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 Quarterly Report on Form 10-Q
and with our audited financial statements and notes thereto for the year ended
December 31, 2020 included in our Annual Report on Form 10-K for the year ended
December 31, 2020, as amended.
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, our ability to implement an
integrated testing and therapeutics strategy, the expected benefits from our
partnerships or promotion arrangements with third-parties, 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.

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 CB-CAPs technology. Our
goal is to enable rheumatologists to improve care for patients through the
differential diagnosis, prognosis and monitoring of complex autoimmune and
autoimmune-related diseases, including systemic lupus erythematosus, or SLE, and
rheumatoid arthritis, or RA. Our strategy includes leveraging our portfolio of
testing products to market therapeutics through our sales channel, targeting the
approximately 5,000 rheumatologists across the United States. 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 CTDs and other related diseases with overlapping symptoms. We
commercially launched AVISE® CTD in 2012 and revenue from this product comprised
81% and 83% of our revenue for the three months ended March 31, 2021 and 2020,
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. In December 2018 we entered into the co-promotion
agreement, or the Janssen Agreement, with Janssen Biotech, Inc., or Janssen, to
exclusively promote SIMPONI® in order to advance our integrated testing and
therapeutics strategy and we began direct promotion of SIMPONI® in January 2019.
Our SIMPONI® promotion efforts contributed approximately $0.3 million and no
revenue for the three months ended March 31, 2021 and 2020, respectively, with
our quarterly tiered promotion fee based on the incremental increase in total
prescribed units above a predetermined average baseline. See "-
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Janssen Promotion Agreement" below for additional terms of the agreement. We
also have agreements with GlaxoSmithKline plc., or GSK, Covance Inc. 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 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 as Brigham and Women's Hospital, Hospital
for Special Surgery, Duke University and Emory University as well as the Lupus
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 the Clinical Laboratory
Improvement Amendments of 1988, or CLIA, by the Centers for Medicare and
Medicaid Services, or CMS, and accredited by the College of American
Pathologists, or CAP, and located in Vista, California. Our laboratory is
certified for performance of high-complexity testing by CMS in accordance with
CLIA. We are approved to offer our products in all 50 states. Our clinical
laboratory reports all AVISE® testing product results within five business days.
In the second half of 2021, we expect to begin the conversion of approximately
8,000 square feet of warehouse space into additional clinical laboratory and
research and development facility space, which is expected to be completed in
the first half of 2022. 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
development of tests for fibromyalgia, RA, thrombosis and lupus nephritis.
We market our AVISE® testing products using our specialized sales force. As of
March 31, 2021, we have a sales force of 60 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 enables 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 our efforts developing and
marketing products for the diagnosis, prognosis and monitoring of autoimmune
diseases. Although our revenue has increased sequentially year over year, we
have never been profitable and, as of March 31, 2021 we had an accumulated
deficit of $187.5 million. We incurred net losses of $6.2 million and $5.6
million for the three months ended March 31, 2021 and 2020, 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, or IPO, in September
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. In March 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 of March 31, 2021, we had $118.1 million of cash and cash
equivalents.
Impact of COVID-19
The current COVID-19 worldwide pandemic has presented substantial public health
challenges and is affecting our employees, patients, physicians and other
healthcare providers, communities and business operations, as well as the U.S.
and global economies and financial markets. International and U.S. governmental
authorities in impacted regions are taking actions in an effort to slow the
spread of COVID-19, including issuing varying forms of "stay-at-home" orders,
restricting business functions outside of one's home, restricting gatherings,
restricting travel, and mandating social distancing and face coverings. Certain
jurisdictions have begun a phased re-opening, although the
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potential to return to prior restrictions remains if there are increases in new
COVID-19 cases in the future. Even in areas where "stay-at-home" restrictions
have been lifted and the number of COVID-19 cases have declined, many
individuals remain cautious about resuming activities such as preventative-care
medical visits. As a result of COVID-19 related limitations and reordering of
priorities across the U.S. healthcare system, a reduction in patient flow
occurred and our test volumes began to decrease in the second half of March 2020
and we experienced an AVISE® CTD volume decrease of approximately 5% in the year
ended December 31, 2020 as compared to 2019. We substantially recovered to
pre-COVID-19 AVISE® CTD tests delivered in the fourth quarter 2020. For the
three months ended March 31, 2021 as compared to the same period in 2020, we
experienced a AVISE® CTD test volume increase of approximately 7%. However, the
continued spread of COVID-19 may adversely affect testing volumes in future
periods, the extent of which is highly uncertain.
In addition, we believe there are several other important factors that have
impacted, and that we expect will impact our operating performance and results
of operations, including shutdowns of our facilities and operations as well as
those of our suppliers and courier services, disruptions to the supply chain of
material needed for our tests, our sales and commercialization activities and
our ability to receive specimens and perform or deliver the results from our
tests, delays in reimbursement and coverage decisions from Medicare and
third-party payors and in interactions with regulatory authorities, as well as
our inability to achieve volume-based pricing discounts with our key suppliers
and absorb fixed laboratory expenses. For example, we have experienced delays in
patient enrollment for ongoing and planned clinical studies involving our tests,
which may delay or prevent launch of future test products. We have also
experienced delays in procurement of our testing supplies due to suppliers
rationing testing supplies and prioritizing COVID-19 testing in the first
quarter of 2021, which may continue into the future, and our partners, including
Janssen, may also experience a disruption in their ability to readily obtain
supply. Our sales force has been, and for an extended period of time may
continue to be limited to their in-person interactions with healthcare
providers, and therefore, also limited their ability to engage in various types
of healthcare provider education activities. Healthcare providers and patients
have canceled or delayed scheduling, and for an extended period of time may
continue to cancel or delay scheduling, standard wellness visits and other
non-emergency appointments and procedures, contributing to a decline in orders
of our testing products. The portion of our workforce which has been working
remotely in an effort to reduce the spread of COVID-19, may be infected from the
virus or otherwise distracted. We may also face increased competition for
laboratory employees due to the increased demand in the industry for such
personnel. We may inaccurately estimate the duration or severity of the COVID-19
pandemic, which could cause us to misalign our staffing, spending, activities
and precautionary measures with market current or future market conditions.
In response to the COVID-19 pandemic, we initially curtailed non-essential
travel and have equipped most of our employees with the ability to work remotely
with the exception of our clinical laboratory employees, and implemented
measures to protect the health of our employees and to support the functionality
of our clinical laboratory, such as providing personal protective equipment
(including face masks or shields) and maintaining social distancing. In
addition, in the second quarter of 2020, our sales force recommenced certain
field-based interactions and scaled marketing spend, although access to
healthcare providers remains limited and the use of virtual sales tools has
increased. From March 2020 through December 31, 2020, as a result of the
COVID-19 pandemic, we terminated our temporary employees and 18 full-time
employees, which included three employees at the vice president level. The full
extent of which the COVID-19 pandemic will directly or indirectly continue to
impact our business, results of operations and financial condition, 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, as well as the economic impact on local, regional,
national and international markets.

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 through March 31, 2021, we have delivered over 516,000 of these tests.
Through the first quarter of 2021, 29,029 AVISE® CTD tests were delivered,
representing approximately 7% growth over the same period in 2020. The number of
ordering healthcare providers in the first quarter of 2021 was a record 1,763,
representing an approximate 4% increase over the same period in 2020, and we had
a record 659 adopting healthcare
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providers (defined as those who previously prescribed at least 11 diagnostic
tests in the corresponding period) compared to 582 in the same period in 2020. A
high percentage of adopting healthcare providers continue to order tests in
subsequent quarters, as approximately 99% of adopting healthcare providers from
the fourth quarter of 2020 ordered at least one diagnostic test in the first
quarter of 2021. 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 third-party commercial payors, most of which have not contracted with
us to be a participating provider. Historically, we have experienced situations
where commercial payers 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.
?Promotion of SIMPONI®.  We began promoting SIMPONI® in the United States under
the Janssen Agreement in January 2019. Our SIMPONI® promotion efforts
contributed approximately $0.3 million and no revenue for the three months ended
March 31, 2021 and 2020, respectively. We may continue to encounter difficulties
in successfully promoting SIMPONI® and generating significant revenue under the
Janssen Agreement. Our ability to effectively promote SIMPONI® will require us
to be successful in a range of activities, including creating demand for
SIMPONI® through our own sales activities as well as those of Janssen. In
interest of supporting these efforts we plan to continue to evaluate the reach
and frequency of our sales force and the dedication of time and resources to
supporting the co-promotion efforts of SIMPONI® as compared to other aspects of
our business. We expect to encounter difficulties being able to maintain
meaningful co-promotion revenue based on sales over the predetermined baseline
in 2021 and we may not be successful in materially increasing market share,
potentially resulting in the recognition of the minimum promotion fee of $0.3
million in the second quarter of 2021, which would cause us to continue to rely
on our existing testing products to drive revenue growth. Additionally, there is
no minimum promotion fee for the second half of 2021.
?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 realized an increase to our gross margins
beginning in the first quarter of 2020 following the expiration of a 10% annual
royalty on our CB-CAPs technology. 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. However, our efforts to
maintain a meaningful margin may be partially offset by our ability to generate
meaningful co-promotion revenue in 2021.
?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.
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?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
payor. Changes to such estimates may increase or decrease revenue recognized in
future periods.
While each of these areas present 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
In December 2018, we entered into the Janssen Agreement, under which we are
responsible for the costs associated with our sales force in promoting SIMPONI®
in the United States. Janssen is 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 are entitled to a quarterly tiered promotion fee
based on the incremental increase in total prescribed units of SIMPONI® for that
quarter over a predetermined baseline. For the quarter ended March 31, 2020, the
tiered promotion fee ranged from $750 to $1,250 per prescription over a
predetermined baseline. Due in part to COVID-19, in June 2020 we amended the
Janssen Agreement, to adjust the predetermined average baseline for total
prescribed units of SIMPONI® to approximately 26,000 prescribed units per
quarter. For each of the third and fourth quarters of 2020, we received a
minimum promotion fee of $0.3 million and the fee was be capped at 5% above the
adjusted predetermined baseline. In December 2020, we further amended the
Janssen Agreement, pursuant to which the predetermined average baseline for
total prescribed units of SIMPONI® for the quarters ending December 31, 2020,
March 31, 2021 and June 30, 2021, was adjusted to approximately 28,750
prescribed units per quarter, subject to further adjustment under certain
circumstances. For the first and second quarter of 2021, we will be entitled to
an amended quarterly tiered promotion fee ranging from $500 to $1,000 per
prescription based on the incremental increase in total prescribed units of
SIMPONI® for that quarter over the predetermined baseline. Pursuant to the
Amended Janssen Agreement, for each of the first and second quarters of 2021, we
will receive a minimum promotion fee of $0.3 million and the fee will be capped
at 10% above the adjusted predetermined baseline. The quarterly tiered promotion
fee for the remaining term of the Amended Janssen Agreement beginning on July 1,
2021 will revert to the terms set forth in the Janssen Agreement prior to the
amendment, with no minimum promotion fee and no cap on predetermined baseline
units. The Janssen Agreement expires on December 31, 2021, unless extended by us
for an additional 12 months upon 180 days written notice prior to the end of the
current term. If we elect to extend the term, the predetermined baseline for
2022 will be subject to future agreement by us and Janssen. Janssen may
terminate the Janssen Agreement at any time for any reason upon 30 days' notice
to us, and we may terminate the Janssen Agreement for any reason at the end of
any calendar quarter upon 30 days' notice to Janssen. Either party may terminate
the Janssen Agreement in the event of the other party's default of any of its
material obligations under the agreement if such default remains uncured for a
specified period of time following receipt of written notice of such default.
We recognized approximately $0.3 million and no revenue for the three months
ended March 31, 2021 and 2020, respectively, for our promotional efforts under
the Janssen Agreement.
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, 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 in the United States. The
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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 (i.e. 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. These assessments require significant judgment by management.
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 well as our
ability to continue to generate meaningful co-promotion revenue. We expect to
encounter difficulties promoting SIMPONI® above the predetermined baseline
potentially resulting in us receiving the minimum promotion fee of $0.3 million
in the second quarter of 2021. Additionally, there is no minimum promotion fee
for the second half of 2021.
As discussed above, we substantially recovered to pre-COVID-19 AVISE® CTD tests
delivered in the fourth quarter of 2020. However, the continued spread of
COVID-19 may adversely affect testing volumes in future periods, the extent of
which 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.
Each payor, 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 month's billings.
Assuming future testing volumes are not negatively impacted by the 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
shipping costs and other volume efficiencies we may gain as the number of tests
we perform increases. 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 2021 as compared to 2020, as we continue to evaluate the
reach and frequency of our sales and sales support functions, expected additions
to headcount and increases for personnel costs, including stock-based
compensation.
Research and Development Expenses
Research and development expenses include costs incurred to develop our
technology, testing 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
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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 2021 as compared to 2020, 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 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 with Innovatus Life Sciences Lending Fund I, LP, or
Innovatus.
We expect interest expense to remain consistent in 2021 as compared to 2020, and
remain consistent thereafter until 2023.
Other Income, Net
Other income, net, consists primarily of interest income earned on our cash and
cash equivalents.
Income Tax Benefit
Income taxes include federal and state income taxes in the United States.

Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020:
                                                                      Three Months Ended March 31,
                                                                         2021                  2020             Change
                                                                                (unaudited, in thousands)
Revenue                                                           $        10,587          $   9,584          $ 1,003
Operating expenses:
Costs of revenue                                                            4,711              4,545              166
Selling, general and administrative expenses                               10,040              9,626              414
Research and development expenses                                           1,403                634              769

Total operating expenses                                                   16,154             14,805            1,349
Loss from operations                                                       (5,567)            (5,221)            (346)
Interest expense                                                             (645)              (631)             (14)

Other income, net                                                               3                171             (168)
Loss before income taxes                                                   (6,209)            (5,681)            (528)
Income tax benefit                                                              -                118             (118)
Net loss                                                          $        (6,209)         $  (5,563)         $  (646)


Revenue
Revenue increased $1.0 million, or 10.5%, for the three months ended March 31,
2021 compared to the three months ended March 31, 2020, primarily due to an
increase in the number of diagnostic tests delivered resulting in part from
volume reductions experienced in late March 2020 as a result of the COVID-19
pandemic. The number of AVISE® CTD tests, which accounted for 81% and 83% of
revenue in the three months ended March 31, 2021 and 2020, respectively,
increased to 29,029 tests delivered in the three months ended March 31, 2021
compared to 27,126 tests delivered in the same 2020 period. The adoption of the
AVISE® CTD test by rheumatologists for the three months ended March 31, 2021
increased to 1,763 ordering healthcare providers as compared to 1,692 ordering
healthcare providers in the same 2020 period. In addition, revenue from the
co-promotion of SIMPONI®
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increased to approximately $0.3 million during the three months ended March 31,
2021 compared to no co-promotion revenue during the three months ended March 31,
2020.
Costs of Revenue
Costs of revenue increased $0.2 million, or 3.7%, for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020. This increase
was primarily due to increased direct costs such as materials and supplies,
labor and shipping and handling associated with the increase in test volume in
2021 compared to 2020, partially offset by decreased royalty costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.4 million, or 4.3%,
for the three months ended March 31, 2021 compared to the three months ended
March 31, 2020. This increase was primarily due to an increase of $0.4 million
of employee related expenses, including stock-based compensation and recruitment
expenses, and increases related to insurance expenses of $0.1 million and legal
expenses of $0.1 million, partially offset by decreases in audit and
professional services of $0.1 million and marketing expenses of $0.1 million.
The first quarter of 2020 included one-time restructuring charges of
approximately $0.2 million.

Research and Development Expenses
Research and development expenses increased $0.8 million for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020. This
increase was primarily due to an increase of $0.4 million of employee related
expenses, including stock-based compensation and recruitment expenses, and an
increase related to clinical study expenses of $0.4 million.
Interest Expense
Interest expense remained consistent for the three months ended March 31, 2021
compared to the three months ended March 31, 2020.
Other Income, Net
Other income, net, decreased $0.2 million for the three months ended March 31,
2021 compared to the three months ended March 31, 2020. The decrease was
primarily driven by lower money market interest rates in 2021 compared to 2020.
Income Tax Benefit
Income tax benefit decreased $0.1 million for the three months ended March 31,
2021 compared to the three months ended March 31, 2020 due to a change in tax
law under the CARES Act enacted in 2020 that resulted in an income tax benefit
during the three months ended March 31, 2020.
Liquidity and Capital Resources
We have incurred net losses since our inception. For the three months ended
March 31, 2021 and 2020, we incurred a net loss of $6.2 million and
$5.6 million, respectively, and we expect to incur additional losses and
increased operating expenses in future periods. As of March 31, 2021, we had an
accumulated deficit of $187.5 million. To date, we have generated only limited
revenue, and we may never achieve revenue sufficient to offset our expenses.
Through the date of our IPO in September 2019, our operations were financed
primarily from sales of our common stock and redeemable convertible preferred
stock and borrowings under various debt financings. In September 2019, we
completed our IPO and received net proceeds of approximately $50.4 million, net
of underwriting discounts, commissions and other offering expenses, for
aggregate expenses of approximately $7.5 million. On November 10, 2020, we filed
a registration statement on Form S-3 (the Shelf Registration Statement),
covering the offering, from time to time, of up to $150.0 million of common
stock, preferred stock, debt securities, warrants and units, which Shelf
Registration Statement became effective on November 19, 2020. In March 2021, we
completed a
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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 of March 31, 2021, we had $118.1 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.
In September 2017, we entered into the loan and security agreement with
Innovatus under which we immediately drew down $20.0 million. In December 2018,
we borrowed an additional $5.0 million under the loan agreement. In November
2019, we amended the loan and security agreement with Innovatus, which we
collectively refer to as the Amended Loan Agreement. Pursuant to the Amended
Loan Agreement, the loan term is for five years with a final maturity date of
November 2024. The Amended Loan Agreement accrues interest at an annual rate of
8.5%, of which 2.0%, during the first 36 months, will be treated as paid in-kind
interest. Paid in-kind interest is added to the principal balance each period.
After the initial 36 months of the loan, the entire 8.5% will be paid in cash at
the end of each period. On or after the first anniversary of the Loan Amendment,
but before the second anniversary of the Loan Amendment, we may, at our option,
prepay the term loan borrowings by paying the lender a prepayment premium.
Prepayment before the second anniversary of the Loan Amendment may only occur
for specified reasons in the Amended Loan Agreement. The prepayment premium
decreases by 1% during each subsequent twelve-month period after the first
anniversary of the Loan Amendment.
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 liquidity of $2.0 million and achieve certain minimum
amounts of revenue, and 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. At March 31, 2021, 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.
In connection with the execution of the loan and security agreement with
Innovatus in November 2017, we issued the lender a seven-year warrant to
purchase 15,384,615 shares of our Series F redeemable convertible preferred
stock at an exercise price of $0.078 per share, and in December 2018, in
connection with the additional $5.0 million borrowed under the loan and security
agreement, we issued to the lender a seven-year warrant to purchase 3,846,154
shares of our Series F redeemable convertible preferred stock at an exercise
price of $0.078 per share. In connection with the completion of our IPO in
September 2019, the warrants were automatically converted into warrants
exercisable for an aggregate of 104,722 shares of common stock at an exercise
price of $14.32.
In April 2020, we received $0.7 million of funding under the CARES Act Provider
Relief Fund, subject to our agreement to comply with the Department of Health &
Human Services', or HHS, standard terms and conditions. The CARES Act Provider
Relief Fund is a federal fund allocated for general distributions to Medicare
facilities and providers impacted by the COVID-19 pandemic and is intended to
support healthcare-related expenses or lost revenue attributable to COVID-19.
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, promote SIMPONI®, 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
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approximately 8,000 square feet of warehouse space into additional clinical
laboratory and research and development facility space, which is expected to be
completed in the first half of 2022. The expansion of our clinical laboratory
and research 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 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 in Vista, California and
payments for capital 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, including challenges
resulting from social distancing and stay-at home orders through a reduction in
testing volumes;
•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 studies;
•the additional costs we may incur as a result of operating as a public company;
•the costs associated with our promotion of SIMPONI®, including the expansion of
our sales capabilities, and the extent and timing of generating revenue from
such promotion; and
•the extent to which we establish additional partnerships or in-license, acquire
or invest in complementary businesses or products.
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 relationships with parties
such as Janssen. 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
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The following table summarizes our cash flows for the periods indicated:

Three Months Ended March 31,


                                                                                   2021                  2020
(in thousands)                                                                           (unaudited)
Net cash provided by (used in):
Operating activities                                                        $        (4,312)         $  (3,301)
Investing activities                                                                   (167)               (84)
Financing activities                                                                 65,081                (51)
Net change in cash, cash equivalents and restricted cash

$ 60,602 $ (3,436)




Cash Flows from Operating Activities
Net cash used in operating activities for the three months ended March 31, 2021
was $4.3 million and primarily resulted from our net loss of $6.2 million
adjusted for non-cash charges of $1.3 million related to stock-based
compensation, depreciation, amortization and non-cash interest and changes in
our net operating assets of $0.6 million primarily related to net decreases in
prepaid expenses and other current assets and accounts receivable, net,
partially offset by net decreases in accounts payables and accrued and other
current liabilities.
Net cash used in operating activities for the three months ended March 31, 2020
was $3.3 million and primarily resulted from our net loss of $5.6 million
adjusted for non-cash charges of $0.6 million related to depreciation,
amortization, stock-based compensation and non-cash interest. The net cash in
operating activities were partially offset by changes in our net operating
assets of $1.6 million primarily related to net increases in accounts payable
and accrued and other current liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021
and March 31, 2020 was $0.2 million and $0.1 million, respectively, and was due
to net purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities for the three months ended March 31,
2021 was $65.1 million primarily resulting from the net proceeds received from
our public offering in March 2021 of $65.0 million and proceeds from Employee
Stock Purchase Plan purchases, partially offset by principal payments on capital
lease obligations.
Net cash used by financing activities for the three months ended March 31, 2020
was $0.1 million and primarily resulted from principal payments on capital 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 with United States generally accepted accounting
principles, or U.S. GAAP. The year-end condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures required
by U.S. 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 the Annual Report on Form 10-K for the year ended
December 31, 2020, as amended. There have been no significant changes in our
critical accounting policies and estimates during the three months ended
March 31, 2021 as compared to the critical accounting policies and estimates
disclosed in Management's
                                       29

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Discussion and Analysis of Financial Condition and Operations included in the
Annual Report on Form 10-K for the year ended December 31, 2020, as amended,
other than as set forth in Note 2 to the unaudited condensed financial
statements included in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Please see Note 2 to the unaudited condensed financial statements included in
this Quarterly Report on Form 10-Q for a summary of changes in significant
accounting policies.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have any
off-balance sheet arrangements, as defined under the rules and regulations of
the SEC.
JOBS Act Accounting Election
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, which such fifth anniversary will occur in 2024. However, if
certain events occur prior to the end of such 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 the end of such five-year period.

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