You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed financial statements and the notes thereto included elsewhere in this Amended Quarterly Report on Form 10-Q/A and with our audited financial statements and notes thereto for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Forward Looking Statements The following discussion and other parts of this quarterly report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, the impact of the COVID-19 pandemic, current and future product offerings, reimbursement and coverage, the expected benefits from our partnerships or promotion arrangements with third-parties, evaluations and interpretation of study results, research and development costs, timing and likelihood of success and plans and objectives of management for future operations, are forward-looking statements. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, and short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors." The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. The following information has been adjusted to reflect the restatement of our financial statements as described in the "Explanatory Note" at the beginning of this Amended Quarterly Report and in Note 1, "Restatement of Previously Issued Financial Statements," in the Notes to Condensed Financial Statements of this Amended Quarterly Report. Overview We are dedicated to transforming the care continuum for patients suffering from debilitating and chronic autoimmune diseases by enabling timely differential diagnosis and optimizing therapeutic intervention. We have developed and are commercializing a portfolio of innovative testing products under our AVISE® brand, several of which are based on our proprietary Cell-Bound Complement Activation Products (CB-CAPs) technology. Our goal is to enable healthcare providers to improve care for patients through the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases, including systemic lupus erythematosus (SLE), and rheumatoid arthritis (RA). Our business model of integrating testing products and therapeutics positions us to offer targeted solutions to rheumatologists and, ultimately, better serve patients. We currently market 10 testing products under our AVISE® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases. Our lead testing product, AVISE® CTD, enables differential diagnosis for patients presenting with symptoms indicative of a wide variety of connective tissue diseases (CTDs), and other related diseases with overlapping symptoms. We commercially launched AVISE® CTD in 2012 and revenue from this product comprised 81% and 81% of our revenue for the six months endedJune 30, 2022 and 2021, respectively. There is an unmet need for rheumatologists to add clarity in their CTD clinical evaluation, and we believe there is a significant opportunity for our tests that enable the differential diagnosis of these diseases, particularly for potentially life-threatening diseases such as SLE. We are leveraging our portfolio of testing products to establish partnerships with leading pharmaceutical companies, academic research centers and patient advocacy organizations. We also have agreements with GlaxoSmithKline plc. (GSK), Labcorp Drug Development and Parexel, among others, that leverage our testing products and/or the information generated from such tests. We provide GSK, a leader in lupus therapeutics, our test result data to 23 -------------------------------------------------------------------------------- provide market insight into and help increase awareness of the benefits of early and accurate diagnosis of SLE and lupus nephritis, and monitoring disease activity. We partner with academic research centers and patient advocacy organizations, such asBrigham and Women's Hospital ,Hospital for Special Surgery ,Duke University andEmory University as well as theLupus Foundation of America , to help improve the quality of life for people affected by autoimmune diseases through programs of research, education, support and advocacy. We plan to pursue additional strategic partnerships that are synergistic with our evolving portfolio of testing products. We perform all of our AVISE® tests in our approximately 10,000 square foot clinical laboratory, which is certified under theClinical Laboratory Improvement Amendments of 1988 (CLIA), by theCenters for Medicare and Medicaid Services (CMS), and accredited by theCollege of American Pathologists (CAP), and located inVista, California . Our laboratory is certified for performance of high-complexity testing by CMS in accordance with CLIA and is licensed by all states requiring out-of-state licensure. Our clinical laboratory reports all AVISE® testing product results within five business days. In the second half of 2021, we began the conversion of approximately 8,000 square feet of warehouse space into additional clinical laboratory space and approximately 6,000 square feet of warehouse space into additional research and development facility space. In the second quarter of 2022, we completed the clinical laboratory space conversion, which is currently being utilized for both clinical laboratory and research and development purposes. We expect to complete the conversion of the research and development facility space by the second half of 2022. The expansion of our clinical laboratory and research and development facility is expected to allow us to enhance our testing capacity and improve efficiencies as well as allow us to develop molecular and multiomic capabilities and advance our product pipeline, including support of development of tests for fibromyalgia, RA, thrombosis and lupus nephritis. We market our AVISE® testing products using our specialized sales force. As ofJune 30, 2022 , we have a sales force of 57 representatives covering a total of 63 territories. Unlike many diagnostic sales forces that are trained only to understand the comparative benefits of their tests, the specialized backgrounds of our sales force coupled with our comprehensive training enable our sales representatives to interpret results from our de-identified patient test reports and provide unique insights in a highly tailored discussion with rheumatologists. Our integrated testing and therapeutics strategy results in a unique opportunity to promote and sell targeted therapies in patient focused sales calls with rheumatologists, including those with whom we have a longstanding relationship and history using our portfolio of testing products. Reimbursement for our testing services comes from several sources, including commercial third-party payors, such as insurance companies and health maintenance organizations, government payors, such as Medicare, and patients. Reimbursement rates vary by product and payor. We continue to focus on expanding coverage among existing contracted rheumatologists and to achieve coverage with commercial payors, laboratory benefit managers and evidence review organizations. Since inception we have devoted substantially all of our efforts to developing and marketing products for the diagnosis, prognosis and monitoring of autoimmune diseases. Although our revenue has historically increased sequentially year over year, with the exception of the six months endedJune 30, 2022 compared to 2021, we have never been profitable and, as ofJune 30, 2022 , we had an accumulated deficit of$233.1 million . We incurred net losses of$24.9 million and$12.6 million for the six months endedJune 30, 2022 and 2021, respectively. We expect to continue to incur operating losses in the near term as our operating expenses will increase to support the growth of our business, as well as additional costs associated with being a public company. We have funded our operations primarily through equity and debt financings and revenue from sales of our products. We completed our initial public offering (IPO), inSeptember 2019 , raising net proceeds from the offering of approximately$50.4 million , net of underwriting discounts, commissions and other offering expenses, for aggregate expenses of approximately$7.5 million . InMarch 2021 , we completed a public offering of 4,255,000 shares of our common stock at a public offering price of$16.25 per share. Net proceeds from the offering were approximately$64.7 million , net of underwriting discounts and commissions and offering costs of$4.4 million . As ofJune 30, 2022 , we had$76.4 million of cash and cash equivalents.
Recent Developments
InMarch 2022 , we entered into an agreement with Centene Corporation, pursuant to which, effectiveJune 1, 2022 , AVISE® test offerings became an in-network, covered benefit with Centene Corporation, including its subsidiaryWellCare Health Plans , providing enhanced care to over 22.7 million members. 24 -------------------------------------------------------------------------------- InJune 2022 , we entered into an agreement withMediNcrease Health Plans, LLC's national provider network, pursuant to which, effectiveJuly 1, 2022 , AVISE® test offerings became an in-network, covered benefit to its approximately 7.5 million commercial lives. As a result, AVISE® tests will surpass 99 million lives as an in-network benefit for patients. Last quarter we disclosed that theCenters for Medicare & Medicaid Services (CMS) agreed, effectiveApril 1, 2022 , to recognize a newProprietary Laboratory Analyses (PLA) code for our protein-based test, AVISE® Lupus, and that Noridian, our Medicare Administrative Contractor, priced this PLA code at$1,085 per test. The process for obtaining and maintaining consistent reimbursement for new tests (particularly for protein-based tests) can be uncertain, lengthy and time consuming. A pricing determination is not synonymous with a coverage determination. Having a price associated with the PLA code for any particular test does not secure coverage or reimbursement for that PLA code from Medicare or any other third-party payor. During the quarter, we submitted to Noridian 3,749 claims for Medicare Part B reimbursement under our PLA code for AVISE® Lupus. As ofAugust 1, 2022 , 76 of these claims have been paid, 335 claims have been denied, 2,778 claims are subject to requests from Noridian for additional information (such as medical records), and the balance of those claims remain pending with no responses received as of this date. While we are still gathering information from Noridian, we believe these denials and requests for additional information may be due in part to confusion regarding appropriateAmerican Medical Association (AMA) Common Procedural Terminology (CPT) coding for the AVISE® CTD test, which includes the AVISE® Lupus test plus conventional antibody tests. We interpret AMA coding guidelines to support that we submit claims for AVISE® CTD using the individual codes that describe the other conventional antibody tests included in AVISE® CTD, in addition to the PLA code for AVISE® Lupus. Although we routinely include explanatory notes in our reimbursement requests, this practice can create confusion. We are actively working with Noridian on the issue. In order to confirm coverage and payment of claims and in addition to ongoing discussions with Noridian regarding our coding approach, we submitted a formal request to Noridian for coverage of our AVISE® Lupus test under the new PLA Code. We have not yet received a response. In the meantime, we will continue to submit Medicare claims for AVISE® Lupus, appeal denials and respond to requests for additional information. However, until this reimbursement issue is resolved, we anticipate a significant interruption to our revenue from AVISE® Lupus with respect to Medicare claims. The aggregate amount of reimbursement we are seeking for our unpaid AVISE® Lupus Medicare claims in the second quarter of 2022 is approximately$4.0 million , and, as previously noted, all of the unpaid AVISE® Lupus Medicare claims are either under review, being appealed or subject to requests for additional information, which we are in the process of addressing. Variable consideration for these claims is deemed to be fully constrained due to the uncertainty of the outcome of these claims. For fully constrained claims, we generally recognize revenue in the period the uncertainty is definitively resolved and we can provide no assurance that such resolution will be achieved on a timely basis, or at all.Recent Publications InJuly 2022 , we announced new, real-world evidence illustrating that AVISE® testing enables decisive clinical action in the differential diagnosis of lupus. The "Complement Activation Products vs Standard ANA Testing: Treatment Outcomes, Diagnosis, and Economic Impact in Systemic Lupus Erythematosus," (CAPSTONE) study was the largest comparative utility study in lupus diagnostics and was published in theJournal of Managed Care & Specialty Pharmacy . The study leveraged multiple databases encompassing electronic health records and linked insurance claims data on nearly 50,000 patients tested with AVISE® or standard of care labs from hundreds of rheumatologists acrossthe United States , comparing diagnosis, treatment, and cost of care outcomes for new patients tested with AVISE® Lupus and those tested with a traditional ANA (tANA) approach, including specific autoantibodies. The CAPSTONE study supports that the AVISE® Lupus test is more clinically effective, both for patients who test positive and those who test negative, as compared to the current standard of care. Important key findings of the CAPSTONE study included, among other things, a: (i) 2x decrease in diagnostic testing costs in the first six-month follow-up period for AVISE® Lupus [-] vs tANA[-]; (ii) 3.5x less frequent repeat testing overall when using AVISE® Lupus vs. tANA; (iii) 6x increased odds of establishing a new SLE diagnosis with AVISE® Lupus [+] vs tANA[+]; and (iv) 3x increased odds of initiating one or more SLE treatments with AVISE® Lupus [+] vs tANA[+]. The CAPSTONE study exemplifies the advantages of the AVISE® Lupus test for patients, providers, and payors. Delayed diagnosis leads to increased disease burden and diminished quality of life for the patient relative to the current standard of care. By receiving conclusive results, providers are able to initiate treatment early, reducing the need for more 25 -------------------------------------------------------------------------------- aggressive approaches down the road that can lead to irreversible consequences for the patient. Additionally, a conclusive negative test allows providers to lower the number of repeat tests and follow-up visits which is a critical step for achieving diagnostic clarity for the patient.
Impact of COVID-19
The full extent of which the COVID-19 pandemic will directly or indirectly continue to impact our business, results of operations and financial condition and will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, including the success of ongoing vaccination efforts, the emergence and prevalence of variant strains of COVID-19, the institution or reinstitution of shutdowns, "stay-at-home-orders" and other public health measures, as well as the related economic impact of these matters on local, regional and international markets. We have implemented business continuity plans designed to address the COVID-19 pandemic and minimize disruptions to ongoing operations. While for the three months endedJune 30, 2022 as compared to the same period in 2021, we experienced an AVISE® CTD test volume increase of approximately 5%, and for the six months endedJune 30, 2022 as compared to the same period in 2021, we experienced an AVISE® CTD test volume increase of approximately 6%, the patient flow and our related test volumes have in the past been, and may continue to be, impacted by the COVID-19 pandemic. We have experienced, and may again, experience significant impacts on our test volume, delays in patient enrollment for ongoing and planned clinical trials, and delays in procurement of our testing supplies as a result of the COVID-19 pandemic. In addition, COVID-19 travel limitations and government-mandated work-from-home or shelter-in-place orders have, and may again, cause supply chain delays or reduce the number of in-person meetings between our sales force and healthcare providers and limit the ability of our sales force to engage in various types of healthcare provider education activities, which may lead to a decline in orders of our testing products. To mitigate the impact of COVID-19 on our business, we put in place certain safety measures for our employees, patients, healthcare providers, and suppliers to limit exposure and a portion of our workforce was required to work remotely in an effort to reduce that spread of COVID-19. We are facing and may continue to face increased competition for laboratory and scientific employees due to the increased demand in the industry for such personnel. As the circumstances surrounding the COVID-19 pandemic remain uncertain, we may inaccurately estimate the duration or severity of the COVID-19 pandemic, which could, among other things, cause us to misalign our staffing, spending, activities and precautionary measures with market current or future market conditions.
Factors Affecting Our Performance
In addition to the impact of COVID-19, we believe there are several important factors that have impacted, and that we expect will impact, our operating performance and results of operations, including:
?Continued Adoption of Our Testing Products. Since the launch of AVISE® CTD in 2012 and throughJune 30, 2022 , we have delivered over 680,000 of these tests. Through the second quarter of 2022, 65,822 AVISE® CTD tests were delivered, representing approximately 6% growth over the same period in 2021. The number of ordering healthcare providers in the second quarter of 2022 was a record 2,273, representing an approximate 18% increase over the same period in 2021, and we had a record 797 adopting healthcare providers (defined as those who previously prescribed at least 11 diagnostic tests in the corresponding period) compared to 703 in the same period in 2021. A high percentage of adopting healthcare providers continue to order tests in subsequent quarters, as approximately 99% of adopting healthcare providers from the first quarter of 2022 ordered at least one diagnostic test in the second quarter of 2022. Revenue growth for our testing products will depend on our ability to continue to expand our base of ordering healthcare providers and increase our penetration with existing healthcare providers. ?Reimbursement for Our Testing Products. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payors, including both commercial and government payors such as Medicare. Payment from third-party payors differs depending on whether we have entered into a contract with the payors as a "participating provider" or do not have a contract and are considered a "non-participating provider." Payors will often reimburse non-participating providers, if at all, at a lower amount than participating providers. We have received a substantial portion of our revenue from a limited number of 26 -------------------------------------------------------------------------------- third-party commercial payors, most of which have not contracted with us to be a participating provider. In addition to the challenges described under the heading "Overview - Recent Developments" above, historically, we have experienced situations where commercial payors proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payors have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payors, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate. ?Synergistic Partnerships. InAugust 2021 , we mutually agreed to terminate the Janssen Agreement regarding our promotion efforts with SIMPONI®, effectiveAugust 31, 2021 . Our SIMPONI® promotion efforts contributed no co-promotion revenue and approximately$0.6 million in revenue during the six months endedJune 30, 2022 and 2021, respectively. We will continue to rely on our existing testing products to drive revenue growth. ?Development of Additional Testing Products. We rely on sales of our AVISE® CTD test to generate the significant majority of our revenue. We expect to continue to invest in research and development in order to develop additional testing products and expect these costs to increase. Our success in developing new testing products will be important in our efforts to grow our business by expanding the potential market for our testing products and diversifying our sources of revenue. ?Maintain Meaningful Margin. We believe we are well positioned to maintain meaningful margin through a continued focus on increasing operating leverage through the implementation of certain internal initiatives, such as conducting additional validation and reimbursement oriented clinical studies to facilitate payor coverage of our testing products, capitalizing on our growing reagent purchasing to negotiate improved volume-based pricing and automation in our clinical laboratory to reduce material and labor costs. ?Timing of Our Research and Development Expenses. Our spending on experiments and clinical studies may vary substantially from quarter to quarter. We also expend funds to secure clinical samples that can be used in discovery, product development, clinical validation, utility and outcome studies. The timing of these research and development activities is difficult to predict. If a substantial number of clinical samples are obtained in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses will affect our financial results. We conduct clinical studies to validate our new testing products, as well as ongoing clinical and outcome studies to further expand the published evidence to support our commercialized AVISE® testing products. Spending on research and development for both experiments and studies may vary significantly by quarter depending on the timing of these various expenses. ?How We Recognize Revenue. We record revenue on an accrual basis based on our estimate of the amount that will be ultimately realized for each test upon delivery based on a historical analysis of amounts collected by test and by a payor and other factors. Variable consideration for the open AVISE® Lupus Medicare claims is deemed to be fully constrained due to the uncertainty of the outcome of these claims. For fully constrained claims, we generally recognize revenue in the period the uncertainty is definitively resolved and we can provide no assurance that such resolution will be achieved on a timely basis, or at all. Changes to such estimates may increase or decrease revenue recognized in future periods. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. We discuss many of these risks, uncertainties and other factors in the section entitled "Risk Factors."
Janssen Promotion Agreement
InDecember 2018 , we entered into the Janssen Agreement, under which we were responsible for the costs associated with our sales force in promoting SIMPONI® inthe United States . InAugust 2021 , we and Janssen mutually agreed to terminate the Janssen Agreement effectiveAugust 31, 2021 . Pursuant to the Janssen Agreement, as amended, Janssen was responsible for all other costs associated with our promotion of SIMPONI® under the Janssen Agreement. In exchange for our sales and co-promotional services, we were entitled to a quarterly tiered promotion fee based on the incremental increase in total prescribed units of SIMPONI® for that 27 -------------------------------------------------------------------------------- quarter over a predetermined baseline. Upon termination of the Janssen Agreement onAugust 31, 2021 , we became entitled to receive an aggregate of$0.6 million in consideration, which was earned in the year endedDecember 31, 2021 . Pursuant to the terms of the termination, we were restricted untilMay 31, 2022 from promoting any other biologic or Janus kinase inhibitor used for the treatment of indications covered by the Janssen Agreement without first obtaining Janssen's written consent. The restriction no longer applies.
We recognized no revenue and approximately
Seasonality
Based on our experience to date, we expect some seasonal variations in our financial results due to a variety of factors, such as the year-end holiday period and other major holidays, vacation patterns of both patients and healthcare providers, including medical conferences, climate and weather conditions in our markets (for example excess sun exposure can cause flares in SLE), seasonal conditions that may affect medical practices and provider activity, including for example influenza outbreaks that may reduce the percentage of patients that can be seen, and other factors relating to the timing of patient benefit changes, as well as patient deductibles and co-insurance limits.
Financial Overview Revenue To date, we have derived nearly all of our revenue from the sale of our testing products, most of which is attributable to our AVISE® CTD test. We primarily market our testing products to rheumatologists inthe United States . The rheumatologists who order our testing products and to whom results are reported are generally not responsible for payment for these products. The parties that pay for these services, or payors, consist of healthcare insurers, government payors (primarily Medicare and Medicaid), client payors (e.g. hospitals, other laboratories, etc.), and patient self-pay. Our service is completed upon the delivery of test results to the prescribing rheumatologists which triggers billing for the service. We recognize revenue in accordance with the provisions of ASC Topic 606, Revenue from Contracts with Customers. We record revenue on an accrual basis based on our estimate of the amount that will be ultimately realized for each test upon delivery based on a historical analysis of amounts collected by test and by payor and other factors. These assessments require significant judgment by management. As more fully described under the heading "Overview - Recent Developments" above, we experienced a disruption in our revenue recognition and cash collection during the quarter endedJune 30, 2022 in relation to Medicare Part B reimbursements for our AVISE® Lupus test. Variable consideration for the open AVISE® Lupus Medicare claims is deemed to be fully constrained due to the uncertainty of the outcome of these claims. For fully constrained claims, we generally recognize revenue in the period the uncertainty is definitively resolved and we can provide no assurance that such resolution will be achieved on a timely basis, or at all.
Our ability to increase our revenue will depend on our ability to further penetrate the market for our current and future testing products, and increase our reimbursement and collection rates for tests delivered.
As discussed above, our volume of AVISE® CTD tests delivered substantially recovered to pre-COVID-19 levels in the fourth quarter of 2020. However, the continued spread of COVID-19, including any of its viral variants, may adversely affect testing volumes in future periods, and the extent of any such adverse effects is highly uncertain. Operating Expenses Costs of Revenue Costs of revenue represents the expenses associated with obtaining and testing patient specimens. The components of our costs of revenue include materials costs, direct labor, equipment and infrastructure expenses associated with testing specimens, shipping charges to transport specimens, blood specimen collections fees, royalties, depreciation and allocated overhead, including rent and utilities. 28 -------------------------------------------------------------------------------- Each payor, whether a commercial third-party, government, or individual, reimburses us at different amounts. These differences can be significant. As a result, our costs of revenue as a percentage of revenue may vary significantly from period to period due to the composition of payors for each period's billings. Assuming future testing volumes are not negatively impacted by the continued spread of COVID-19, we expect that our costs of revenue will increase in absolute dollars as the number of tests we perform increases. However, we expect that the cost per test will decrease over time due to volume discounts on materials and other volume efficiencies we may gain as the number of tests we perform increases. The decrease in cost per test may be partially offset due to increased depreciation and allocated overhead associated with our clinical laboratory expansion as well as increased labor, material and shipping costs (including as a result of inflation) associated with the commercialization of our portfolio products. As discussed above, the continued spread of COVID-19 may adversely affect testing volumes which may result in an increase in cost per test due to our inability to realize volume efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel costs, including stock-based compensation expense, direct marketing expenses, accounting and legal expenses, consulting costs, and allocated overhead including rent, information technology, depreciation and utilities.
We expect that our selling, general and administrative expenses will increase in absolute dollars in 2022 as compared to 2021, due to expected additions to headcount and associated increases for personnel costs, including stock-based compensation.
Research and Development Expenses
Research and development expenses include costs incurred to develop our technology, test products and product candidates, collect clinical specimens and conduct clinical studies to develop and support our testing products and product candidates. These costs consist of personnel costs, including stock-based compensation expense, materials, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies and allocated overhead including rent and utilities. We expense all research and development costs in the periods in which they are incurred. We expect that our research and development expenses will increase in absolute dollars in 2022 as compared to 2021, as we continue to invest in research and development activities related to our existing testing products and product candidates, including the expansion of our clinical research and development facility, expected additions to headcount and associated increases for personnel costs, including stock-based compensation.
Interest Expense
Interest expense consists of cash and non-cash interest expense associated with our financing arrangements, including the borrowings under our amended loan and security agreement withInnovatus Life Sciences Lending Fund I, LP (Innovatus ).
We expect interest expense to remain substantially consistent in the near term.
Other Income (Expense), Net
Other income (expense), net, consists primarily of interest income earned on our cash and cash equivalents.
Results of Operations The following information has been adjusted to reflect the restatement of our financial statements as described in the "Explanatory Note" at the beginning of this Amended Quarterly Report and in Note 1, "Restatement of Previously Issued Financial Statements," in the Notes to Condensed Financial Statements of this Amended Quarterly Report. 29 --------------------------------------------------------------------------------
Comparison of the Three Months Ended
Three Months Ended June 30, 2022 2021 Change (in thousands) (As Restated) Revenue $ 7,606$ 12,772 $ (5,166) Operating expenses: Costs of revenue 6,078 5,451 627 Selling, general and administrative expenses 12,903 11,171 1,732 Research and development expenses 2,689 1,892 797 Total operating expenses 21,670 18,514 3,156 Loss from operations (14,064) (5,742) (8,322) Interest expense (606) (663) 57 Other income (expense), net 5 (5) 10 Net loss$ (14,665) $ (6,410) $ (8,255) Revenue Revenue decreased$5.2 million , or 40.4%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , primarily due a decrease in AVISE® CTD revenue of$4.5 million . The decrease in AVISE® CTD revenue was primarily due to (i) a decrease in average reimbursement per AVISE® CTD test, (ii) a net negative adjustment associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods and (iii) uncertainty of the outcome of certain claims, which have been deemed fully constrained. The number of AVISE® CTD tests delivered, which accounted for 77% of revenue in each of the three months endedJune 30, 2022 and 2021, increased to 34,919 tests delivered in the three months endedJune 30, 2022 compared to 33,328 tests delivered in the same 2021 period. The adoption of the AVISE® CTD test by healthcare providers for the three months endedJune 30, 2022 increased to 2,273 ordering healthcare providers as compared to 1,934 ordering healthcare providers in the same 2021 period. Revenue resulting from the Janssen Agreement contributed no revenue for the three months endedJune 30, 2022 compared to$0.3 million for the three months endedJune 30, 2021 .
Costs of Revenue
Costs of revenue increased$0.6 million , or 11.5%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily due to increased direct costs such as labor, materials and supplies, shipping and handling and allocated overhead associated with the increase in test volume in 2022 compared to 2021. Gross margin as a percentage of revenue decreased to 20.1% for the three months endedJune 30, 2022 , compared to 57.3% for the three months endedJune 30, 2021 . This was primarily attributable to a decrease in average reimbursement per AVISE® CTD test and a decrease in revenue resulting from the Janssen Agreement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$1.7 million , or 15.5%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily due to an increase of$0.8 million of employee related expenses, including stock-based compensation and recruitment expenses, increases related to audit and professional services of$0.2 million , legal fees of$0.2 million , marketing expenses of$0.2 million , allocated overhead of$0.2 million and insurance expenses of$0.1 million .
Research and Development Expenses
Research and development expenses increased$0.8 million for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . This increase was primarily due to increases in expenses related to current, former and potential future employees, including severance, stock-based compensation and recruitment expenses of$0.7 million , collaboration expenses of$0.4 million , laboratory supplies expense of$0.2 million , 30 --------------------------------------------------------------------------------
consulting costs of
Interest Expense
Interest expense remained substantially consistent for the three months ended
Other Income (Expense), Net
Other income (expense), net, remained substantially consistent for the three
months ended
Comparison of the Six Months Ended
Six Months Ended June 30, 2022 2021 Change (in thousands) (As Restated) Revenue$ 18,000 $ 23,359 $ (5,359) Operating expenses: Costs of revenue 11,895 10,162 1,733 Selling, general and administrative expenses 25,055 21,211 3,844 Research and development expenses 4,793 3,295 1,498 Total operating expenses 41,743 34,668 7,075 Loss from operations (23,743) (11,309) (12,434) Interest expense (1,204) (1,308) 104 Other income (expense), net 10 (2) 12 Net loss$ (24,937) $ (12,619) $ (12,318) Revenue Revenue decreased$5.4 million , or 22.9%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , primarily due a decrease in AVISE® CTD revenue of$4.4 million . The decrease in AVISE® CTD revenue was primarily due to (i) a decrease in average reimbursement per AVISE® CTD test, (ii) a net negative adjustment associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods and (iii) uncertainty of the outcome of certain claims, which have been deemed fully constrained. The number of AVISE® CTD tests delivered, which accounted for 81% of revenue in each of the six months endedJune 30, 2022 and 2021, respectively, increased to 65,822 tests delivered in the six months endedJune 30, 2022 compared to 62,357 tests delivered in the same 2021 period. The number of ordering healthcare providers increased to 2,273 for the three months endedJune 30, 2022 compared to 1,934 in the same 2021 period. Revenue resulting from the Janssen Agreement contributed no revenue for the six months endedJune 30, 2022 compared to$0.6 million during the six months endedJune 30, 2021 .
Costs of Revenue
Costs of revenue increased$1.7 million , or 17.1%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily due to increased direct costs such as materials and supplies, labor, shipping and handling and allocated overhead associated with the increase in test volume and increase in cost per test in 2022 compared to 2021. Gross margin as a percentage of revenue decreased to 33.9% for the six months endedJune 30, 2022 , compared to 56.5% for the six months endedJune 30, 2021 . This was primarily attributable to a decrease in average reimbursement per AVISE® CTD test, an increase in cost per test, and a decrease in revenue resulting from the Janssen Agreement.
Selling, General and Administrative Expenses
31 -------------------------------------------------------------------------------- Selling, general and administrative expenses increased$3.8 million , or 18.1%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily due to an increase of$2.4 million of employee related expenses, including stock-based compensation and recruitment expenses, increases related to allocated overhead of$0.4 million , legal fees of$0.4 million , audit and professional services of$0.2 million , marketing expenses of$0.2 million and insurance expenses of$0.1 million .
Research and Development Expenses
Research and development expenses increased$1.5 million , or 45.5%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . This increase was primarily due to increases in expenses related to current, former and potential employees, including severance, stock-based compensation and recruitment expenses of$1.2 million , collaboration expenses of$0.5 million , allocated overhead of$0.3 million , laboratory supplies expense of$0.3 million and consulting fees of$0.1 million , partially offset by decreases in clinical trial expenses of$0.4 million and license fees of$0.4 million .
Interest Expense
Interest expense remained substantially consistent for the six months ended
Other Income (Expense), Net
Other income (expense), net, remained substantially consistent for the six
months ended
Liquidity and Capital Resources
We have incurred net losses since our inception. For the six months endedJune 30, 2022 and 2021, we incurred a net loss of$24.9 million and$12.6 million , respectively, and we expect to incur additional losses and increased operating expenses in future periods. As ofJune 30, 2022 , we had an accumulated deficit of$233.1 million . To date, we have generated only limited revenue, and we may never achieve revenue sufficient to offset our expenses. Our primary sources of capital have been sales of our common stock and redeemable convertible preferred stock, the sale of our common stock in our IPO, and, to a lesser extent, borrowings under various debt financings. OnNovember 10, 2020 , we filed a registration statement on Form S-3 (Shelf Registration Statement), which was declared effective by theSEC onNovember 19, 2020 , covering the offering, from time to time, of up to$150.0 million of common stock, preferred stock, debt securities, warrants and units. InMarch 2021 , we completed a public offering of 4,255,000 shares of our common stock at a public offering price of$16.25 per share, which shares were sold under the Shelf Registration Statement. Net proceeds from the offering were approximately$64.7 million , net of underwriting discounts and commissions and other offering expenses of$4.4 million . As ofJune 30, 2022 , we had$76.4 million of cash and cash equivalents. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash and money market funds. InSeptember 2017 , we entered into the loan and security agreement withInnovatus under which we immediately drew down$20.0 million . InDecember 2018 , we borrowed an additional$5.0 million under the loan agreement. In each ofNovember 2019 andNovember 2021 , we amended the loan and security agreement withInnovatus , which we collectively refer to as the Amended Loan Agreement. Pursuant to the Amended Loan Agreement, the loan term is for nine years with a final maturity date ofNovember 2026 . The Amended Loan Agreement accrues interest at an annual rate of 8.0%, of which 2.0% will be payable in-kind. Paid in-kind interest is added to the principal balance each period. AfterDecember 1, 2024 , the entire 8.0% will be paid in cash at the end of each period. On or afterNovember 1, 2022 , we may, at our option, prepay the term loan borrowings by paying the lender a prepayment premium. The prepayment premium was 3% as ofNovember 2021 and decreases by 1% on each ofNovember 1, 2022 ,November 1, 2023 andNovember 1, 2024 . Our obligations under the Amended Loan Agreement are secured by a security interest in substantially all of our assets, including our intellectual property. The Amended Loan Agreement contains customary conditions to borrowing, events of default, and covenants, including covenants requiring us to maintain certain levels of minimum 32 -------------------------------------------------------------------------------- liquidity of$2.0 million , performance covenants to achieve certain minimum amounts of revenue, and covenants limiting our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The consequences of failing to achieve the performance covenant will be cured if, within sixty days of failing to achieve the performance covenant, we issue additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined in the Amended Loan Agreement. As ofJune 30, 2022 , we were in compliance with all covenants of the Amended Loan Agreement. In addition, upon the occurrence of an event of default,Innovatus , among other things, can declare all indebtedness due and payable immediately, which would adversely impact our liquidity and reduce the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes.
Funding Requirements
Our primary uses of cash are to fund our operations as we continue to grow our business. We expect to continue to incur operating losses in the near term as our operating expenses will be increased to support the growth of our business. We expect that our costs of revenue, selling, general and administrative expenses, and research and development expenses will continue to increase as we increase our test volume, expand our marketing efforts and increase our internal sales force to drive increased adoption of and reimbursement for our AVISE® testing products, prepare to commercialize new testing products, continue our research and development efforts and further develop our product pipeline. We believe we have sufficient laboratory capacity to support increased test volume. We expect to make significant investments for laboratory equipment and capital expenditures in the near term related to our laboratory facilities and expansion of research capabilities, including an investment to convert approximately 8,000 square feet of warehouse space into additional clinical laboratory space and approximately 6,000 square feet of warehouse space into additional research and development facility space. We began such conversion in the second half of 2021 and completed the conversion for the clinical laboratory space in the second quarter of 2022 and expect to complete the conversion for the additional research and development facility in the second half of 2022. The converted clinical laboratory space is currently being utilized for both clinical laboratory and research and development purposes. The expansion of our clinical laboratory and research and development facility are expected to allow us to enhance our testing capacity and improve efficiencies as well as allow us to develop molecular and multiomic capabilities and advance our product pipeline, including support of the development of tests for fibromyalgia, RA, thrombosis and lupus nephritis. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect that our near- and longer-term liquidity requirements will continue to consist of working capital and general corporate expenses associated with the growth of our business, including payments we may be required to make upon the achievement of previously negotiated milestones associated with intellectual property we have licensed, payments related to non-cancelable purchase obligations with one supplier for reagents, payments related to our principal and interest under our long term borrowing arrangements, payments for operating leases related to our office and laboratory space inVista, California and our office space inCarlsbad, California , and payments for finance leases related to our laboratory equipment. Based on our current business plan, we believe that our existing cash and cash equivalents and our anticipated future revenue, will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the date of this filing. Our estimate of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including:
•the impact of the COVID-19 pandemic on our business;
•our ability to maintain and grow sales of our AVISE® testing products, as well as the costs associated with conducting clinical studies to demonstrate the utility of our products and support reimbursement efforts;
•our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for our testing products;
•fluctuations in working capital;
•the costs of developing our product pipeline, including the costs associated with conducting our ongoing and future validation, utility and outcome studies as well as the success of our development efforts;
•the additional costs we may incur as a result of operating as a public company;
33 -------------------------------------------------------------------------------- •the extent to which we establish additional partnerships or in-license, acquire or invest in complementary businesses or products as well as the success of our existing partnerships and/or in-licenses; and
•the costs associated with our promotion of other therapeutics, if any, including the expansion of our sales capabilities, and the extent and timing of generating revenue from each such promotion, if any.
Until such time, if ever, as we can generate revenue to support our costs structure, we expect to finance our operations through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. If additional funding is required or desired, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all, or that we will generate sufficient cash from operations to adequately fund our operating needs or achieve or sustain profitability. If we are unable to raise additional capital or generate sufficient cash from operations to adequately fund our operations, we will need to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion plans or commercialization efforts. Doing so will likely have an unfavorable effect on our ability to execute on our business plan and could have a negative impact on our commercial and strategic relationships. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended June 30, 2022 2021 (in thousands) (As Restated) Net cash (used in) provided by: Operating activities$ (19,728) $ (8,762) Investing activities (3,033) (881) Financing activities (294) 64,771 Net change in cash, cash equivalents and restricted cash $
(23,055)
Cash Flows from Operating Activities
Net cash used in operating activities for the six months endedJune 30, 2022 was$19.7 million and primarily resulted from (i) our net loss of$24.9 million adjusted for non-cash charges of$4.3 million related to stock-based compensation, depreciation, amortization, non-cash lease expense and non-cash interest and (ii) changes in our net operating assets of$0.9 million primarily related to net decreases in accrued and other current liabilities and operating lease liabilities, partially offset by net increases in accounts payable and net decreases in prepaid expenses and other current assets. Net cash used in operating activities for the six months endedJune 30, 2021 was$8.8 million and primarily resulted from (i) our net loss of$12.6 million adjusted for non-cash charges of$3.0 million related to stock-based compensation, depreciation, amortization and non-cash interest and (ii) changes in our net operating assets of$0.8 million primarily related to net decreases in prepaid expenses and other current assets.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended
Cash Flows from Financing Activities
34 -------------------------------------------------------------------------------- Net cash used in financing activities for the six months endedJune 30, 2022 was$0.3 million and primarily resulted from payment on finance lease obligations and payment of taxes withheld on vested restricted stock units, partially offset by proceeds from ESPP purchases. Net cash provided by financing activities for the six months endedJune 30, 2021 was$64.8 million primarily resulted from the net proceeds received from our public offering inMarch 2021 of$64.7 million and proceeds from ESPP purchases, partially offset by principal payments on finance lease obligations.
Critical Accounting Policies and Significant Management Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles (GAAP). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated 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, and any such differences may be material. For a description of our critical accounting policies, please see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Significant Management Estimates" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Except as disclosed in Note 2 to the unaudited condensed financial statements included in this Amended Quarterly Report on Form 10-Q/A, there have been no significant changes in our critical accounting policies and estimates during the three months endedJune 30, 2022 as compared to the critical accounting policies and estimates disclosed in the Management's Discussion and Analysis of Financial Condition and Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 22, 2022 .
Recent Accounting Pronouncements
Please see Note 2 to the unaudited condensed financial statements included in this Amended Quarterly Report on Form 10-Q/A for a summary of changes in significant accounting policies.
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012 (the JOBS Act), contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." The JOBS Act permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our audited financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (the Securities Act), which will occur in 2024. However, if certain events occur prior to the end of this five-year period, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed$1.07 billion or we issue more than$1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to this anniversary.
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