CMPX US Equity☆

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

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

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

Overview

We are a clinical-stage biopharmaceutical company developing proprietary antibody therapeutics intended to engage the immune system to treat both solid tumors and hematological malignancies. Our immuno-oncology product candidates include a clinical-stage monoclonal antibody targeting solid tumors, a novel bispecific targeting PD-1 and PD-L1, and a portfolio of bispecific and monoclonal antibodies at various stages of pre-clinical development. These product candidates are designed to address three critical components required for an effective immune response to cancer: induction of a potent innate immune response; activation of the adaptive immune system; and alleviation of immunosuppressive mechanisms used by tumors to evade immune surveillance and activation. We plan to advance our product candidates through clinical development, either as standalone therapies or in combination with existing therapies as long as their continued development is supported by clinical and nonclinical data.

Financial Overview

Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, business planning, raising capital, research and development activities, building our intellectual property portfolio and providing general and administrative support for these operations. To date, we have funded our operations to date primarily with proceeds from private placements of preferred and common equityand borrowings under the 2018 loan and security agreement with Pacific Western Bank, or 2018 Credit Facility. Through December 31, 2020, we had received gross proceeds of $192.5 million from the sale of equity securities, including $60.5 million in gross proceeds from the sale of our common stock in the Private Placement (as defined below), and $15.0 million under the 2018 Credit Facility.

We have incurred significant operating losses since inception. We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future, if at all. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our therapies and any future product candidates. Our net losses were $29.5 million and $34.7 million for the years ended December 31, 2020 and 2019, respectively, and as of December 31, 2020, we had an accumulated deficit of $151.4 million. We expect to continue to incur significant expenses for at least the next several years as we advance through clinical development, develop additional product candidates and seek regulatory approval of any product candidates that complete clinical development. In addition, if we obtain marketing approval for any product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company.

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Asaresult,wewillneedsubstantialadditionalfundingtosupportourcontinuingoperationsandpursueourgrowthstrategy.Untilsuchtimeaswecangeneratesignificantrevenuefromproductsales,ifever,weexpecttofinanceouroperationsthroughequityanddebtfinancings,orothercapitalsources,whichmayincludecollaborationswithothercompaniesorotherstrategictransactions.AsofDecember31,2020,wehad$47.1millionincashandcashequivalents.Basedonourresearchanddevelopmentplans,weexpectthatthesecashresourceswillenableustofundouroperatingexpensesandcapitalexpendituresrequirementsintothesecondquarterof2022.Wemaybeunabletoraiseadditionalfundsorenterintosuchotheragreementsorarrangementswhenneededonfavorableterms,oratall.Ifwefailtoraisecapitalorenterintosuchagreementsasandwhenneeded,wemayhavetosignificantlydelay,reduceoreliminatethedevelopmentandcommercializationofoneormoreofourproductcandidatesordelayourpursuitofpotentialin-licensesoracquisitions.

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

Listing on the OTCQB Market

On March 4, 2021, shares of our common stock were approved for trading on the OTCQB Venture Market under the symbol “CMPX”.

Reverse Merger

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

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

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

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

The Merger and the Blocker Mergers were treated as a recapitalization and reverse acquisition by us for financial reporting purposes. Compass Therapeutics is considered the acquirer for accounting purposes, and the historical financial statements of Olivia before the Merger have been replaced with the

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historicalfinancialstatementsofCompassTherapeuticsinthisandfuturefilingswiththeSEC.TheMergerisintendedtobetreatedasatax-freereorganizationunderSection368(a)oftheCode.

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

Private Placement Offering

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

In connection with the Private Placement, we agreed to pay the placement agents, Raymond James & Associates, Inc., B. Riley FBR, Inc. and Katalyst Securities LLC and other legal and accounting private placement costs of $6.3 million, for net proceeds of $54.2 million.

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

COVID-19 Update

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. As of February 2021, COVID-19 has spread to Europe, the United States and many other countries, and has been declared a pandemic by the World Health Organization. In an effort to contain the spread of COVID-19, the United States, Europe and Asia have implemented severe travel restrictions, social distancing requirements, stay-at-home or shelter-in-place orders and have delayed the commencement of non-COVID-19-related clinical trials, among other restrictions. As a result, the COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as contributing to significant volatility and negative pressure on the U.S. economy and in financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or mitigate its impact, and the economic impact on local, regional, national and international markets.

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

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Todate,wehavebeenabletocontinuetopursueourPhase1clinicaltrialwithoutsignificantdelaysormajordifficultiesdespitetheCOVID-19pandemic.Nevertheless,wecouldexperiencesometemporarydelaysordisruptionsduetotheCOVID-19pandemic,includinglimitedorreducedpatientaccesstotrialinvestigators,hospitalsandtrialsites,delayedinitiationofnewclinicaltrialsitesandlimitedon-sitepersonnelsupportatvarioustrialsites,whichcouldadverselyimpactourdevelopmentplans,includingtheinitiationofplannedclinicaltrialsandourabilitytoconductongoingclinicaltrials.We alsoexpectthatCOVID-19precautionsmaydirectlyorindirectlyimpact(i)ouremployeesandbusinessoperationsorpersonnelatthird-partysuppliersandothervendorsintheU.S.andothercountries,(ii)theavailability,costorsupplyofmaterials,and(iii)thetimelineforourongoingclinicaltrialandpotentialfuturetrials.WearecontinuingtoassessthepotentialimpactoftheCOVID-19pandemiconourcurrentandfuturebusinessandoperations,includingourexpensesandclinicaltrials,aswellasonourindustryandthehealthcaresystem.

Components of Results of Operations

Research and development

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

• costs related to compliance with quality and regulatory requirements; and

• payments made under third-party licensing agreements.

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

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

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Ourclinicaldevelopmentcostsmayvarysignificantlybasedonfactorssuchas:

• per patient trial costs;

• the number of trials required for approval;

• the number of sites included in the trials;

• the location where the trials are conducted;

• the length of time required to enroll eligible patients;

• the number of patients that participate in the trials;

• the number of doses that patients receive;

• the drop-out or discontinuation rates of patients;

• potential additional safety monitoring requested by regulatory agencies;

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

• the cost and timing of manufacturing our product candidates;

• the phase of development of our product candidates; and

• the efficacy and safety profile of our product candidates.

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

• the timing and progress of nonclinical and clinical development activities;

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

• raising necessary additional funds;

• our ability to establish new licensing or collaboration arrangements;

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

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

• competition with other products;

• a continued acceptable safety profile of our therapies following approval.

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

General and administrative expenses

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

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

Interest expense

Interest expense consists primarily of cash interest under our 2018 Credit Facility that we entered into in March 2018 and the related non-cash interest attributable to the amortization of deferred financing costs incurred in connection with this facility.

Other income (expense)

Other income (expense) consists of the change in fair value of derivative liability, realized loss on sale of furniture and equipment and interest income received on our cash equivalents.

Our 2018 Credit Facility includes contingent interest rate reset features and a contingent feature to pay a success fee upon the occurrence of certain liquidity events as defined in the credit agreement. These features had been bifurcated from the 2018 Credit Facility, recorded at their estimated fair values

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andre-measuredateachreportingperioduntiltheywereexercised,expire,orotherwisesettled.ThesuccessfeewassettledinitsentiretyinJune2020inconnectionwiththeMerger.

Income taxes

Compass Therapeutics, a Delaware limited liability company and the business that was acquired in the Merger, is treated as a partnership for income tax reporting purposes and therefore, federal and state income taxes are the responsibility of its individual members. As such, no federal or state income taxes related to the limited liability company are recorded in our condensed consolidated financial statements. The wholly-owned subsidiary of Compass Therapeutics, Compass Therapeutics Advisors Inc., is organized as a C corporation and is subject to federal and state income taxes. All such taxes have been recorded in our consolidated financial statements. The Company recorded a deferred income tax asset of $6.6 million primarily related to a net operating loss carryforward and research and development tax credit carryforward. The asset has a corresponding full deferred income tax valuation allowance. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an ownership change (generally defined as a greater than 50% change (by value) in the ownership of its equity over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income may be limited. We may have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of shifts in our stock ownership, some of which are outside our control. See Note 15 to our financial statements appearing in this Form 10-K.

Results of Operations

Comparison of the Years Ended December 31, 2020 and 2019

The following table summarizes the results of operations for the years ended December 31, 2020 and 2019, respectively:

Year Ended December 31,

Operating expenses:

Other income (expense):

Income tax expense (32 ) (91 ) 59

Research and development expenses

Research and development expenses decreased by $7.5 million from $22.4 million for the year ended December 31, 2019 to $14.9 million for the year ended December 31, 2020. This decrease was primarily attributable to a reduction in our research and development personnel and related expenses, and the completion of our preclinical efforts for our lead product candidate, CTX-471. We initiated efforts to reduce our research and development workforce in April 2019 which resulted in a decrease in salaries and related benefits of $3.2 million. In addition, the transition of CTX-471 to the clinic and the completion of pre-clinical studies and filing of our IND in 2019 resulted in research and development expenses

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decreasingby$4.5millionfortheyearendedDecember31,2020,ofwhich$1.5millionwasduetoamilestonepaymentwemadeunderourcollaborationagreementwithAdimabLLCin2019whilenosuchpaymentsweremadein2020.Otherresearchanddevelopmentexpensesdecreasedby$0.3million.Thedecreasewaspartiallyoffsetby$0.5millioninincreasedmanufacturingfeesresultingfrominitiatingamanufacturingcampaignforourproductcandidateCTX-8371.

We track supplies, outsourced development, outsourced personnel costs and other external research and development costs of specific programs. We do not track our internal labor or facility costs on a program-by-program basis. Research and development expenses are summarized by program in the table below:

Year Ended December 31,

Other research and development expenses 10,207 15,979

Total research and development expenses $ 14,904 $ 22,449

We recently decided to deprioritize our development efforts for our NKp30 innate cell engager platform.

General and administrative expenses

General and administrative expenses increased by $1.3 million from $11.6 million for the year ended December 31, 2019 to $12.9 million for the year ended December 31, 2020. The increase was primarily attributable to the issuance of stock options which resulted in an increase in stock-based compensation expense of $2.9 million, as well as an increase in legal and professional fees of $1.6 million associated with transitioning to operating as a public company. These increases were partially offset by a decrease in salaries and related benefits of $2.3 million related to reduced headcount and we began allocating employee benefits to research and development according to headcount in 2020. In addition, the increases were offset by decreased legal costs associated with our intellectual property of $0.7 million and decreased facilities costs of $0.2 million. The reduced headcount was the result of efforts we initiated in April 2019 which resulted in a decrease in salaries and related benefits. We anticipate that our general and administrative expenses will continue to increase in future periods as we expand our operations to support our research and development efforts and operate as a public company.

Interest expense

Interest expense was $0.9 million during the year ended December 31, 2020, compared to $1.2 million during the year ended December 31, 2019. Pursuant to our 2018 Credit Facility, we began making principal payments in April 2020, reducing the average outstanding balance of our debt in the second quarter of 2020.

Other income (expense)

Interest income decreased by $0.6 million during the year ended December 31, 2020 compared to 2019 and was primarily attributable lower interest rates on our cash and cash equivalents. We recognized an increase in our derivative liability of $0.4 million. The increase in fair value of the derivative liability was attributable to a liquidity event occurring whereby a success fee payment became payable pursuant to our 2018 Credit Facility. This fee was paid in June 2020 following the Merger. There was a realized loss of $0.3 million from the sale of equipment in conjunction with our move to a new location.

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Incometaxexpense

During the years ended December 31, 2020 and 2019, we recognized income tax expense of $32 thousand and $91 thousand, respectively, which were attributable to the services provided by a wholly-owned subsidiary of Compass Therapeutics, prior to the closing of the Merger.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any product sales or any other sources, and we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. To date, we have funded our operations to date primarily with proceeds from private placements of preferred and common equity and borrowings under the 2018 Credit Facility. Through December 31, 2020, we had received gross proceeds of $192.5 million from the sale of equity securities, including $60.5 million from the sale of our common stock in the Private Placement (as described above). In addition, we received $15.0 million in term loan borrowings under the 2018 Credit Facility, of which $9.3 million was outstanding as of December 31, 2020. As of December 31, 2020, we had cash and cash equivalents of $47.1 million.

Indebtedness

In March 2018, we entered into the 2018 Credit Facility with Pacific Western Bank which matures on March 1, 2022 and consists of $15.0 million in term loans. The term loans bear interest at the greater of (i) 6.25% and (ii) the prime rate plus an applicable margin of 2.0%. On December 31, 2020, the interest rate was 6.25%. In an event of default, as defined in the agreement, the interest rate applicable to borrowings would increase by 5.0%. We made interest-only payments through March 31, 2020, and beginning in April 2020, we began to make equal monthly principal payments of $625 thousand, which we are required to be made through March 31, 2022. The 2018 Credit Facility allows us to prepay the outstanding principal at any time, subject to a 0.5% prepayment charge on the then-outstanding principal amount.As of December 31, 2020, $9.3 million was outstanding. The 2018 Credit Facility included a success fee of $1.1 million to the lender which was paid upon completion of the Merger. See additional details of the 2018 Credit Facility in Note 7 to our financial statements appearing in this Form 10-K.

Funding Requirements

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

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

Cash Flows

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

Year ended December 31,

Cash used in operating activities $ (26,803 ) $ (31,741 )

Cash provided by (used in) investing activities 38 (466 )

Cash provided by financing activities 48,538 —

Operating Activities

During the year ended December 31, 2020, we used $26.8 million of cash in operating activities, resulting from our net loss of $29.5 million and the change in operating assets and liabilities of $4.6 million, offset by non-cash charges of $7.3 million. Our non-cash charges were comprised of depreciation and amortization of $2.4 million, loss on disposal of equipment of $0.3 million, share-based compensation expense of $4.0 million, non-cash interest expense of $90 thousand, and a change in fair value of our derivative liability of $0.5 million. The change in our operating assets was primarily related to an increase in prepaid manufacturing expenses, the settlement of a derivative liability and a decrease in our accrued expenses due to the timing in which we pay our vendors.

During the year ended December 31, 2019, we used $31.7 million of cash in operating activities, resulting from net loss of $34.7 million and the change in operating assets and liabilities of $0.3 million, offset by non-cash charges of $3.3 million. Our non-cash charges were comprised of depreciation and amortization of $2.1 million, unit-based compensation expense of $0.9 million, a change in fair value of our derivative liability of $0.1 million and non-cash interest expense of $0.1 million. The change in our operating assets was primarily related to the decrease in our accounts payable offset by the decrease in prepaid expenses and the increase in accrued expenses.

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InvestingActivities

During the year ended December 31, 2020 cash provided by investing activities was $38 thousand attributed to the sale of equipment for which we received $0.1 million, offset by $0.1 million in purchases of equipment. During the year ended December 31, 2019, cash used in investing activities was $0.5 million and is for the purchase of property and equipment.

Financing Activities

During the year ended December 31, 2020, we received net cash proceeds of $48.5 million from financing activities. This was primarily due to the closing of a Private Placement in June 2020, which resulted in net proceeds of $54.2 million that were partially offset by $5.6 million in payments under the 2018 Credit Facility. We had no financing activities during the year ended December 31, 2019.

Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our lead product candidate into the expansion stage of our Phase 1 trial and our second product candidate to IND-enabling studies. The timing and amount of our operating expenditures will depend largely on:

• our ability to maintain our relationships with key collaborators;

• the effect of competing technological and market developments;

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We believe that our existing cash and cash equivalents as of December 31, 2020 will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to complete the clinical development of CTX-471, initiate clinical development of CTX-8371, commercialize our product candidates, if we receive regulatory approval, and pursue in-licenses or acquisitions of other product candidates. If we receive regulatory approval for CTX-471 and CTX-8371 or other product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize our product candidates.

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

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

Payments due by Period (000's)(4)

Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years

Manufacturing commitments(3) 2,195 2,195 — — —

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Critical Accounting Policies and Significant Judgments and Estimates

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

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

Research and Development Expenses

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

At the end of each reporting period, we compare payments made to third-party service providers to the estimated progress toward completion of the applicable research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that we estimate has been made as a result of the service provided, we may record net prepaid or accrued expenses relating to these costs. As of December 31, 2020, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Valuation of Derivative Liability

Our derivative liability is comprised of the contingent interest rate reset features and a contingent feature to pay a success fee upon the occurrence of certain liquidity events under the 2018 Credit Facility. At issuance and at each reporting period, we are required to estimate the fair value of the derivative liability using a probability-weighted expected return method. This method requires judgment when estimating the timing and probability of future events, such as a change in control event, future liquidity events, and repayment of our debt obligation under the 2018 Credit Facility. We then apply a risk-adjusted discount rate reflecting the expected risk profile for each of the potential settlement scenarios and relating timing. Due to the nature of and inputs in the model used to assess the fair value of the future tranche rights, it is not abnormal to experience significant fluctuations during each remeasurement period. The contingent success fee derivative was settled at the time of the Merger in June 2020.

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StockAwardsandUnit-BasedCompensation

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

Year Ended December 31,

Research and development $ 605 $ 383

General and administrative 3,411 532

Total unit-based compensation $ 4,016 $ 915

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

Off-Balance Sheet Arrangements

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

Recently Issued and Adopted Accounting Pronouncements

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

JOBS Act

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

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Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk.

Our cash is held on deposit in demand accounts at a large financial institution in amounts in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance coverage limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. We have reviewed the consolidated financial statements of this institution and believe it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us. Financial instruments that potentially subject us to concentrations of credit risk principally consist of cash equivalents. We limit our credit risk associated with cash equivalents by placing investments in highly-rated money market funds.

As discussed above under “—Liquidity and Capital Resources—Indebtedness”, the 2018 Credit Facility bears interest at a floating interest rate, which resets monthly and is equal to the greater of 6.25% and 1.5%, plus the prime rate as published by The Wall Street Journal. As a result, we are exposed to risks from changes in interest rates. A 1.0% increase in interest rates would have resulted in a $0.1 million increase to our interest expense for the year ended December 31, 2020.

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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 Cash Flows 122

Notes to Consolidated Financial Statements 123

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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 withaccounting 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

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Compass Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except par value per share data)

December 31,

Assets

Current assets:

Prepaid expenses and other current assets 3,126 935

Liabilities and Stockholders' Equity (Deficit)

Current liabilities:

Current portion of long-term debt 7,467 5,576

Derivative liability related to loan — 494

Long-term debt, net of current portion 1,867 9,293

Commitments and Contingencies (Note 11)

Stockholders' equity (deficit):

Total liabilities and stockholders' equity (deficit) $ 51,911 $ 30,381

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

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CompassTherapeutics,Inc.andSubsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Year Ended December 31,

Operating expenses:

Other income (expense):

Other income (expense), net (748 ) 627

Income tax expense (32 ) (91 )

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.

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Compass Therapeutics, Inc. and Subsidiaries

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

(In thousands)

Shares Amount Shares Amount Capital Deficit Equity (Deficit)

Vesting of share-based awards — — 679 — — — —

Share-based compensation expense — — — — 915 — 915

Shares Amount Shares Amount Capital Deficit Equity (Deficit)

Vesting of share-based awards — — 474 — — — —

Stock-based compensation — — — — 4,016 — 4,016

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

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Compass Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,

Cash flows from operating activities:

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

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 )

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.

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CompassTherapeutics,Inc.andSubsidiaries

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.

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OnJune19,2020,theCompanycompletedaprivateplacement(“PrivatePlacement”)andsold12,096,442sharesofitscommonstockatapurchasepriceof$5.00pershareandreceivednetproceedsof$54.2million,afterassociatedofferingcosts.

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.

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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.

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CashandCashEquivalents

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. Cash 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

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carryingamountoftheassetsmaynotbefullyrecoverable.FactorsthattheCompanyconsidersindecidingwhentoperformanimpairmentreviewincludesignificantunderperformanceofthebusinessinrelationtoexpectations,significantnegativeindustryoreconomictrendsandsignificantchangesorplannedchangesintheuseoftheassets.Ifanimpairmentreviewisperformedtoevaluatealong-livedassetgroupforrecoverability,theCompanycomparesforecastsofundiscountedcashflowsexpectedtoresultfromtheuseandeventualdispositionofthelong-livedassetgrouptoitscarryingvalue.Animpairmentlosswouldberecognizedintheconsolidatedstatementsofoperationswhenestimatedundiscountedfuturecashflowsexpectedtoresultfromtheuseofanassetgrouparelessthanitscarryingamount.Theimpairmentlosswouldbebasedontheexcessofthecarryingvalueoftheimpairedassetgroupoveritsfairvalue,determinedbasedondiscountedcashflows.TheCompanydidnotrecordanyimpairmentlossesonlong-livedassetsduringtheyearendedDecember31,2020and2019.

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.

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.

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ResearchandDevelopmentCosts

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.

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Stock-BasedCompensation

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 Issuedas 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 progress of our commercialization efforts;

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• our stage of development and our business strategy;

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,

Convertible preferred stock — 30,630

Stock options 2,159 —

Nonvested restricted stock 896 1,917

Common unit warrants — 3,114

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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.

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InDecember2019,theFASBissuedASUNo.2019-12,IncomeTaxes(Topic740):SimplifyingtheAccountingforIncomeTaxes("ASU2019-12"),whichisintendedtosimplifytheaccountingforincometaxes.ASU2019-12removescertainexceptionstothegeneralprinciplesinTopic740andalsoclarifiesandamendsexistingguidancetoimproveconsistentapplication.ThenewstandardwillbeeffectivebeginningJanuary1,2022.TheCompanydoesnotexpecttheadoptionofASU2019-12tohaveamaterialimpactonitsfinancialpositionandresultsofoperationsuponadoption.

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

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

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.

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Thefairvalueofthederivativeliabilityrecognizedwasdeterminedbasedonsignificantinputsnotobservableinthemarket,whichrepresentsaLevel3measurementwithinthefairvaluehierarchy.Thefairvalueofthederivativeliabilitywasdeterminedusingtheprobability-weightedexpectedreturnmethod,whichconsideredasinputsthetype,timingandprobabilityofoccurrenceofachange-of-controlevent,thefutureequityfinancingandcashsettlementoftheloans;thepotentialamountofthepaymentundereachofthesepotentialsettlementscenarios;andtherisk-adjusteddiscountratereflectingtheexpectedriskprofileforeachofthepotentialsettlementscenarios.

The following table provides a roll forward of the aggregate fair values of the Company’s derivative liability:

Derivative Liability

Change in fair value 104

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,

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,

Compensation and benefits $ 976 $ 1,759

Research and development expenses 212 249

Legal and professional fees 326 417

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7. Debt

The aggregate principal amount of debt outstanding consisted of the following:

December 31,

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)

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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)

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,

Research and development $ 605 $ 383

General and administrative 3,411 532

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.

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AsummaryoftheCompany’srestrictedshareactivityduringtheyearendedDecember31,2020isasfollows:

Forfeited or canceled (670 ) $ 1.75

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,

Expected term (in years) 6.0 6.0

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.

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Thefollowingtablesummarizesthestockoptionactivityforthe2020Plan:

Outstanding at January 1, 2020 — $ —

Exercise - $ —

Forfeited/cancelled (16 ) $ 5.00

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

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

TheCompany 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.

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OtherLicensesandResearchAgreements

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)

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,

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

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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,

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,

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 %

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

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taxassetswasapproximately$6.6millionand$1.5millionasofDecember31,2020and2019,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,

Deferred tax assets (000's)

Net operating loss carryforwards $ 3,938 $ —

Research and development credits 2,038 1,511

Noncash compensation 609 —

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.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020, the end of the period covered by this Form 10-K. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

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Basedonthisevaluation,managementconcludedthatourdisclosurecontrolsandprocedureswereeffectiveasofDecember31,2020.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.

As a result of becoming a public company, we are required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with this Form 10-K. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The SEC defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be detected or prevented on a timely basis. Management conducted an evaluation of the effectiveness, as of December 31, 2020, of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020.

As an “emerging growth company” under the JOBS Act, we are exempt from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a result, our independent registered public accounting firm has not audited or issued an attestation report with respect to the effectiveness of our internal control over financial reporting as of December 31, 2020.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2020, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

On March 4, 2021, we announced that our common stock has been cleared for trading on the OTCQB Venture Market under the ticker symbol “CMPX,” and the trading of our common stock will commence effective at the market open on March 5, 2021.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Except to the extent provided below, the information required by this Item 10 will be included in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this Item 11 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item 12 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item 13 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this Item 14 will be included in our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.

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PARTIV

Item 15. Exhibits, Financial Statement Schedules.

(3) Exhibits

Exhibit

4.2** Description of Registered Securities

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23.1** Consent of CohnReznick LLP, independent registered public accounting firm

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101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Presentation Linkbase Document

** Filed herewith.

Item 16. Form 10-K Summary

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Compass Therapeutics, Inc.

Date: March 5, 2021 By: /s/ Thomas J. Schuetz

Thomas J. Schuetz

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Name Title Date

Thomas J. Schuetz

Vered Bisker-Leib

/s/ Carl L. Gordon Chair of the Board March 5, 2021

Carl L. Gordon

/s/ Phil Ferneau Director March 5, 2021

Phil Ferneau

/s/ Brett Kaplan Director March 5, 2021

Brett Kaplan

/s/ Steven Squinto Director March 5, 2021

Steven Squinto

/s/ Julie Sunderland Director March 5, 2021

Julie Sunderland

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