)

Convertible Preferred Stock

(In thousands)

Preferred Stock

Stockholders'

Equity (Deficit)

Balance at January 1, 2020

Balance at December 31, 2020

Vesting of share-based awards

1 unchanged sentence

Balance at March 31, 2021

Common shares issued to former shareholders of Olivia Ventures Inc.

Conversion of Compass Therapeutics LLC preferred shares into common shares

upon consummation of the reverse merger

Common shares issued in private placement, net of issuance costs of $6,902

Payment to non-participating Compass Therapeutics LLC members upon

consummation of Merger

Vesting of share-based awards

Stock-based compensation

Balance at June 30, 2020

Adjustment to issuance costs related to June 2020 private placement

Vesting of share-based awards

Stock-based compensation

Balance at September 30, 2020

Convertible Preferred

Preferred Stock

Stockholders'

Equity (Deficit)

Balance at January 1, 2019

Balance at December 31, 2019

Vesting of share-based awards

Share-based compensation expense

Stock-based compensation

Balance at March 31, 2020

Vesting of share-based awards

Share-based compensation expense

Balance at June 30, 2019

Vesting of share-based awards

Share-based compensation expense

Balance at September 30, 2019

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

For the Nine Months Ended September 30,

For the Three Months

Ended March 31,

Cash flows from operating activities:

1 unchanged sentence

Depreciation and amortization

Loss on disposal of equipment

Gain on disposal of equipment

Noncash interest expense

1 unchanged sentence

Change in fair value of derivative liability

ROU asset amortization

Changes in operating assets and liabilities:

3 unchanged sentences

Accrued expenses

Settlement of derivative liability

Operating lease liability

Net cash used in operating activities

2 unchanged sentences

Proceeds from sale of equipment

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of common units

Issuance costs from issuance of common units

Repayment of borrowings under loan

Net cash provided by financing activities

Net cash used in financing activities

Net change in cash, cash equivalents and restricted cash

4 unchanged sentences

Supplemental disclosure of financing activities

Conversion of preferred units

Acquisition of equipment included in accrued expenses

Deferred offering costs included in accrued expenses

ROU asset acquired through operating leases

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

Notes to Unaudited Condensed Consolidated Financial Statements

(Amounts in thousands, except share and per share amounts)

Nature of Business and Basis of Presentation

1 unchanged sentence

(“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 immuno-oncology product candidates include a clinical-stage monoclonal antibody and a portfolio of bispecific antibodies.

The Company’s immuno-oncology product candidates include a clinical-stage monoclonal antibody and a portfolio of bispecific antibodies.

References to Compass or the Company herein include Compass Therapeutics, Inc.

and its wholly-owned subsidiaries.

The Company was incorporated as Olivia Ventures, Inc.

(“Olivia”) in the State of Delaware on March 20, 2018.

Prior to the Merger (as defined below), Olivia was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

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

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

The issuances of shares of the Company’s common stock to the security holders of Compass LLC and the Blockers are collectively referred to as the Share Conversion.

In addition, 2,930,836 shares of the Company’s common stock were reserved for issuance under its 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, or the Stock Forfeiture.

No fractional shares of the Company’s common stock were issued in connection with the Merger, and holders of Compass LLC Units 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 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 in this and future filings with the SEC.

As a result, the vested and outstanding common units held by Compass LLC members have been presented as outstanding shares of the Company’s common stock for all periods presented.

All outstanding preferred units of Compass LLC are presented as convertible preferred stock for all periods and until such units were converted into shares of the Company’s common stock at the time of the Merger.

On June 19, 2020, the Company completed a 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.

Prior to the Company’s reverse merger with Compass Therapeutics LLC (the “Merger”), Olivia was a “shell company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).

The Company is subject to risks and uncertainties common to companies in the biotechnology and pharmaceutical industries.

2 unchanged sentences

In addition, the Company is dependent upon the services of its employees and consultants.

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 condensed 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 loan agreements.

The Company has incurred recurring losses since its inception and had an accumulated deficit of $143.0 million at September 30, 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 first 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.

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

As of May 2020, COVID-19 has spread to Europe, the United States and many other countries, and has been declared a pandemic by the World Health Organization.

In an effort to contain the spread of COVID-19, the United States, Europe and Asia have implemented severe travel restrictions, social distancing requirements, stay-at-home or shelter-in-place orders and have delayed the commencement of non-COVID-19-related clinical trials, among other restrictions.

As a result, the COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting the Company’s 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 the Company’s 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.

Due to the evolving and uncertain global impacts of the COVID-19 pandemic, the Company cannot precisely determine or quantify the impact this pandemic will have on its business operations for the remainder of fiscal 2020.

The extent to which COVID-19 may impact the Company’s results of operations will depend on a variety of factors and future developments, which are highly uncertain and cannot be predicted with confidence, including the ultimate geographic spread of the disease, the duration, scope and severity of the pandemic, the duration and extent of travel restrictions and social distancing in the U.S.

and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S.

and other countries to contain and treat COVID-19.

For ongoing and planned clinical trials, the Company has experienced some temporary delays or disruptions due to the COVID-19 pandemic, including limited or reduced patient access to trial investigators, hospitals and trial sites, delayed initiation of new clinical trial sites and limited on-site personnel support at various trial sites, which could adversely impact the Company’s development plans, including the initiation of planned clinical trials and its ability to conduct ongoing clinical trials.

There may also be local orders affecting one or more trial sites, which may trigger mandated changes to the Company’s clinical trial protocols or temporary suspensions in the affected trial sites.

In addition, quarantines, stay-at-home, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations have occurred and could continue to occur or be expanded in scope or duration, which could adversely impact ongoing and planned clinical trials, employees and business operations, personnel at third-party suppliers and other vendors in the U.S.

and other countries, the availability, cost or supply of materials, which may cause delays or disruptions to development plans for the Company’s product candidates, and sales and marketing activities for any product candidates for which the Company may receive marketing approval in the U.S.

or other geographies in the future.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed 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 the opinion of managemen t, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fai rly the Company’s financial position as of September 30, 2020 and its results of operations and changes in convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 .

Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 .

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2021 and its results of operations and changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2021 and 2020.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The unaudited condensed consolidated financial statements include the accounts of Compass Therapeutics, Inc.

and its subsidiaries, and have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of Compass Therapeutics LLC and related footnotes for the year ended December 31, 2019, included as Exhibit 99.1 in the Company’s Form 8-K filed with the SEC on June 23, 2020.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Compass Therapeutics, Inc., and its wholly-owned subsidiaries 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 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.

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 $52.2 million and $22.8 million at September 30, 2020 and December 31, 2019, respectively.

Concentrations of Credit Risk and Off-Balance Sheet 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

Furniture and fixtures

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 condensed consolidated balance sheet and any resulting gains or losses are included in the condensed 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 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 condensed 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 nine months ended September 30, 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 judgmen t.

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 s ignificant 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 September 30, 2020 and December 31, 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.

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 condensed 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.

Stock-Based Compensation

Prior to the Merger, Compass Therapeutics LLC 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.

Subsequent to the Merger, the Company has granted stock options to various employees, directors and consultants.

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 vesting 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.

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 September 30, 2020 and 2019 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

September 30,

Convertible preferred stock

Stock options

Nonvested restricted stock

Common stock warrants

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No.

Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”).

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our Company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations.

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

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

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

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

Based on our research and development plans, we expect that such cash resources will enable us to fund our operating expenses and capital expenditure requirements for the next 12 months as of the filing of this Quarterly Report on Form 10-Q.

COVID-19 Update

We have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and to reduce the spread of COVID-19 community-wide.

We are ensuring that essential staffing levels at our operations remain in place, including maintaining key personnel in our laboratory facilities.

We have implemented stringent safety measures designed to create a safe and clean environment for our employees as we continue to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic.

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

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

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

We expect that COVID-19 may continue to directly or indirectly impact (i) our employees and business operations or personnel at third-party suppliers and other vendors in the U.S.

and other countries, (ii) the availability, cost or supply of materials, and (iii) the timeline for our ongoing clinical trial and potential future trials.

We are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.

Summary of Significant Accounting Policies

There have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report, except as noted below.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016‑02, Leases , which requires a lessee to record a right‑of‑use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.

2 unchanged sentences

If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date.

The standard is effective for the Company beginning January 1, 2021, with early adoption permitted.

The Company plans to adopt this standard on January 1, 2021 and is currently evaluating the expected impact that the standard could have on its financial position and results of operations upon adoption.

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 condensed consolidated financial statements and related disclosures.

In November 2018, the FASB issued ASU No.

2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction Between Topic 808 and Topic 606 (“ASU 2018-18”).

The amendments in this update clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer.

The standard is effective for the Company beginning January 1, 2021.

The Company is currently evaluating the potential impact ASU 2018-18 may have on its financial position and results of operations upon adoption.

The Company adopted this standard on January 1, 2021.

See Note 12 for additional details on the Company’s accounting for leases.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No.

6 unchanged sentences

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

Fair Value Measurements as of September 30, 2020 Using:

Fair Value Measurements as of March 31, 2021 Using:

Quoted Prices

Identical Assets

Cash equivalents - money market funds

Restricted cash

Derivative liability related to loan

Total liabilities

Fair Value Measurements as of December 31, 2020 Using:

Quoted Prices

Identical Assets

Cash equivalents - money market funds

Restricted cash

Derivative liability related to loan

Total liabilities

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 (refer to Note 7).

The Company classified these instruments as a liability on the condensed consolidated balance sheets 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 condensed consolidated statements of operations.

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

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 (in thousands):

Balance at December 31, 2019

Change in fair value

Payment of success fee

Balance at September 30, 2020

Property and Equipment

Property and equipment consist of the following (in thousands):

September 30,

Furniture and fixtures

Leasehold improvements

Assets not yet placed in service

Total property and equipment–at cost

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Property and equipment, net

Total depreciation and amortization expense for three months ended September 30, 2020 and 2019, was $0.4 million and $0.5 million, respectively.

Total depreciation and amortization expense for nine months ended September 30, 2020 and 2019, was $1.3 million and $1.6 million, respectively.

Total depreciation and amortization expense for three months ended March 31, 2021 and 2020, was $0.2 million and $0.5 million, respectively.

Accrued Expenses

Accrued expenses consist of the following (in thousands):

September 30,

Compensation and benefits

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The aggregate principal amount of debt outstanding consisted of the following (in thousands):

September 30,

Current portion of debt

unamortized debt discount

Current portion of debt, net of debt discount

Current portion of debt, net of debt

Long-term debt, net of current portion

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The Company entered into, and subsequently amended, a term loan facility with Pacific Western Bank, Inc.

(“PWB”), and received $15.0 million debt proceeds.

(the “Credit Facility”), and received $15.0 million debt proceeds.

The loans bear interest at the greater of (i) 6.25% and (ii) the prime rate plus an applicable margin of 2.0%.

The interest rate was 6.

2 5% at September 30, 2020.

In an event of default, as defined in the agreement, the interest rate applicable to borrowings would be increased by 5.0%.

The interest rate was 6.25% at March 31, 2021.

In an event of default, as defined in the Credit Facility, the interest rate applicable to borrowings would be increased by 5.0%.

The Company made interest-only payments through March 31, 2020.

Beginning in April 2020, the Company is obligated to ma ke equal monthly principal payments of $ 625,000 through March 31, 2022 when the notes mature.

The loan agreement allows for prepayment of the outstanding principal at any time, subject to a prepayment charge that is dependent on the prepayment date.

The debt agreement contained provisions whereby the Company was obligated to pay a success fee of $1.1 million upon the achievement of certain liquidity events.

In April 2020, the Company became obligated to make equal monthly principal payments of $625,000 through March 31, 2022 when the notes mature.

The Credit Facility allows for prepayment of the outstanding principal at any time, subject to a prepayment charge that is dependent on the prepayment date.

The Credit Facility agreement contains a provision whereby the Company was obligated to pay a success fee of $1.1 million upon the achievement of certain liquidity events.

Upon consummation of the Merger, the Company success fee payment became due and was paid in its entirety in June 2020.

The 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.

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

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

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The borrowings are collateralized by substantially all of the Company’s assets, excluding intellectual property, and contains affirmative and negative covenants including restrictions on the Company’s ability to incur additional indebtedness, pay dividends, encumber its property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses.

The Company must maintain a minimum cash balance of $6.0 million beginning in April 2020.

The Company was in compliance with its covenants as of September 30, 2020.

The Company recognized interest expense of $0.2 million and $0.3 million during the three months ended September 30, 2020 and 2019 and $0.7 million and $0.9 million during the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, the aggregate minimum future principal payments due in connection with the 2018 Loan Agreement, as amended, are as follows (in thousands):

The Company was in compliance with its covenants as of March 31, 2021.

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

As of March 31, 2021, the aggregate minimum future principal payments due in connection with the Credit Facility, as amended, are as follows (in thousands):

Year Ending December 31,

Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Convertible Preferred Stock

In connection with the Merger, as discussed in Note 1, the Company issued 30,629,606 shares of its common stock to holders of convertible preferred interests of Compass Therapeutics LLC.

No convertible preferred securities were outstanding as of September 30, 2020.

As of December 31, 2019, convertible preferred stock consisted of the following shares outstanding :

Preferred Stock

Shares Issued

and Outstanding

In connection with the Merger, as discussed in Note 1, the Company issued 1,000,000 shares of common stock to the former shareholders of Olivia Ventures Inc.

The Company paid $69,000 to several nonaccredited investors of Compass Therapeutics LLC in lieu of issuing shares.

In addition, 2,930,836 shares of the Company’s common stock were reserved for issuance under the 2020 Stock Option and Incentive Plan.

The Company also sold 12,096,442 shares of its common stock pursuant to the closing of a private placement offering at a purchase price of $5.00 per share.

The Company adopted ASU 2016-02, Leases (Topic 842) , or ASU 2016-02, effective January 1, 2021, using the modified retrospective transition method, in which the new standard is applied as of the date of initial adoption.

The Company recognized and measured agreements executed prior to the date of initial adoption that were considered

leases on January 1, 20 21 .

No cumulative effect adjustment of initially applying the standard to the opening balance of retained earnings was made upon adoption.

The Company elected the package of practical expedients permitted under the transition guidance that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard.

In addition, the Company elected the accounting policy of not recording short-term leases with a lease term at the commencement date of 12 months or less on the condensed consolidated balance sheet as permitted by the new standard.

The Company has evaluated its leases and determined that it has one lease that is classified as an operating lease.

The classification of this lease is consistent with the Company’s determination under the previous accounting standard.

When available, the Company will use the rate implicit in the lease to discount lease payments to present value;

however, the Company’s current lease does not provide an implicit rate.

Therefore, the Company used its incremental borrowing rate to discount the lease payments based on the date of the lease commencement.

The Company has one operating lease for its corporate office and laboratory facility (“Facility”) that was signed in December 2020.

The Company moved into the Facility in January 2021.

The Facility lease has an initial term of four years and five months, beginning on January 1, 2021.

The Facility lease contains scheduled rent increases over the lease term.

The discount rate used for the Facility lease is 6.25%, and the remaining lease term of the Facility lease is four years and two months as of March 31, 2021.

Minimum lease payments

The table below presents the undiscounted cash flows for the lease term.

The facility lease, the undiscounted cash flows are reconciled to the operating lease liabilities recorded on the condensed consolidated balance sheet:

Remainder of 2021

Years ending December 31,

Total minimum lease payments

amount of lease payments representing interest

Present value of future minimum lease payments

operating lease obligations, current portion

Operating lease obligations, long-term portion

Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 was classified in the consolidated statement of operations and comprehensive loss as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

In June 2020, the Company’s board of directors adopted the 2020 Stock Option and Incentive Plan (the “2020 Plan”) and reserved 2.93 million shares of common stock for issuance under this plan.

The 2020 Plan includes automatic annual increases.

The increase on January 1, 2021 was 2.08 million shares.

As of March 31, 2021, 1.78 million shares remain available for future grant.

The 2020 Plan authorizes the board of directors or a committee of the board to grant incentive stock options, nonqualified stock options and restricted stock awards to eligible officers, employees, consultants and directors of the Company.

Options generally vest over a period of four years and have a contractual life of ten years from the date of grant.

Stock-based compensation expense for the three months en ded March 31 , 2021 and 2020 was classified in the condensed consolidated statement of operations as follows:

Three Months Ended March 31,

Research and development

General and administrative

Estimating Fair Value of Equity Awards

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.

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 the 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.

Following the closing of the Merger and upon establishing a public trading market for the Company’s securities, the fair value 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.

Restricted Stock

Prior to the Merger, Compass 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.

A summary of the Company’s restricted share activity during the nine months ended September 30, 2020 is as follows:

Weighted Average

Nonvested, January 1, 2020

Prior to the adoption of the 2020 Plan, the Company issued restricted stock.

A summary of the Company’s restricted stock activity during the three months ended March 31, 2021 is as follows:

Weighted Average Fair Value

Unvested, December 31, 2020

Forfeited or canceled

Nonvested, September 30, 2020

The weighted-average grant-date fair value for Compass LLC profits interests granted was $2.34 per unit.

No restricted share awards have been granted following the Merger.

As of September 30, 2020, remaining unrecognized compensation cost related to unvested restricted stock awards to be recognized in future periods totaled $1.8 million, which is expected to be recognized over a weighted average period of 1.9 years.

The fair value of each profits interest was estimated on the date of grant using the weighted average assumptions in the table below:

Nine Months Ended September 30,

Expected term (in years)

Risk-free rate

Expected volatility

Expected dividend yield

Unvested, March 31, 2021

As of March 31, 2021, remaining unrecognized compensation cost related to unvested restricted stock awards to be recognized in future periods totaled $1.4 million, which is expected to be recognized over a weighted average period of 2.3 years.

Stock Options

In June 2020, the Company’s board of directors adopted the 2020 Stock Option and Incentive Plan (the “2020 Plan”) and reserved 2,930,836 shares of common stock for issuance under this plan and subject to automatic annual increases as defined in the plan.

As of September 30, 2020, 1,305,367 shares remain available for future grant.

Options generally vest over a period of four years and have a contractual life of ten years from the date of grant.

The following table summarizes the stock option activity for the 2020 Plan:

Exercise Price

Life (in years)

Outstanding at January 1, 2020

Outstanding at December 31, 2020

Forfeited/cancelled

Outstanding at September 30, 2020

Vested at September 30, 2020

For the nine months ended September 30, 2020, the weighted average grant date fair value for options granted was $3.42.

The aggregate intrinsic value for options vested and outstanding as of and for the nine months ended September 30, 2020 was de minimis.

As of September 30, 2020, the unrecognized compensation cost related to outstanding options was $3.3 million, expected to be recognized over a weighted average period of approximately 2.1 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 nine months ended September 30, 2020 were as follows:

September 30,

Outstanding at March 31, 2021

Vested at March 31, 2021

For the three months ended March 31, 2021, the weighted average grant date fair value for options granted was $3.58.

There was no aggregate intrinsic value for options vested and outstanding as of and for the three months ended March 31, 2021.

As of March 31, 2021, the unrecognized compensation cost related to outstanding options was $7.5 million, and is expected to be recognized over a weighted average period of approximately 3.0 years.

There were no stock options granted for the three months ended Mach 31, 2020.

The assumptions used in the Black-Scholes pricing model to determine the fair value of stock options granted during the three months ended March 31, 2021 were as follows:

Expected term (in years)

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Expected volatility

Expected dividend yield

License, Research and Collaboration Agreements

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The Company entered into a collaboration agreement with Adimab, LLC on October 16, 2014.

As of September 30, 2020, future milestone payments in connection with this agreement amounted to $2.0 million.

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 three and nine months ended September 30, 2020.

The Company made milestone payments of $1.0 million and $1.5 million in research and development during the three and nine months ended September 30, 2019, respectively, upon filing an IND for its product candidates associated with this license and first dosing of patient.

The agreement includes provisions for payment of royalties at rates ranging in the single digits as a percentage of future net sales within a specified term from the first commercial sale.

There were no milestone payments made during the first quarter of 2021.

As of March 31, 2021, future potential milestone payments in connection with this agreement amounted to $2.0 million.

Other License and Research Agreements

The Company has entered into several license agreements with various 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 $63,000 and $0.2 million during the three and nine months ended September 30, 2020, respectively.

The Company recorded research and development expense of $64,000 and $79,000 during the three months ended September 30, 2020 and 2019, respectively, and $0.2 million and $0.4 million during the nine months ended September 30, 2020 and 2019, respectively.

In addition, the Company also committed to make certain clinical and regulatory milestone payments in the aggregate of $0.5 million associated with the in-licensed technology.

Commitments and Contingencies

Operating Leases

The Company leases laboratory and office space in Cambridge, MA.

The Company also leases a vivarium and storage space in Cambridge, MA.

The leases expire January 31, 2021.

The lease agreements have annual scheduled payment increases and the Company is recognizing the rent expense on a straight‑line basis over the lease term.

Rental expense was $0.5 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively, and $1.5 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.

The future minimum rental payments under the leases as of September 30, 2020 are as follows:

Year Ending December 31,

FUJIFILM Diosynth Biotechnologies Agreement

The Company entered into a scope of work (“SOW”) under a master services agreement with FUJIFILM Diosynth Biotechnologies on July 20, 2020.

The Company made cash payments of $0.2 million and recorded $1.0 million in research and development expense during the quarter ended March 31, 2021.

As of March 31, 2021, future payments in connection with this SOW amounted to $2.0 million.

Related Parties and Related-Party Transactions

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The Company’s co-founder has a direct ownership interest in Adimab, LLC.

The Company recorded research and development expense of $0 million and $1.5 in connection with this agreement during nine months ended September 30, 2020 and 2019, respectively.

On September 18, 2017, the Company entered into a software license and services agreement with StackWave, LLC.

A former employee of the Company is the co-founder and has a direct ownership interest in StackWave, LLC.

The Company recorded research and development expense of $17,000 for the nine months ended September 30, 2020 and capitalized software of $0.2 million and $0.7 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company recorded no research and development expenses in connection with this agreement during the three months ended March 31, 2021 and 2020.

Other Expense

Other income and expense consisted of the following:

Interest income

Interest expense

Change in fair value of derivative liability

Realized gain (loss) on disposal of equipment

Total other income (expenses)

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

What changed 10-Q

Item 1. Financial Statements