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 endedDecember 31, 2020 included in our Annual Report on Form 10-K for the year endedDecember 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 acrossthe 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 72% of our revenue for the six months endedJune 30, 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. 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 asBrigham and Women's Hospital ,Hospital for Special Surgery ,Duke University andEmory University as well 20 -------------------------------------------------------------------------------- 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, or CLIA, by theCenters for Medicare and Medicaid Services , or CMS, and accredited by theCollege of American Pathologists , or 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 expect to begin 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, and expect to complete such conversion in the third quarter 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 ofJune 30, 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 of 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 ofJune 30, 2021 we had an accumulated deficit of$193.9 million . We incurred net losses of$12.6 million and$8.9 million for the six months endedJune 30, 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, 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, 2021 , we had$112.6 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 theU.S. and global economies and financial markets. International andU.S. governmental authorities in impacted regions have taken 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 potential to return to prior restrictions remains if there are increases (or, in some jurisdictions, continued increases) in new cases of COVID-19 or any of its viral variants 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 theU.S. healthcare system, a reduction in patient flow occurred and our test volumes 21 -------------------------------------------------------------------------------- began to decrease in the second half ofMarch 2020 and we experienced an AVISE® CTD volume decrease of approximately 5% in the year endedDecember 31, 2020 as compared to 2019. In the fourth quarter 2020, our volume of AVISE® CTD tests delivered substantially recovered to pre-COVID-19 levels. For the three months endedJune 30, 2021 as compared to the same period in 2020, we experienced a AVISE® CTD test volume increase of approximately 80%. For the six months endedJune 30, 2021 as compared to the same period in 2020, we experienced a AVISE® CTD test volume increase of approximately 37%. However, the continued spread of COVID-19, the extent of which is highly uncertain, may adversely affect testing volumes in future periods. 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 beginning in the first quarter of 2021, which may continue into the future, and our partners 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, in their in-person interactions with healthcare providers, and therefore, also limited in 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. FromMarch 2020 throughDecember 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, 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. 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, 2021 , we have delivered over 549,000 of these tests. Through the second quarter of 2021, 62,357 AVISE® CTD tests were delivered, representing approximately 37% growth over the same period in 2020. The number of ordering healthcare providers in the second quarter of 2021 was a record 1,934, representing an approximate 34% increase over the same period in 2020, and we had a record 703 22 -------------------------------------------------------------------------------- adopting healthcare providers (defined as those who previously prescribed at least 11 diagnostic tests in the corresponding period) compared to 428 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 first quarter of 2021 ordered at least one diagnostic test in the second 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 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. ?Success of 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 approximately$0.6 million and$2.1 million in revenue for the six months endedJune 30, 2021 and 2020, respectively. We will continue to rely on our existing testing products to drive revenue growth and intend to leverage our integrated testing and therapeutics strategy to establish partnerships with a focus on the development and commercialization of therapeutics that are synergistic with our testing products. ?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 payor. Changes to such estimates may increase or decrease revenue recognized in future periods. 23 -------------------------------------------------------------------------------- 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 InDecember 2018 , we entered into the Janssen Agreement, under which we are responsible for the costs associated with our sales force in promoting SIMPONI® inthe United States . InAugust 2021 , the Company and Janssen mutually agreed to terminate the Janssen Agreement effective onAugust 31, 2021 . Pursuant to the Janssen Agreement, 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 quarter over a predetermined baseline. For the quarter endedJune 30, 2020 , the tiered promotion fee ranged from$750 to$1,250 per prescription over a predetermined baseline. Due in part to COVID-19, inJune 2020 we amended the Janssen Agreement, to adjust the predetermined average baseline for the third and fourth quarters of 2020. InDecember 2020 , we further amended the Janssen Agreement, to adjust the average baseline for total prescribed units of SIMPONI® for the quarters endingDecember 31, 2020 andMarch 31, 2021 , subject to further adjustment under certain circumstances. InJune 2021 , the Janssen Agreement was again amended to proportionally increase the baseline for prescribed units for the quarter endingJune 30, 2021 to reflect the addition of certain geographies to the sales territories covered by the Janssen Agreement. For the first and second quarters of 2021, we are 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, and we are entitled to receive a minimum promotion fee of$0.3 million and the fee will be capped at 10% above the adjusted predetermined baseline. In connection with the Janssen Agreement's termination, we are entitled to receive an aggregate of$0.6 million in consideration. During the remainder of the term of the Janssen Agreement and the 9 month period immediately following its termination onAugust 31, 2021 , we will be restricted from promoting any other biologic or Janus kinase inhibitor used for treatment of indications covered by the Janssen Agreement without first obtaining Janssen's written consent. We recognized approximately$0.6 million and$2.1 million in revenue for the six months endedJune 30, 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 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. These assessments require significant judgment by management. 24 -------------------------------------------------------------------------------- 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 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. 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 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 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 withInnovatus Life Sciences Lending Fund I, LP , orInnovatus . We expect interest expense to remain consistent in 2021 as compared to 2020, and remain consistent thereafter until 2023. 25 -------------------------------------------------------------------------------- Other (Expense) Income, Net Other income, net, consists primarily of interest income earned on our cash and cash equivalents and amount received under theCARES Act Provider Relief Fund in the second quarter of 2020. Income Tax Benefit Income taxes include federal and state income taxes inthe United States . Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020: Three Months Ended June 30, 2021 2020 Change (unaudited, in thousands) Revenue$ 12,772 $ 8,948 $ 3,824 Operating expenses: Costs of revenue 5,451 3,338 2,113 Selling, general and administrative expenses 11,171 8,276 2,895 Research and development expenses 1,892 751 1,141 Total operating expenses 18,514 12,365 6,149 Loss from operations (5,742) (3,417) (2,325) Interest expense (663) (635) (28) Other (expense) income, net (5) 689 (694) Net loss$ (6,410) $ (3,363) $ (3,047) Revenue Revenue increased$3.8 million , or 42.7%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , primarily due to an increase in the number of diagnostic tests delivered resulting in part from volume reductions experienced in lateMarch 2020 as a result of the COVID-19 pandemic. The number of AVISE® CTD tests delivered, which accounted for 81% and 60% of revenue in the three months endedJune 30, 2021 and 2020, respectively, increased to 33,328 tests delivered in the three months endedJune 30, 2021 compared to 18,522 tests delivered in the same 2020 period. The adoption of the AVISE® CTD test by rheumatologists for the three months endedJune 30, 2021 increased to 1,934 ordering healthcare providers as compared to 1,442 ordering healthcare providers in the same 2020 period. The increase in revenue was partially offset by a decrease in revenue from the co-promotion of SIMPONI® during the three months endedJune 30, 2021 to approximately$0.3 million compared to approximately$2.1 million during the three months endedJune 30, 2020 . Costs of Revenue Costs of revenue increased$2.1 million , or 63.3%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 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. Selling, General and Administrative Expenses Selling, general and administrative expenses increased$2.9 million , or 35.0%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily due to an increase of$2.2 million of employee related expenses, including stock-based compensation and recruitment expenses, and increases related to audit and professional services of$0.2 million , insurance expenses of$0.3 million , marketing expenses of$0.1 million and facilities expenses of$0.1 million .
Research and Development Expenses
26 -------------------------------------------------------------------------------- Research and development expenses increased$1.1 million for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily due to increases related to license fees of$0.4 million , clinical trial expenses of$0.4 million , employee related expenses, including stock-based compensation, of$0.2 million and laboratory supplies expense of$0.1 million . Interest Expense Interest expense remained substantially consistent for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . Other (Expense) Income, Net Other (expense) income, net, decreased$0.7 million for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The decrease was primarily driven by the$0.7 million we received under theCARES Act Provider Relief Fund due to lost revenues attributable to COVID-19 in the second quarter of 2020. Comparison of the Six Months EndedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 Change (unaudited, in thousands) Revenue$ 23,359 $ 18,532 $ 4,827 Operating expenses: Costs of revenue 10,162 7,883 2,279 Selling, general and administrative expenses 21,211 17,902 3,309 Research and development expenses 3,295 1,385 1,910 Total operating expenses 34,668 27,170 7,498 Loss from operations (11,309) (8,638) (2,671) Interest expense (1,308) (1,266) (42) Other (expense) income, net (2) 860 (862) Loss before income taxes (12,619) (9,044) (3,575) Income tax benefit - 118 (118) Net loss$ (12,619) $ (8,926) $ (3,693) Revenue Revenue increased$4.8 million , or 26.0%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , primarily due to an increase in the number of diagnostic tests delivered resulting in part from volume reductions experienced in lateMarch 2020 as a result of the COVID-19 pandemic. The number of AVISE® CTD tests delivered, which accounted for 81% and 72% of revenue in the six months endedJune 30, 2021 and 2020, respectively, increased to 62,357 tests delivered in the six months endedJune 30, 2021 compared to 45,648 tests delivered in the same 2020 period. The adoption of the AVISE® CTD test by rheumatologists for the six months endedJune 30, 2021 increased to 2,236 ordering healthcare providers as compared to 1,950 ordering healthcare providers in the same 2020 period. The increase in revenue was partially offset by a decrease in revenue from the co-promotion of SIMPONI® during the six months endedJune 30, 2021 to approximately$0.6 million compared to approximately$2.1 million during the six months endedJune 30, 2020 . Costs of Revenue Costs of revenue increased$2.3 million , or 28.9%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 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 27 -------------------------------------------------------------------------------- Selling, general and administrative expenses increased$3.3 million , or 18.5%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily due to an increase of$2.6 million of employee related expenses, including stock-based compensation and recruitment expenses, and increases related to insurance expenses of$0.3 million , audit and professional services of$0.1 million and facilities expenses of$0.2 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$1.9 million for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily due to increases related to clinical trial expenses of$0.7 million , employee related expenses, including stock-based compensation and recruitment expenses, of$0.5 million , license fees of$0.4 million and laboratory supplies expense of$0.2 million . Interest Expense Interest expense remained substantially consistent for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Other (Expense) Income, Net Other (expense) income, net, decreased$0.9 million for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The decrease was primarily driven by the$0.7 million we received under theCARES Act Provider Relief Fund due to lost revenues attributable to COVID-19 in the second quarter of 2020 and lower money market interest rates in 2021 compared to 2020. Income Tax Benefit Income tax benefit decreased$0.1 million for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 due to a change in tax law under the CARES Act enacted in 2020 that resulted in an income tax benefit during the six months endedJune 30, 2020 . Liquidity and Capital Resources We have incurred net losses since our inception. For the six months endedJune 30, 2021 and 2020, we incurred a net loss of$12.6 million and$8.9 million , respectively, and we expect to incur additional losses and increased operating expenses in future periods. As ofJune 30, 2021 , we had an accumulated deficit of$193.9 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 inSeptember 2019 , our operations were financed primarily from sales of our common stock and redeemable convertible preferred stock and borrowings under various debt financings. InSeptember 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 . OnNovember 10, 2020 , we filed a registration statement on Form S-3, or 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 onNovember 19, 2020 . 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, 2021 , we had$112.6 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. InNovember 2019 , 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 five years with a final maturity date ofNovember 2024 . The Amended Loan Agreement accrues interest at an annual rate of 8.5%, of 28 -------------------------------------------------------------------------------- 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% at each of the second anniversary and the third 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 , 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. AtJune 30, 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 withInnovatus inNovember 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 inDecember 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 inSeptember 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 per share. InApril 2020 , we received$0.7 million of funding under theCARES Act Provider Relief Fund , subject to our agreement to comply with theDepartment 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, 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 expect to begin such conversion in the second half of 2021 and complete such conversion in the third quarter 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 29 -------------------------------------------------------------------------------- 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 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, 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; •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, including the expansion of our sales capabilities, and the extent and timing of generating revenue from each such promotion. 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 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
2021 2020 (in thousands) (unaudited) Net cash provided by (used in): Operating activities$ (8,762) $ (8,057) Investing activities (881) (237) Financing activities 64,771 (90) Net change in cash, cash equivalents and restricted cash
30 -------------------------------------------------------------------------------- Cash Flows from Operating Activities 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. Net cash used in operating activities for the six months endedJune 30, 2020 was$8.1 million and primarily resulted from (i) our net loss of$8.9 million adjusted for non-cash charges of$1.6 million related to depreciation, amortization, stock-based compensation, non-cash interest and deferred income taxes and (ii) changes in our net operating assets of$0.7 million primarily related to net increases in accounts receivables. Cash Flows from Investing Activities Net cash used in investing activities for the six months endedJune 30, 2021 and 2020 was$0.9 million and$0.2 million , respectively, and was due to net purchases of property and equipment. Cash Flows from Financing Activities Net cash provided in financing activities for the six months endedJune 30, 2021 was$64.8 million primarily resulting 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 capital lease obligations. Net cash used in financing activities for the six months endedJune 30, 2020 was$0.1 million and primarily resulted from principal payments on capital lease obligations, as well as proceeds from our unsecured loan pursuant to theU.S. Small Business Administration Paycheck Protection Program of the CARES Act, which we subsequently repaid inMay 2020 . 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, orU.S. GAAP. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required byU.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 our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as amended. There have been no significant changes in our critical accounting policies and estimates during the three months endedJune 30, 2021 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, 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 31
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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 theSecurities and Exchange Commission , or theSEC . JOBS Act Accounting Election The Jumpstart Our Business Startups Act of 2012, or 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, or 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 may cease to be an emerging growth company prior to the end of such five-year period.
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