SERA PROGNOSTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Final Prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Investors and others should note that we routinely use the Investors section of our website to announce material information to investors and the marketplace. While not all of the information that we post on the Investors section of our website is of a material nature, some information could be deemed to be material. Accordingly, we encourage investors, the media, and others interested in us to review the information that we share on the Investors section of our website, www.seraprognostics.com/investors/. Overview We are a women's health diagnostic company utilizing our proprietary proteomics and bioinformatics platform to discover, develop, and commercialize clinically meaningful and economically impactful biomarker tests, with an initial focus on improving pregnancy outcomes. We believe that our method of combining the disciplines of proteomics and bioinformatics with rigorous clinical testing and economic analysis enables us to provide physicians and patients with actionable data and information designed to result in better maternal and neonatal health at lower cost. Our vision is to deliver pivotal and actionable information to pregnant women, their physicians, and healthcare payers to significantly improve maternal and neonatal health and to dramatically reduce healthcare costs. We have built an advanced, proprietary, and scalable proteomics and bioinformatics platform to characterize the biology of pregnancy and to discover and validate key protein biomarkers found in blood that are highly accurate predictors of dynamic changes that occur during pregnancy. By incorporating our proprietary technology platform into our rigorous data-driven development process, we have created a differentiated approach for effectively addressing major conditions of pregnancy. We envision that our comprehensive approach will enable us to fully characterize one of the most important periods in the lives of women and children, and will help to improve their well-being. Our goal is to develop and commercialize tests that inform important decisions during all pregnancies. We also believe that the work we perform in pregnancy can ultimately be leveraged more broadly to address other areas in medicine and healthcare. Our first commercial product, the PreTRM test, is the only broadly validated, commercially available blood-based biomarker test to accurately predict the risk of a premature delivery, also known as preterm birth. The PreTRM test is a non-invasive blood test given to a pregnant woman, carrying a single fetus, during week 19 or 20 of gestation that provides an accurate prediction of the expectant mother's risk of delivering spontaneously before 37 weeks' gestation. Our commercialization strategy includes conducting clinical trials to demonstrate the health and economic benefits of early and accurate detection of preterm birth risk coupled with well-recognized interventions in higher risk patients. Anthem, Inc., or Anthem, whose health plans cover more than 10% ofU.S. pregnancies annually, will make our PreTRM test available to eligible pregnant members as part of a multi-year contract. Anthem is the nation's second largest health insurer with greater than 43 million members nationwide. Through this collaboration, a significant number of physicians and patients in theU.S. gain access to early and accurate predictions of preterm birth to enable more informed decision-making during pregnancy. Sera believes that its commercial collaboration with Anthem further validates the clinical and economic value of its PreTRM test and significantly de-risks initial commercialization. Sera further expects this provides a pathway for broader market adoption through subsequent coverage decisions by other major payers. We are actively discovering and developing several additional biomarker tests to predict other major conditions of pregnancy, such as preeclampsia, and gestational diabetes, among others, that have the potential to offer significant health benefits to women and their babies. There are approximately 140 million births globally each year. Of these, it is estimated that as many as 25% are affected by various complications, including: preterm birth, preeclampsia, fetal growth restriction, stillbirth, hypertension of pregnancy, gestational diabetes, and others. Inthe United States , there are approximately 3.8 million births annually, and over 10% of those pregnancies result in preterm births with profound short- and long-term health consequences to the mother and baby. These health consequences are estimated to lead to associated costs of approximately$25 billion annually inthe United States . Traditional methods to detect prematurity risk in time for proactive management have been limited and fail to identify the vast majority of women who will deliver prematurely. We believe our actionable blood-based biomarker test for prematurity risk can enable patients, physicians, and payers to more proactively manage and 23 -------------------------------------------------------------------------------- Table of Contents mitigate the complications and associated costs of prematurity. Given that pregnancy is the launch point for the future health of babies and a key determinant in the future health of mothers and babies, we believe this area is ripe for innovation and better tools to improve patient outcomes. Our operations are located inSalt Lake City, Utah , including a CLIA-certified laboratory. Since our inception, we have devoted the majority of our efforts and resources to performing research and development, acquiring product rights, raising capital, establishing facilities, conducting clinical trials, and establishing commercial operations to market the PreTRM test. During this period, we have incurred annual net losses. We have largely funded our operations with proceeds from the sale and issuance of convertible preferred stock, debt financings, bank loans, and the sale and issuance of Class A common stock in our IPO, which was completed inJuly 2021 . See Note 10-Capital Structure for additional details about the IPO. We have incurred significant operating losses since inception. Our net losses were$9.9 million and$5.1 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$22.5 million and$14.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. We expect to incur significant additional operating losses and negative cash flows for the foreseeable future, principally as a result of our commercialization activities for the PreTRM test, and to support additional clinical studies, publications, and anticipated research and development activities. We had no significant commercial revenue for the nine months endedSeptember 30, 2021 and 2020, and we have no recurring sources of licensing or other revenue. We have signed an agreement with Anthem, pursuant to which Anthem will purchase our PreTRM test, and we continue to negotiate private payer insurance contracts that could eventually result in revenues. If we are unable to secure payer contracts that result in significant revenues or access additional funds, we may be required to delay, scale back or abandon some, or all, of our development programs and other operations. Until such time as we can generate significant revenue from the sales of our products, if ever, we may need to continue to finance our cash needs through equity offerings, debt financings or other capital sources, potentially including collaborations or other similar arrangements. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends and may require the issuance of warrants. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, 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 when needed, we may have to significantly delay, reduce, or eliminate some or all of 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. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm our business, financial condition, and results of operations. Impact of COVID-19 The degree to which COVID-19 impacts our future business operations, research and development programs, and financial condition will depend on future developments, including the ultimate duration and/or severity of the outbreak and any resurgences, actions by government authorities to contain the spread of the virus, the effectiveness of vaccines against the virus, and when and to what extent normal economic and operating conditions can resume. The ability of our employees and other business partners to travel and conduct other routine business activity has been and is likely to continue to be disrupted or adversely affected. The primary impacts to our business have been the early cessation of enrollment in our Serum Assessment of Preterm Birth Outcomes Compared to Historical Controls study, or the AVERT PRETERM TRIAL study, inMarch 2020 , the delayed commencement of enrollment in our PRIME study untilNovember 2020 , and limited access to clinicians as we have initiated the commercialization of our PreTRM test. However, our laboratory has remained operational and, to the extent possible, we are conducting our other business operations with necessary or advisable modifications to employee travel and many of our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations, and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change. 24 -------------------------------------------------------------------------------- Table of Contents Collaboration Agreement with Anthem OnFebruary 17, 2021 , we entered into a Commercial Collaboration Agreement with Anthem relating to the commercialization of the PreTRM test. Under the agreement, we will provide PreTRM tests to eligible individuals enrolled in, or serviced or covered by, the health insurance products of Anthem. Pursuant to the agreement, Anthem will purchase a certain minimum number of tests from us for each of the first three years of the term of the agreement. Additionally, Anthem has agreed to pay us a certain minimum amount per year for the first three years of the term of the Commercial Collaboration Agreement. Anthem has been participating in our PRIME study, and at the conclusion of the PRIME study, we agreed to enter into Anthem's standard lab provider agreement with longer term commercial pricing. Key Components of Our Results of Operations Revenues We expect to derive substantially all of our revenue in the near term from sales of the PreTRM test. To date, we have not generated material revenues from the commercial sale of the PreTRM test. We have signed an agreement with Anthem and we continue to engage with other commercial payers to close additional reimbursement contracts. These additional contracts could also enable an upfront negotiated reimbursement rate which could eventually result in revenues when healthcare providers order the PreTRM test. Operating Expenses Cost of Revenue Cost of revenue reflects the aggregate costs incurred in delivering the proteomic testing results to clinicians and includes expenses for third-party sample collection and shipping costs, as well as our lab personnel, materials and supplies, equipment, and infrastructure expenses associated with clinical testing, and allocated overhead including rent and equipment depreciation. We expect costs of revenue will generally move in line with the sales of the PreTRM test. Research and Development Expenses Research and development expenses consist of costs incurred for our research activities and development of our product candidates. These expenses include: •clinical studies; •laboratory processes; •research and bioinformatic activities; •biobanking and publication efforts; •personnel-related expenses, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for employees engaged in these research and development activities; •direct clinical study expenses incurred under agreements with clinical study sites or contract research organizations; •consultants engaged in our research and development efforts; •laboratory materials and supplies; •facilities costs; and •depreciation, amortization, and other direct and allocated expenses, including rent, insurance, and other operating costs, incurred as a result of our research and development activities. We expense all research and development costs, both internal and external, in the period in which they are incurred. We expect that our research and development expenses will continue to increase for the foreseeable future as we support additional clinical studies, publications, and other product development activities. 25 -------------------------------------------------------------------------------- Table of Contents Selling and Marketing Expenses Selling and marketing expenses consist primarily of salaries, payroll taxes, employee benefits, and stock-based compensation charges for sales, marketing, and payer access personnel. Other significant costs include travel, consulting, public relations, and legal costs related to commercial efforts. We expect selling and marketing expenses to increase in the future as we incur additional expenses associated with the commercialization activities for the PreTRM test and related initiatives. Based on our commercial collaboration with Anthem, we initially deployed ourU.S. based specialty OB-GYN commercial sales force to cover the key states where Anthem has a significant market share. We expect to expand our dedicated sales force into additional territories inthe United States to cover the entireU.S. OB-GYN sales channel over time as we seek to enter into contracts with payers and employers. General and Administrative Expenses General and administrative expenses consist primarily of salaries, payroll taxes, employee benefits, and stock-based compensation charges for personnel in executive, finance, information technology, human resources, and other administrative functions. Other significant costs include facilities, corporate and intellectual property legal fees, accounting, insurance, consulting, and other professional fees. We anticipate that our general and administrative expenses will increase in the future as we construct the appropriate infrastructure to support expanded commercialization efforts and ongoing research and development activities. We expect increased expenses related to audit, tax, and legal services associated with maintaining compliance withSEC requirements, as well as increased director and officer insurance premiums, board of director fees, and investor relations costs associated with operating as a public company. Interest Expense Interest expense represents interest expense incurred on our loans payable and convertible promissory note, amortization of a discount feature on a convertible promissory note, and periodic fair value adjustments on certain liabilities. As ofSeptember 30, 2021 , we had no outstanding debt. Other Income (Expense), Net Other income (expense), net consists of interest earned on our cash, cash equivalents, and marketable securities, grant income, periodic fair value adjustments on certain liabilities, and other gains and losses. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations The results of operations presented below should be reviewed in conjunction with the condensed financial statements and related notes included elsewhere in this report. Comparison of the Three Months EndedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the three months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, 2021 2020 $ Change (in thousands) (unaudited) Revenue $ 23$ 5 $ 18 Operating expenses: Cost of revenue 10 3 7 Research and development 2,724 1,888
836
Selling and marketing 2,690 1,054
1,636
General and administrative 4,041 1,704 2,337 Total operating expenses 9,465 4,649 4,816 Loss from operations (9,442) (4,644) (4,798) Interest expense (439) (425) (14) Other income (expense), net 22 (3) 25 Net loss$ (9,859) $ (5,072) $ (4,787) Research and Development Expenses The following table summarizes our research and development expenses for the three months endedSeptember 30, 2021 and 2020: Three
Months Ended
2021 2020 $ Change
(in thousands)
(unaudited)
Research and development expenses:
Clinical studies $ 769 $ 536 $ 233
Research and bioinformatics 783 638 145
Laboratory operations 1,172 714 458
Total research and development expenses $ 2,724 The$0.8 million increase was due to a$0.5 million increase in laboratory operations costs, a$0.2 million increase in clinical study costs, and a$0.1 million increase in research and bioinformatics expenses. The$0.5 million increase in laboratory operations costs is primarily due to a$0.3 million increase in lab supplies, a$0.1 million increase in stock-based compensation expense, and a$0.1 million increase in personnel costs driven by increased headcount. The$0.2 million increase in clinical study costs is primarily due to a$0.1 million increase of enrollment and site setup activity in the PRIME study and a$0.1 million increase in personnel costs driven by increased headcount. The$0.1 million increase in research and bioinformatics expenses was due to personnel costs primarily driven by increased headcount. 27 -------------------------------------------------------------------------------- Table of Contents Selling and Marketing Expenses The$1.6 million increase was due primarily to increases of$1.1 million in personnel-related costs driven by increased headcount,$0.2 million of marketing programs and materials development,$0.1 million of consulting and outside services related to developing payer and reimbursement strategies for the PreTRM test,$0.1 million of travel expenses, and$0.1 million of increased stock-based compensation expense. General and Administrative Expenses The$2.3 million increase was due primarily to increases of$0.7 million of personnel expenses driven by increased headcount,$0.5 million of director and officer insurance costs which increased as a result of our becoming a public company,$0.4 million of professional services and fees related to public company compliance,$0.3 million of recruiting expenses,$0.3 million of increased stock-based compensation expense, and$0.2 million of legal expenses. Interest Expense Interest expense remained consistent between periods due to a$0.4 million decrease in interest expense as a result of paying the remaining loan payable balance in the first quarter of 2021, offset by a$0.4 million increase in interest expense related to fair value adjustments on certain liabilities. Comparison of the Nine Months EndedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 $ Change (in thousands) (unaudited) Revenue $ 56$ 19 $ 37 Operating expenses: Cost of revenue 23 8 15 Research and development 7,944 5,690 2,254 Selling and marketing 5,780 2,634 3,146 General and administrative 9,157 4,904 4,253 Total operating expenses 22,904 13,236 9,668 Loss from operations (22,848) (13,217) (9,631) Interest expense (744) (1,282) 538 Other income, net 1,067 26 1,041 Net loss$ (22,525) $ (14,473) $ (8,052) 28
-------------------------------------------------------------------------------- Table of Contents Research and Development Expenses The following table summarizes our research and development expenses for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 $ Change (in thousands) (unaudited) Research and development expenses: Clinical studies$ 2,347 $ 1,721 $ 626 Research and bioinformatics 2,298 1,862 436 Laboratory operations 3,299 2,107 1,192 Total research and development expenses$ 7,944 $
5,690
The$2.3 million increase was due to a$1.2 million increase in laboratory operations costs, a$0.6 million increase in clinical study costs, and a$0.4 million increase in research and bioinformatics expenses. The$1.2 million increase in laboratory operations costs is primarily due to a$0.7 million increase in lab supplies, a$0.3 million increase in stock-based compensation expense, and a$0.3 million increase in personnel costs driven by increased headcount, partially offset by a$0.1 million decrease in depreciation expense. The$0.6 million increase in clinical study costs is primarily due to a$0.3 million increase resulting from the increased enrollment and site setup activity in the PRIME study, a$0.2 million increase in personnel costs driven by increased headcount, and a$0.1 million increase in stock-based compensation expense. The$0.4 million increase in research and bioinformatics expenses was primarily due to an increase of$0.3 million in personnel costs driven by increased headcount and a$0.1 million increase in consulting costs. Selling and Marketing Expenses The$3.1 million increase was due primarily to increases of$1.9 million in personnel-related costs driven by increased headcount,$0.4 million of consulting and outside services related to developing payer and reimbursement strategies for the PreTRM test,$0.4 million of marketing programs and materials development,$0.3 million of increased stock-based compensation expense, and$0.1 million of travel costs. General and Administrative Expenses The$4.3 million increase was due primarily to increases of$1.7 million of personnel expenses driven by increased headcount,$0.7 million of professional services and fees related to public company compliance,$0.7 million of stock-based compensation expense,$0.5 million of director and officer insurance costs which increased as a result of our becoming a public company,$0.5 million of recruiting fees, and$0.3 million of legal expenses. Interest Expense The$0.5 million decrease in interest expense between periods was due primarily to a decrease of$0.9 million in interest expense as a result of paying the remaining loan payable balance in the first quarter of 2021, partially offset by a$0.4 million increase in interest expense related to fair value adjustments on certain liabilities. Other Income (Expense), net The$1.0 million increase in other income (expense) was primarily due to a$1.1 million gain on extinguishment of the PPP loan, which was forgiven inJune 2021 . 29 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of Liquidity Since inception, we have not generated a significant amount of commercial revenue from product sales or any other sources and have incurred significant operating losses and negative cash flows from operations. We anticipate that we will continue to incur net losses for the foreseeable future. We have financed our operations primarily through proceeds from the sale and issuance of convertible preferred stock and convertible notes, bank loans, and the sale and issuance of Class A common stock in our IPO, which was completed inJuly 2021 . See Note 10-Capital Structure for additional details about the IPO. As ofSeptember 30, 2021 , we had cash and cash equivalents of$82.5 million , available-for-sale securities of$67.5 million , and an accumulated deficit of$154.0 million . Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2021 2020 (in thousands) (unaudited) Net cash provided by (used in): Operating activities$ (22,484) $ (12,683) Investing activities (68,127) (105) Financing activities 159,557 10,080
Net increase (decrease) in cash and cash equivalents $ 68,946
Operating Activities The net cash used in operating activities during the nine months endedSeptember 30, 2021 was primarily due to a net loss of$22.5 million and a decrease in operating assets and liabilities of$2.1 million , partially offset by non-cash charges of$2.1 million . The net cash used in operating activities during the nine months endedSeptember 30, 2020 was primarily due to a net loss of$14.5 million and a decrease in operating assets and liabilities of$0.5 million , partially offset by non-cash charges of$2.3 million . Investing Activities Net cash used in investing activities was$68.1 million for the nine months endedSeptember 30, 2021 , representing$67.6 million in purchases of marketable securities and$0.6 million in purchases of property and equipment. Net cash used in investing activities was$0.1 million for the nine months endedSeptember 30, 2020 , representing purchases of property and equipment. Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was primarily due to net proceeds of$99.0 million from the sale of Series E convertible preferred stock, net proceeds of$66.6 million from our IPO, proceeds of$1.1 million from issuance of common stock warrants in connection with the sale of our Series E convertible preferred stock, and$0.5 million in proceeds from options exercised, partially offset by$3.1 million and$4.5 million of loan and note repayments, respectively. Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was primarily due to$10.7 million of net proceeds from the sale of Series D convertible preferred stock and proceeds of$1.1 million from a loan payable, partially offset by$1.7 million of note repayments. 30 -------------------------------------------------------------------------------- Table of Contents Future Funding Requirements We expect to incur significant additional operating losses and negative cash flows for the foreseeable future. We expect our losses in the future to be principally as a result of our commercialization activities for the PreTRM test, and to support additional clinical studies and anticipated research and development activities. We had no significant commercial revenue for the nine months endedSeptember 30, 2021 and 2020, and we have no recurring sources of licensing or other revenue. There can be no assurance that we will eventually achieve significant revenues or profitability, or if achieved, can sustain either on a continuing basis. If we are unable to achieve significant revenues or raise additional funding, when needed, we may not be able to continue the development or commercialization of our diagnostic products and could be required to delay, scale back, or abandon some or all of our development programs and other operations. No assurance can be given that we will be successful in raising the required capital at reasonable cost and at the required times, or at all. Any additional equity financing may not be available on favorable terms, most likely will be dilutive to our current stockholders, and debt financing, if available, may involve restrictive covenants and dilutive financing instruments. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. We currently have no credit facility or committed sources of capital. Our future funding requirements will depend on many factors, including the following: •the timing, receipt, and amount of sales, if any, from the PreTRM test; •the cost and timing of establishing sales, marketing, and other commercialization capabilities inthe United States and abroad; •our ability to develop and commercialize other products; •the terms and timing of any collaborative, licensing, and other arrangements that we may establish; •the cost, timing, and outcomes of regulatory approvals; •the scope, rate of progress, results, and cost of our clinical studies, and other related activities; •the cost of preparing, filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights; •the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions; •partnerships and other strategic options for our product and other product candidates; and •other factors described in the "Risk Factors" section and elsewhere in this report. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. Contractual Obligations and Commitments Our contractual obligations and commitments for the year endedDecember 31, 2020 are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Final Prospectus. Material changes that have occurred during the nine months endedSeptember 30, 2021 include the following: •The outstanding principal, accrued interest, and applicable final payment fees for the Loan Agreement and theFebruary 2019 Convertible Note were repaid. •The PPP loan was fully forgiven. •Future minimum lease payments have increased by approximately$0.1 million as a result of an amendment to our corporate office operating lease for additional space which was signed during the period. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of theSEC . 31 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies, Significant Judgments and Use of Estimates A summary of our critical accounting policies, significant judgments, and use of estimates is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Final Prospectus. There have been no significant changes in the application of our critical accounting policies, significant judgments and use of estimates during the nine months endedSeptember 30, 2021 . Emerging Growth Company and Smaller Reporting Company Status We are an emerging growth company, or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (1) are no longer an EGC or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies, reduce disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. As an EGC, we are also not required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates and we are not required to provide auditor attestation regarding requirements of Section 404(b) of Sarbanes-Oxley. We will remain an EGC until the earliest to occur of: (1) the last day of the fiscal year in which we have at least$1.07 billion in annual revenue; (2) the last day of the fiscal year in which we are deemed to be a "large accelerated filer," as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year; (3) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period; and (4)December 31, 2026 . We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies until the fiscal year following the determination that the market value of our voting and non-voting common stock held by non-affiliates is more than$250 million measured on the last business day of our second fiscal quarter, or our annual revenues are less than$100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is more than$700 million measured on the last business day of our second fiscal quarter. Recent Accounting Pronouncements A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2-Significant Accounting Policies. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our exposure to changes in interest rates relates primarily to interest earned and market value on our cash and cash equivalents and marketable securities. Our cash and cash equivalents and marketable securities consist of cash held in banks, money market funds, commercial paper,U.S. government securities,U.S. federal agency securities and investment grade corporate securities. Our investment policy and strategy are focused on preservation of capital and supporting our liquidity requirements. Changes inU.S. interest rates affect the interest earned on our cash and cash equivalents and marketable securities, and the market value of those securities. A hypothetical 100 basis point increase in interest rates would have resulted in a decrease of$0.7 million in the market value of our available-for-sale debt securities as ofSeptember 30, 2021 . Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity. 32 -------------------------------------------------------------------------------- Table of Contents Foreign Currency We do not regularly incur expenses with vendors outsidethe United States or that are denominated in currencies other than theU.S. dollar. We may incur such expenses in the future at which point exchange rate fluctuations might adversely affect our expenses, results of operations, financial position and cash flows. To date, exchange rate fluctuations have not had a material effect on our results of operations. Effects of Inflation Inflation generally affects us by increasing our costs of labor, laboratory supplies, and clinical trials. We do not believe inflation has had a material effect on our results of operations during the periods presented and do not anticipate a material impact going forward. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer and principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures as ofSeptember 30, 2021 . Based on the evaluation of our disclosure controls and procedures as ofSeptember 30, 2021 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 33
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