Seer, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors.” Overview Our mission is to imagine and pioneer new ways to decode the secrets of the proteome to improve human health. Our first product, the Proteograph TM Product Suite (Proteograph), leverages our proprietary engineered nanoparticle (NP) technology to provide unbiased, deep, rapid and large-scale access to the proteome. The Proteograph Product Suite is an integrated solution that includes consumables, an automation instrument and software. We believe that broader access to the proteome is essential, not only to understanding its complexity and accelerating biological insights, but also to expanding end-markets. These markets may include basic research and discovery, translational research, diagnostics and applied applications. To comprehend the complexity and dynamic nature of the proteome, researchers must perform population-scale, deep, unbiased interrogation of biological samples over time. We believe that this level of interrogation was not previously feasible and that the Proteograph can enable researchers to perform these types of proteomics studies. Since we were incorporated in 2017, we have devoted substantially all of our resources to research and development activities, including with respect to the Proteograph Product Suite, building our commercial infrastructure including manufacturing, operations, sales and marketing and service and support functions, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, becoming a publicly-traded company, and providing general and administrative support for these activities. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful commercialization of the Proteograph Product Suite. We are commercializing the Proteograph Product Suite as an integrated solution comprised of consumables, our SP100 automation instrument and software. Our commercial strategy is focused on growing adoption by the research community of the Proteograph, expanding the installed base and increasing utilization to generate revenue from the purchase of Proteograph consumables. We expect a highly efficient sales model because our workflow integrates with most existing proteomics laboratories’ workflows and also complements large-scale genomics research. We are broadly commercializing the Proteograph Product Suite through a direct sales channel in the United States, and through both direct and distributor sales channels in regions outside the United States. Since we are in the early stages of commercialization, we have built, and will continue to build our sales, marketing, support and product distribution capabilities. In addition, we will continue to build the necessary infrastructure for these activities in the United States, European Union, the United Kingdom, and other countries and regions, including Asia-Pacific, as we execute on our commercialization strategy for the Proteograph. We leverage well-established unit operations to formulate and manufacture our NPs at our facilities in Redwood City, California. We procure certain components of our consumables from third-party manufacturers, which includes the commonly-available raw materials needed for manufacturing our proprietary engineered NPs. We are currently manufacturing using our production-scale and pilot lines and continue to build out our manufacturing capabilities to support broad commercial availability of our products. We obtain some of the reagents and components used in the Proteograph workflow from third-party suppliers. While some of these reagents and components are currently sourced from a single supplier, these products are readily available from numerous suppliers. While we currently perform some filling and packaging of the Proteograph assay and the related consumables, we may eventually have 77 our filling and packaging outsourced to a third party. We conduct vendor and component qualification for components provided by third-party suppliers and quality control tests on our NPs. We designed the SP100 automation instrument and have outsourced its manufacturing to Hamilton Company, a leading manufacturer of automated liquid handling workstations. We have entered into a non-exclusive agreement with Hamilton that covers the manufacturing of the SP100 automation instrument and its continued supply on a purchase order basis. The agreement has an initial term that runs three years following our commercial launch. We have the option to extend the term of the agreement with Hamilton upon written notice at the end of the initial term; provided that prices are only fixed during the initial term of the agreement. Hamilton has represented to us that it maintains ISO 9001 and ISO 13485 certification. On December 8, 2020, we completed our IPO, in which we sold 10,592,106 shares of Class A common stock at a price to the public of $19.00 per share, resulting in net proceeds of $183.9 million after deducting offering costs, underwriting discounts and commissions. Concurrent with the IPO, we issued 7,105,262 shares of our Class A common stock in a private placement for net proceeds of $130.3 million after deducting underwriting discounts and commissions. On February 1, 2021, we completed an underwritten public offering of 1,650,000 shares of our Class A common stock at a public offering price of $67.00 per share. We received net proceeds of $103.0 million after deducting offering costs, underwriting discounts and commissions. During the years ended December 31, 2022 and 2021, we incurred a net loss of $93.0 million and $71.2 million and used $60.8 million and $46.3 million of cash in operations, respectively. As of December 31, 2022, we had an accumulated deficit of $219.5 million and cash, cash equivalents, and investments of $426.4 million. We expect to continue to incur significant and increasing losses and do not expect positive cash flows from operations for the foreseeable future. We expect our expenses to increase significantly in connection with our ongoing activities, as we: • broadly commercialize the Proteograph Product Suite; • attract, hire and retain qualified personnel; • continue to build our sales, marketing, service, support and distribution infrastructure as part of our commercialization efforts; • build-out and expand our in-house NP manufacturing capabilities; • continue to engage in research and development of other products and enhancements to the Proteograph Product Suite; • implement operational, financial and management information systems; • obtain, maintain, expand, and protect our intellectual property portfolio; and • build the infrastructure to operate and scale as a public company. PrognomiQ In August 2020, we transferred certain assets related to human disease testing to PrognomiQ, Inc. (PrognomiQ), a new wholly-owned subsidiary, in exchange for all of its outstanding equity interests. Following the transfer, we completed a pro-rata distribution to our stockholders of most of the shares of capital stock of PrognomiQ. Following the distribution and two subsequent equity financings of PrognomiQ totaling $102 million, we hold approximately 15% of the outstanding capital stock in PrognomiQ as of December 31, 2022. The rationale for this transaction was to enable the growth of ecosystems around new applications that leverage unbiased, deep and large-scale proteomic information. The transaction allows us to remain focused on our core strategy, which is to be a provider, rather than a consumer, of proteomics solutions to all customers across these ecosystems. By focusing on our role as a provider of proteomics solutions, we are no longer potentially competing 78 with, or creating the perception that we are competing with, our customers. Our relationship with PrognomiQ does not preclude us from selling the Proteograph Product Suite to any customer in any geography, nor does it preclude our customers from using the Proteograph in any way. PrognomiQ has indicated that it plans to combine the protein data from the Proteograph solution with genomics and other -omics data, to create a multi-omics approach to health and disease testing. We believe PrognomiQ’s use of proteomics and the potential for other similar companies which use proteomics in their research and products will help us drive the adoption of the Proteograph Product Suite in these applications. We have entered into certain agreements with PrognomiQ. Omid Farokhzad, our Chief Executive Officer and President, and Chair of our board of directors, also serves as the Chair of PrognomiQ’s board of directors. Philip Ma, Ph.D., our former Chief Business Officer, serves as the Chief Executive Officer and President of PrognomiQ. While Dr. Ma has fully transitioned to PrognomiQ, he will continue to consult until April 2023 at which time, Dr. Ma’s consulting agreement will automatically renew for subsequent one year terms unless and until terminated. We granted PrognomiQ a non-exclusive license to certain patents and patent applications that we own and a non-exclusive sublicense to certain patent applications we exclusively licensed from Brigham and Women’s Hospital (BWH), in each case relating to our core technology, to develop, manufacture and commercialize licensed products for the field of human diagnostics on a worldwide basis. In consideration of the non-exclusive sublicense to certain patent applications licensed from BWH, PrognomiQ paid us a low-five digit figure, and would pay a low single digit royalty, in an amount equivalent to what we would have to pay under our license with BWH, on net sales of sublicensed products beginning with the first commercial sale of a sublicensed product during the term of the agreement. We do not view these amounts to be material to our financial condition and results of operations nor do we expect these amounts to be material to us in the future. In accordance with the non-exclusive license agreement with PrognomiQ, we entered into a supply agreement with PrognomiQ in June 2021. The PrognomiQ supply agreement provides that we will supply PrognomiQ with the Proteograph Product Suite and associated consumables. COVID-19 Pandemic As a result of the COVID-19 pandemic, we could experience disruptions that could severely impact our business. Pandemic precautions and preventative measures may also impact our commercialization plans due to restrictions on our customers’ ability to access laboratories, causing delays in the delivery and installation of the Proteograph products, training such customers on our products, and their ability to conduct research. We have experienced delays in our ability to access customers in certain countries with strict COVID-19 policies to provide installation and training services. Furthermore, COVID-19 has adversely affected the broader economy and financial markets, resulting in an economic downturn that could curtail the research and development budgets of our customers, our ability to hire additional personnel and our financing prospects. Any of the foregoing could harm our operations and we cannot anticipate all the ways in which it could be adversely impacted by health epidemics such as COVID-19. For additional details, see the section titled “Risk Factors.” Components of Results of Operations Revenue We generate revenue from product sales, including sales of the Proteograph Product Suite, which consists of an instrument with embedded software essential to the instrument’s functionality and associated consumables as well as our platform evaluation agreements. In addition, we may at times generate revenue from performing services, the receipt of grant revenue for the reimbursement of research-related expenses, and lease arrangements. Our revenue is primarily generated domestically. We intend to focus our commercial efforts in the United States and expect to grow our international presence. A portion of our revenue is generated by sales to related parties and we anticipate a portion of our revenue to continue to be generated by sales to such related parties. Our grant-funded activities are expected to decrease as a percentage of total revenue as we decrease grant-funded activities and continue to ramp up commercialization of the Proteograph Product Suite. 79 Cost of Revenue We utilize third-party manufacturers for production of our SP100 instrument and we manufacture our NPs and assemble our assay kits internally. Cost of goods sold consists primarily of costs of the components of the Proteograph Product Suite, including the SP100 instrument with embedded software essential to the instrument’s functionality, and consumables, and distribution-related expenses such as logistics and shipping costs. In addition, cost of revenue includes stock-based compensation and related employee benefits, allocated overhead and write-downs or impairments of obsolete inventory. Research and Development Expenses Research and development, or R&D, expenses include costs associated with performing services under research and development service contracts and research and development of our technology and product candidates. R&D expenses consist primarily of employee compensation, including stock-based compensation, and related employee benefits, laboratory supplies used for in-house research, consulting costs, costs related to clinical studies for the collection of biological samples for research use and allocated costs, rent, depreciation, information technology, and utilities. We plan to increase our investment in our R&D efforts related to the Proteograph Product Suite, our product development pipeline and our proprietary engineered NP and other technologies. Therefore, we expect R&D expenses will increase in absolute dollars in future periods as we incur expenses associated with hiring additional personnel, purchasing supplies and materials, and the allocation of facility expense associated with the build-out of our expansion facilities to support our R&D efforts. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of employee compensation, including stock-based compensation, and related benefits for executive management, sales and marketing, service and support, finance, administration and human resources, legal, allocated overhead, professional service fees and other general overhead costs to support our operations. We expect to incur additional selling, general and administrative expenses as we continue to invest in our personnel as we grow our commercial operations and with the additional costs incurred as a result of operating as a public company, including accounting, human resources, legal, insurance and investor relations costs. As a result, we expect selling, general and administrative expenses to increase in absolute dollars in future periods. Interest Income Interest income consists of interest earned on cash, cash equivalents and investments. 80 Results of Operations Comparisons of the Years Ended December 31, 2022 and 2021 The following table summarizes our results of operations for the periods presented: Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Revenue: Product $ 8,557 $ 3,577 $ 4,980 139 % Service 913 500 413 83 % Related party 5,215 2,317 2,898 125 % Grant and other 808 223 585 262 % Total revenue 15,493 6,617 8,876 134 % Cost of revenue: Product 5,459 2,300 3,159 137 % Service 495 42 453 1079 % Related party 1,989 863 1,126 130 % Grant and other 457 — 457 100 % Total cost of revenue 8,400 3,205 5,195 162 % Gross profit 7,093 3,412 3,681 108 % Operating expenses: Research and development 45,797 29,121 16,676 57 % Selling, general and administrative 58,531 45,764 12,767 28 % Total operating expenses 104,328 74,885 29,443 39 % Loss from operations (97,235) (71,473) (25,762) 36 % Other income (expense): Interest income 4,602 326 4,276 1312 % Interest expense — (22) 22 (100) % Other expense (333) — (333) (100) % Total other income 4,269 304 3,965 1304 % Net loss $ (92,966) $ (71,169) $ (21,797) 31 % Revenue Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Revenue $ 15,493 $ 6,617 $ 8,876 134 % Revenue increased by $8.9 million, or 134%, from $6.6 million in 2021 to $15.5 million in 2022, due to sales of products related to the Proteograph Product Suite in the year ended December 31, 2022. Revenue recognized primarily consisted of sales of the Proteograph SP100 instrument, consumable kits and platform evaluations, of which $5.2 million was attributed to related parties. Revenue related to grant and other consisted of our grant-funded activities related to our Small Business Innovation Research (SBIR) grant from the National Institutes of Health Grant (NIH), which increased between the two periods by $45,000 and $0.5 million respectively, and lease arrangements where we are the lessor. 81 Cost of Revenue Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Cost of revenue $ 8,400 $ 3,205 $ 5,195 162 % Cost of revenue increased by $5.2 million, or 162%, from $3.2 million in 2021 to $8.4 million in 2022, primarily due to sales of the Proteograph Product Suite. Grant and other cost of revenue was attributed to the lease of the SP100 instruments. Cost of revenue related to the Proteograph Product Suite consists of costs of the SP100 instrument, consumable kits and other related costs, including labor and overhead. Research and Development Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Research and development $ 45,797 $ 29,121 $ 16,676 57 % Research and development expenses increased by $16.7 million, or 57%, from $29.1 million in 2021 to $45.8 million in 2022. The increase was primarily due to an increase in product development efforts related to the Proteograph Product Suite including $5.6 million increase in employee compensation costs and other related expenses, and a $4.7 million increase in stock-based compensation, due to growth in research and development personnel, and a $4.0 million increase in allocated overhead related to the allocation of facility expense associated with the build-out of our expansion facilities to support our R&D efforts. Other increases include costs related to general business expenses of $1.0 million, which include IT support services and expensed software, a $0.7 million increase in laboratory expenses and a $0.8 million increase in depreciation of laboratory equipment. Selling, General and Administrative Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Selling, general and administrative $ 58,531 $ 45,764 $ 12,767 28 % Selling, general and administrative expenses increased by $12.8 million, or 28%, from $45.8 million in 2021 to $58.5 million in 2022, primarily due to a $4.5 million increase in employee compensation and other related expenses, and a $3.8 million increase in stock-based compensation. Other increases include a $3.4 million increase in professional service and consulting fees primarily related to international expansion, a $0.6 million increase in general business expenses, and a $0.5 million increase in depreciation due to our facility expansion. Total Other Income Year ended December 31, Change 2022 2021 Amount % (dollars in thousands) Total other income $ 4,269 $ 304 $ 3,965 1304 % Total other income increased by $4.0 million, or 1304%, from $0.3 million in 2021 to $4.3 million in 2022. The increase was due to higher rates of interest earned on cash invested in money market funds, U.S. Treasury securities, commercial paper and corporate securities in 2022. 82 Liquidity and Capital Resources Since the date of our incorporation, we have not generated significant revenue from product sales and have incurred significant operating losses and negative cash flows from operations. Our operations have been funded primarily through the sale and issuance of equity securities since inception. We anticipate that we will continue to incur net losses and do not expect positive cash flows from operations for the foreseeable future. However, based on our cash on hand, we believe we will have adequate liquidity over the next twelve months following the date of this Annual Report to operate our business and to meet our cash requirements. In connection with our IPO that closed on December 8, 2020, we sold 10,592,106 shares of Class A common stock and received net proceeds of $183.9 million after deducting offering costs, underwriting discounts and commissions. Concurrent with the IPO, we issued 7,105,262 shares of our Class A common stock in a private placement for net proceeds of $130.3 million after deducting underwriting discounts and commissions. On February 1, 2021, we completed an underwritten public offering of 1,650,000 shares of our Class A common stock and received net proceeds of $103.0 million after deducting offering costs, underwriting discounts and commissions. Cash Flows The following table summarizes our cash flows for the periods indicated: Year ended December 31, 2022 2021 (in thousands) Net cash used in operating activities $ (60,780) $ (46,347) Net cash used in investing activities (122,718) (170,878) Net cash provided by financing activities 3,893 116,634 Net decrease in cash, cash equivalents and restricted cash $ (179,605) $ (100,591) Operating Activities In 2022, cash used in operating activities was $60.8 million, attributable to a net loss of $93.0 million, partially offset by a net change in our net operating assets and liabilities of $7.4 million and non-cash charges of $39.6 million. Non-cash charges primarily consisted of stock-based compensation of $33.7 million, $3.9 million of depreciation and amortization and $2.0 million of non-cash operating lease expense. The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of $1.6 million for anticipated revenue growth, an increase in accounts receivable of $2.3 million from higher sales, an increase in prepaid expenses and other current assets of $0.7 million, an increase in other receivables of $0.5 million, an increase in other assets of $0.4 million and a decrease of $1.6 million in accounts payable. In 2021, cash used in operating activities was $46.3 million, attributable to a net loss of $71.2 million, partially offset by a net change in our net operating assets and liabilities of $5.9 million and non-cash charges of $30.7 million. Non-cash charges primarily consisted of $25.9 million in stock-based compensation, $2.6 million of depreciation and amortization, $1.2 million of net amortization of premiums on available-for-sales securities and $1.0 million of non-cash operating lease expense. The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of $3.6 million, an increase in accounts receivable of $2.5 million and a decrease of $0.6 million in accrued research and development, which was partially offset by an increase in accounts payable of $1.6 million. Investing Activities In 2022, cash used in investing activities was $122.7 million, which related to purchases of available-for-sale securities, net of proceeds from maturities, of $112.6 million, in addition to $10.3 million in payments primarily for laboratory equipment. 83 In 2021, cash used in investing activities was $170.9 million, which related to purchases of available-for-sale securities, net of proceeds from maturities, of $164.0 million, in addition to $6.9 million in payments primarily for laboratory equipment. Financing Activities In 2022, cash provided by financing activities was $3.9 million. This was attributable to net proceeds from the exercise of stock options of $3.1 million and $0.8 million of proceeds from the issuance of common stock in connection with our employee stock purchase plan. In 2021, cash provided by financing activities was $116.6 million. This was attributable to net proceeds of $103.0 million from issuance of common stock upon initial public offering, net of issuance costs, $11.4 million in short-swing profits from a beneficial owner and $1.9 million from the exercise of stock options. Critical Accounting Policies, Significant Judgments and Use of Estimates The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results. Revenue Recognition Our revenue is generated primarily from the sale of products and services. Product revenue consists of sales of an instrument with embedded software essential to the instrument’s functionality and consumables as well as platform evaluation agreements. Service revenue primarily consists of revenue received from the generation and analysis of proteomic data on behalf of our customers. We recognize revenue when control of our products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the transaction price, allocating the transaction price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We consider a performance obligation satisfied once we have transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. In instances where right of payment or transfer of title is contingent upon the customer’s acceptance of the product, revenue is deferred until all acceptance criteria have been met. Revenue from services is recognized once the report is delivered to a customer, which is when the customer obtains benefit of the service. Revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 30 or 60 days. 84 Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. Our contracts with our customer generally do not include rights of return. At times,we may enter into arrangements with payment terms which exceed one year from the transfer of control of the product or service. In such cases, we assess whether the arrangement contains a significant financing component. If a significant financing component exists, the transaction price is adjusted for the financing portion of the arrangement, which is recorded as interest income over the payment term using the effective interest method. We do not assess whether a significant financing component exists when, at contract inception, the period between the transfer of control to a customer and final payment is one year or less. We have elected the practical expedient to account for shipping and handling activities that occur after the customer has obtained control as a fulfillment activity. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period is one year or less or the amount is immaterial. We exclude from the transaction price all taxes assessed by a governmental authority on revenue-producing transactions that are collected by us from a customer. We regularly enter into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. We determine standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts. A portion of our revenue relates to lease arrangements. Standalone lease arrangements are outside the scope of Accounting Standards Codification (ASC) 606, Revenue Contracts with Customer and are therefore accounted for in accordance with ASC 842, Leases . Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type finance lease using the lease classification guidance. Stock-Based Compensation We account for stock-based compensation by measuring and recognizing compensation expense for all share-based awards made to employees and non-employees based on estimated grant-date fair values. We use the straight-line method to allocate compensation cost to reporting periods over the requisite service period, which is generally the vesting period. We recognize actual forfeitures by reducing the stock-based compensation in the same period as the forfeitures occur. We estimate the fair value of share-based awards to employees and non-employees using the Black-Scholes option-pricing valuation model. The Black-Scholes model requires the input of subjective assumptions, including fair value of common stock, expected term, expected volatility, risk-free interest rate, and expected dividend yield, which are described in greater detail below. Estimating the fair value of equity-settled awards as of the grant date using the Black-Scholes option pricing model is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. These inputs are as follows: • Fair value of common stock—Prior to our IPO, there was no public market for our common stock. As such, the estimated fair value of our common stock and underlying stock options has been determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon a review of any recent events and their potential impact on the estimated per share fair value of our common stock. As part of these fair value determinations, our board of directors obtained and considered valuation reports prepared by a third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . For valuations after the completion of our initial public offering, the fair value of each share of underlying common stock is based on the closing price of our Class A common stock as reported on the date of grant. 85 • Expected term—The expected term for options granted to employees and directors represents the average period that our options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the weighted-average vesting date and the end of the contractual term). We have very limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for our stock option grants. The expected term for options granted to non-employees is the contractual term. • Expected volatility—As we had no publicly available stock price information prior to our IPO and limited publicly available stock price information subsequent to our IPO, the expected volatility was estimated based on the historical average volatility for comparable publicly traded life sciences technology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, life cycle stage, or area of specialty. We will continue to apply this process until enough historical information regarding the volatility of our own stock price becomes available. • Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the options. • Expected dividend yield—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. We will continue to use judgment in evaluating the expected volatility, expected terms, and interest rates utilized for our stock-based compensation calculations on a prospective basis. Assumptions we used in applying the Black-Scholes option-pricing model to determine the estimated fair value of our stock options granted involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation could be materially different. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements included elsewhere in this Annual Report for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.