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Item 7. Management’s Discussion and Analysis

2021-03-16 compared with 2020-03-25 · 164 added, 126 removed, 236 unchanged (55% of the section changed)

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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 nine testing products under our AVISE ® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases.

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 82% of our revenue for each of the years ended December 31, 2019 and 2018.

We commercially launched AVISE ® CTD in 2012 and revenue from this product comprised 70% and 82% of our revenue for the years ended December 31, 2020 and 2019, 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.

In order to advance our integrated testing and therapeutics strategy, in December 2018 we entered into the Janssen agreement to exclusively promote SIMPONI ® in the United States for the treatment of adult patients with moderate to severe RA and for other indicated rheumatic diseases.

We began direct promotion of SIMPONI ® in January 2019 and in support of these promotion efforts we expanded our salesforce from 31 representatives as of December 31, 2018 to 50 representatives as of December 31, 2019.

Our SIMPONI ® promotion efforts contributed approximately $1.5 million in incremental revenue in 2019 with our quarterly tiered promotion fee based on the incremental increase in total prescribed units above a predetermined average baseline of approximately 29,000 prescribed units per quarter.

We also have additional agreements with other leading pharmaceutical companies, including GSK and Horizon Therapeutics, that leverage our testing products and the information generated from such tests.

We plan to pursue additional strategic partnerships with a focus on the commercialization of therapeutics that are synergistic with our testing products.

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 Janssen Agreement 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 $5.1 million and $1.5 million in revenue for the years ended December 31, 2020 and 2019, respectively, with our quarterly tiered promotion fee based on the incremental increase in total prescribed units above a predetermined average baseline.

See "-Janssen Promotion Agreement" below for additional terms of the agreement.

We also have agreements with 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, and Duke 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 8,000 square foot clinical laboratory, which is certified by CLIA and accredited by CAP, and located in Vista, California.

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Our clinical laboratory reports all AVISE ® testing product results within five business days.

In the fourth quarter of 2020, we completed the build-out of approximately 2,000 additional square feet to our clinical laboratory.

We market our AVISE ® testing products using our specialized salesforce.

Unlike many diagnostic salesforces that are trained only to understand the comparative benefits of their tests, the specialized backgrounds of our salesforce 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 payers, such as insurance companies and health maintenance organizations, government payers, such as Medicare, and patients.

Reimbursement rates vary by product and payer.

We continue to focus on expanding coverage among existing contracted rheumatologists and to achieve coverage with commercial payers, laboratory benefit managers and evidence review organizations.

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.

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As of December 31, 2020, we had $57.4 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 re-opening only to return to restrictions due to increases in new COVID-19 cases.

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.

We experienced an AVISE ® CTD volume decrease of approximately 5% in the year ended December 31, 2020 as compared to 2019.

By the end of the third quarter of 2020, the number of AVISE ® CTD tests delivered substantially recovered to pre-COVID-19 AVISE ® CTD tests reported in the first quarter of 2020, and in the fourth quarter of 2020, the number of AVISE ® CTD delivered exceeded our pre-COVID-19 AVISE ® CTD tests reported in the first quarter of 2020.

For the three months ended December 31, 2020 as compared to the same period in 2019, we experienced a AVISE ® CTD volume increase of approximately 5%.

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 the resurgence of varying forms of "stay-at-home" orders in the fourth quarter of 2020, which may continue into the future, and our partners, including Janssen,

may also experience a disruption in their ability to readily obtain supply.

Our salesforce 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 have curtailed non-essential travel and 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 salesforce 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

We believe there are several important factors that have impacted, and that we expect will impact, our operating performance and results of operations, including:

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 its launch in 2012, we have grown the number of our AVISE ® CTD tests delivered at a compound annual growth rate of 81%, with limited incremental investment in our commercial infrastructure.

Over 105,000 AVISE ® CTD tests were delivered in 2019, representing 26% growth over 2018, and the number of ordering healthcare providers reached 1,707 in the fourth quarter of 2019, representing 34% growth over the same quarter in 2018.

In the fourth quarter of 2019, we reached 572 adopting healthcare providers, which we classify as those who had previously prescribed at least 11 diagnostic tests in the corresponding period, compared to 506 in the same period in 2018.

More than 387,000 AVISE ® CTD tests have been delivered since launch.

Since the launch of AVISE ® CTD in 2012 and through December 31, 2020, we have delivered over 487,000 of these tests.

For the year ended December 31, 2020, 100,450 AVISE ® CTD tests were delivered, representing an approximate 5% decline over the same period in 2019.

The number of ordering healthcare providers reached a record 2,500 for the year ended December 31, 2020, representing approximately 5% growth over the same period in 2019.

In the fourth quarter of 2020, the number of ordering healthcare providers reached 1,690 compared to 1,707 in the same period in 2019, and we had a record 635 adopting healthcare providers (defined as those who previously prescribed at least 11 diagnostic tests in the corresponding period) compared to 572 in the same period in 2019.

A high percentage of adopting healthcare providers continue to order tests in subsequent quarters, as approximately 99% of adopting healthcare providers from the third quarter of 2020 that order at least one diagnostic test in the fourth quarter of 2020.

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 payers, including both commercial and government payers such as Medicare.

Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a "participating provider" or do not have a contract and are considered a "non-participating provider." Payers 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 payers, 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 payers 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.

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 payers, we may not be able to effectively increase our testing volume and revenue as expected.

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 ® .

In January 2019, we began promoting SIMPONI ® in the United States under the Janssen agreement.

Our SIMPONI ® promotion efforts contributed approximately $1.5 million in incremental revenue in 2019 with our quarterly tiered promotion fee based on the incremental increase in

total prescribed units above a predetermined average baseline of approximately 29,000 prescribed units per quarter.

We may encounter difficulties in successfully promoting SIMPONI ® and generating significant revenue under the agreement.

Our ability to effectively promote SIMPONI ® will require us to be successful in a range of activities, including training and deploying additional sales representatives and creating demand for SIMPONI ® through our own sales activities as well as those of Janssen.

Based on our estimate of the total U.S.

addressable market for SIMPONI ®' s approved indications of $28 billion, each incremental 1% market share we are able to capture for SIMPONI ® above the predetermined baseline under the Janssen Agreement could result in incremental revenue to us of up to $84 million.

In interest of supporting these efforts we expect to continue to expand our salesforce in 2020.

However, it may take longer to generate meaningful revenue than we currently expect and we may not be successful in materially increasing market share, which would cause us to continue to rely on our existing testing products to drive revenue growth.

We began promoting SIMPONI ® in the United States under the Janssen Agreement in January 2019.

Our SIMPONI ® promotion efforts contributed approximately $5.1 million and $1.5 million in revenue for the years ended December 31, 2020 and 2019, 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 salesforce 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 first and 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.

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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.

▪ Margin Expansion .

We believe growth in our promotion of therapeutics will meaningfully improve our margin profile and further support our goal of achieving profitability.

We also expect 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.

In addition, we believe we are well positioned to drive further margin expansion 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 payer 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, these potential margin increases may be partially offset by expected decreases in Medicare reimbursement rates as a result of the Protecting Access to Medicare Act of 2014, or PAMA.

▪ 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 .

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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 payer.

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.

In addition, the recent COVID-19 outbreak may have a material adverse effect on our business, financial condition and results of operations, including as a result of shutdowns of our facilities and operations as well as those of our suppliers and courier services, disrupt the supply chain of material needed for our tests, interrupt our ability to receive specimens, impair our ability to perform or deliver the results from our genomic tests, impede patient movement or interrupt healthcare services causing a decrease in test volumes, delay coverage decisions from Medicare and third party payors, and delay ongoing and planned clinical trials involving our tests.

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 a co-promotion agreement with Janssen, under which we are responsible for the costs associated with our salesforce in promoting SIMPONI ® in the United States.

In December 2018, we entered into the Janssen Agreement, under which we are responsible for the costs associated with our salesforce 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 ranging from $750 to $1,250 per prescription based on the incremental increase in total prescribed units of SIMPONI ® for that quarter over a predetermined baseline.

The predetermined average baseline for the initial term of 18 months is approximately 29,000 prescribed units per quarter, subject to adjustment under certain circumstances.

In September 2019, we

exercised our option to extend the term of the Janssen agreement to December 31, 2021.

Janssen can terminate the agreement at any time for any reason upon 30 days' notice to us, and we can terminate the agreement for any reason at the end of any calendar quarter upon 30 days' notice to Janssen.

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 years ended December 31, 2020 and 2019, 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, pursuant to which the predetermined average baseline for total prescribed units of SIMPONI ® approximately 26,000 prescribed units per quarter, and subject to adjustment under certain circumstances.

For each of the third and fourth quarters of 2020, we received a minimum promotion fee of $0.3 million and the fee was 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.

We continued to receive a minimum promotion fee of $0.3 million and the fee was capped at 5% above the adjusted predetermined baseline for the quarter ended December 31, 2020.

The quarterly tiered promotion fee for the remaining term of the Amended Janssen Agreement beginning with the quarter ended September 30, 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 agreement at any time for any reason upon 30 days' notice to us, and we may terminate the agreement for any reason at the end of any calendar quarter upon 30 days' notice to Janssen.

Either party may terminate the 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 co-promotional revenue of approximately $1.5 million during the year ended December 31, 2019 and expect to continue to recognize revenue as we perform co-promotional services based on the number of total prescribed units of SIMPONI ® over the predetermined baseline.

We recognized approximately $5.1 million and $1.5 million in revenue for the year ended December 31, 2020 and 2019, respectively, for our promotional efforts under the Janssen Agreement.

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

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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 payers, consist of healthcare insurers, government payers (primarily Medicare and Medicaid), client payers (i.e.

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.

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We recognize revenue in accordance with the provisions of ASC Topic 606, Revenue from Contracts with Customers.

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 successfully promote SIMPONI ® .

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 first and second quarter of 2021.

Additionally, there is no minimum promotion fee for the second half of 2021.

Our average reimbursement for AVISE ® CTD decreased in 2020 as compared to 2019 due to the impacts of the PAMA rate reduction as well as changes to payor mix.

However, PAMA is not expected to have an impact on our 2021 average reimbursement for AVISE ® CTD as compared to 2020.

As discussed above, the number of AVISE ® CTD tests delivered in the third quarter of 2020 substantially recovered to the pre-COVID-19 AVISE ® CTD tests reported in the first quarter of 2020, and the number of AVISE ® CTD tests delivered in the fourth quarter of 2020 exceeded pre-COVID-19 AVISE ® CTD tests reported in the first quarter of

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 (Excluding Amortization of Purchased Technology)

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 payer, commercial third-party, government, or individual, reimburses us at different amounts.

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 payers for each month's billings.

We expect that our costs of revenue will increase in absolute dollars as the number of tests we perform increases.

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 2020 as we expand our sales and sales support functions, including expansion activities related to our promotion of SIMPONI ® , and incur expenses from operating as a public company for the entire year, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, additional insurance, investor relations activities and other administrative and professional services such as accounting, legal, regulatory and tax.

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

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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 as we continue to invest in research and development activities related to our existing testing products and product candidates.

Amortization of Intangible Assets

Amortization of intangible assets represents the total amortization expense for our purchased technologies.

The intangible assets recorded as of December 31, 2017 became fully amortized in 2018;

accordingly, we do not expect any future amortization expense related to these assets.

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, 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 Agreement with Innovatus.

We expect interest expense to decrease in the near term due to lower interest rates.

We expect interest expense to remain consistent in 2021 as compared to 2020, and remain consistent thereafter until 2023.

Change in Fair Value of Financial Instruments

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At the end of each reporting period, changes in the estimated fair value during the period were recorded as a component of other income (expense).

In connection with the completion of our IPO, all outstanding warrants to purchase shares of our redeemable convertible preferred stock either terminated or were converted into warrants to purchase shares of our common stock and accordingly, will no longer be subject to measurement.

In connection with the completion of our IPO in September 2019, all outstanding warrants to purchase shares of our redeemable convertible preferred stock either terminated or were converted into warrants to purchase shares of our common stock and accordingly, will no longer be subject to measurement.

Other Income, Net

Other income, net, consists primarily of interest income earned on our cash and cash equivalents.

Income Tax Expense

Other income, net, consists primarily of interest income earned on our cash and cash equivalents and an amount received under the CARES Act.

Income Tax Benefit (Expense)

Income taxes include federal and state income taxes in the United States.

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Operating expenses:

Costs of revenue (excluding amortization of purchased technology) 18,808 15,379 3,429

Costs of revenue 16,559 18,808 (2,249)

Selling, general and administrative expenses 37,033 28,702 8,331

Research and development expenses 3,568 2,176 1,392

Amortization of intangible assets — 141 (141)

Total operating expenses 57,160 49,686 7,474

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Loss before income taxes (16,766) (12,013) (4,753)

Income tax expense 25 58 (33)

Income tax benefit (expense) 79 (25) 104

Net loss $ (16,687) $ (12,038) $ (4,649)

Revenue increased $7.9 million, or 24.5%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to an increase in the number of diagnostic tests delivered.

The number of AVISE ® CTD tests, which accounted for 82% of revenue for the years ended December 31, 2019 and 2018, increased to 105,370 tests delivered in the year ended December 31, 2019 compared to 83,405 tests delivered in the same 2018 period.

The increase is primarily due to the increased adoption of the AVISE ® CTD test by rheumatologists as the number of ordering healthcare providers increased to 1,707 for the fourth quarter of 2019 as compared to 1,278 healthcare providers in the same 2018 period.

In addition, we recognized approximately $1.5 million of revenue related to our SIMPONI ® promotion efforts during the year ended December 31, 2019.

Costs of Revenue (excluding amortization of purchased technology)

Costs of revenue increased $3.4 million, or 22.3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase was primarily due to increased direct costs such as materials and supplies, royalties, shipping and handling and labor associated with the increase in test volume in 2019 compared to 2018.

Revenue increased $1.6 million, or 3.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in revenue to approximately $5.1 million from the co-promotion of SIMPONI ® for the year ended December 31, 2020 compared to approximately $1.5 million for the year ended December 31, 2019.

The increase in revenue was partially offset by a decrease in the number of diagnostic tests delivered due in part to impacts of the COVID-19 pandemic, coupled with a decrease in average reimbursement per AVISE ® CTD test.

The number of AVISE ® CTD tests, which accounted for 70% of revenue for the year ended December 31, 2020, decreased to 100,450 tests delivered in the year ended December 31, 2020 compared to 105,370 tests delivered in the same 2019 period.

The number of AVISE ® CTD tests increased to 28,601 for the three months ended December 31, 2020 compared to 27,133 tests delivered in the same 2019 period.

The adoption of the AVISE ® CTD test by rheumatologists for the year ended December 31, 2020 increased to 2,500 ordering healthcare providers as compared to 2,389 ordering healthcare providers in the same 2019 period.

The number of ordering healthcare providers decreased to 1,690 for the three months ended December 31, 2020 compared to 1,707 in the same 2019 period.

Costs of Revenue

Costs of revenue decreased $2.2 million, or 12.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decrease was primarily due to decreased direct costs such as materials and

supplies associated with the decrease in test volume and decreased royalty costs associated with the expiration of a royalty on our CB-CAPs technology for the year ended December 31, 2020 compared to the same 2019 period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $8.3 million, or 29.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This increase was primarily due to increased employee related expenses of $6.1 million as a result of increasing the size of our salesforce from 30 as of December 31, 2018 to 50 as of December 31, 2019.

The remaining increase relates primarily to increased audit and professional services of $1.2 million, insurance expenses of $0.5 million and stock-based compensation expense of $0.4 million.

This increase was primarily due to an increase of $5.6 million of employee related expenses, including stock-based compensation and recruitment expenses, increases related to insurance expenses of $1.0 million, legal fees of $0.7 million and audit and professional services of $0.7 million.

The year ended December 31, 2020 included one-time restructuring charges of approximately $0.2 million.

Research and Development Expenses

Research and development expenses remained relatively consistent for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Amortization of Intangible Assets

Our purchased intangible assets were fully amortized at December 31, 2018, therefore there is no amortization expense recorded for the year ended December 31, 2019.

Research and development expenses increased $1.4 million, or 64.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was primarily due to an increase of $1.2 million of employee related expenses, including stock-based compensation and recruitment expenses, and an increase related to clinical study expenses of $0.2 million.

Interest Expense

Interest expense increased $0.6 million, or 21.7%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase was primarily due to higher principal amounts outstanding over the year ended December 31, 2019 compared to the prior year period, under our long-term borrowing arrangements.

Interest expense decreased $0.9 million, or 26.5%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decrease was primarily due to the lower interest rate under our long-term borrowing arrangements for the year ended December 31, 2020 compared to the prior year period.

Change in Fair Value of Financial Instruments

The change in fair value of financial instruments increased $0.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase resulted from changes in the valuation of our redeemable convertible preferred stock warrant liabilities.

The change in fair value of financial instruments decreased $0.3 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decrease is due to the conversion of warrants to purchase preferred stock into warrants to purchase our common stock in connection with the completion of our IPO in September 2019.

As a result, such warrants no longer require liability accounting which resulted in the recognition of income or expense.

Other Income, Net

Other income, net, increased $0.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This increase was due to the higher cash balance in our money market funds account during the year ended December 31, 2019 compared to the prior year period.

Income Tax Expense

Income tax expense remained relatively consistent for the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase is primarily due to the $0.7 million received under the CARES Act due to lost revenues attributable to COVID-19 during the second quarter of 2020.

Income Tax Benefit (Expense)

Income tax benefit increased $0.1 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 due to a change in tax law under the CARES Act.

Liquidity and Capital Resources

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Currently, our funds are held in cash and money market funds.

In September 2017, we entered into the loan and security agreement with Innovatus, or the Loan Agreement, under which we immediately drew down $20.0 million.

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 executed the first amendment, or the Loan Amendment, to the Loan Agreement with Innovatus, which we collectively refer to as the Amended 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.

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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.

In connection with the execution of the Loan Agreement, 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 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.

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.

Our revenues for the twelve-month period ended September 30, 2020 were lower than the specified targets, and as a result, we and Innovatus agreed to a new management plan and target to bring us back into compliance with the Loan Amendment.

At December 31, 2020, 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

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We believe we have sufficient laboratory capacity to support increased test volume.

Other than the addition of laboratory equipment, we expect that we will not need to make material capital expenditures in the near term related to our laboratory facilities.

We expect to make material additions for laboratory equipment and capital expenditures in the near term related to our laboratory facilities and expansion of research capabilities.

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.

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.

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 (see footnote 4 and footnote 5 in the audited financial statements included in this Annual Report on Form 10-K).

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;

• the impact of the recent COVID-19 outbreak on our business, including challenges resulting from social distancing and stay-at home orders through a reduction in testing volumes;

▪ 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 associated with our promotion of SIMPONI ® , including the expansion of our sales capabilities, and the extent and timing of generating revenue from such promotion;

▪ the costs of developing our product pipeline, including the costs associated with conducting our ongoing and future validation studies;

▪ our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payers and adequate market share and revenue for our testing products;

▪ 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;

▪ the extent to which we establish additional partnerships or in-license, acquire or invest in complementary businesses or products.

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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.

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.

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Financing activities (97) 68,734

Increase in cash, cash equivalents and restricted cash $ 58,920 $ 1,923

(Decrease) increase in cash, cash equivalents and restricted cash $ (14,636) $ 58,920

Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2020 was $14.1 million and primarily resulted from our net loss of $16.7 million adjusted for non-cash charges of $3.9 million related to stock-based compensation, non-cash interest, depreciation, amortization and deferred income taxes and changes in our net operating assets of $1.3 million related to net increases in account receivables and prepaid expenses and other current assets, partially offset by net increases in accounts payables and accrued liabilities and other current liabilities.

Net cash used in operating activities for the year ended December 31, 2019 was $9.7 million and primarily resulted from our net loss of $12.0 million adjusted for non-cash charges of $2.2 million related to depreciation, amortization, stock-based compensation, non-cash interest and the revaluation of our preferred stock liabilities.

The net cash used in operating activities was partially offset by changes in our net operating assets of $0.2 million related to net increases in accounts payable and accrued liabilities, partially offset by decreases in prepaid expenses and other current assets.

Net cash used in operating activities for the year ended December 31, 2018 was $9.3 million and primarily resulted from our net loss of $8.0 million adjusted for non-cash charges of $0.3 million for remeasurements of financial instruments and $1.8 million for depreciation, amortization and non-cash interest, partially offset by changes in our net operating assets consisting of $2.3 million increase in accounts receivable primarily due to the adoption of ASC 606 and $1.3 million related to net increases in prepaid expenses and other current assets, accounts payable, and accrued liabilities.

The net cash used in operating activities was partially offset by changes in our net operating assets of $0.2 million related to net increases in accounts payable and accrued liabilities and other current liabilities, partially offset by decreases in prepaid expenses and other current assets.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2019 was $0.1 million and was due to net purchases of property and equipment.

Net cash used in investing activities for the year ended December 31, 2018 was $0.2 million and was primarily due to net purchases of property and equipment.

Net cash used in investing activities for the year ended December 31, 2020 and 2019 was $0.5 million and $0.1 million, respectively, and was due to net purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2020 was $0.1 million and primarily resulted from principal payments on capital lease obligations, as well as proceeds from the Paycheck Protection Program loan, which was subsequently repaid in May 2020, partially offset by proceeds from Employee Stock Purchase Plan purchases.

Net cash provided by financing activities for the year ended December 31, 2019 was $68.7 million and primarily resulted from the net proceeds received from our IPO of $50.4 million, as well as net proceeds received from the issuance of our redeemable convertible preferred stock of $18.4 million.

Net cash provided by financing activities for the year ended December 31, 2018 was $11.4 million and primarily resulted from $6.5 million of net proceeds received from the issuance of our redeemable convertible preferred stock and net proceeds of $5.0 million under our long-term borrowing arrangement with Innovatus.

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 audited financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S.

The preparation of these audited 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 audited 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.

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The healthcare professionals who order our services and to whom test results are reported are generally not responsible for payment for these services.

The parties that pay for these services consist of healthcare insurers, government payers (primarily Medicare and Medicaid), client payers (i.e.

The parties that pay for these services consist of healthcare insurers, government payors (primarily Medicare and Medicaid), client payors (i.e.

hospitals, other laboratories, etc.) and patient self-pays.

Payers are billed at our list price.

Net revenues recognized consist of amounts billed net of allowances for differences between amounts billed and the estimated consideration we expect to receive from such payers.

Payors are billed at our list price.

Net revenues recognized consist of amounts billed net of allowances for differences between amounts billed and the estimated consideration we expect to receive from such payors.

We follow a standard process, which considers historical denial and collection experience, insurance reimbursement policies and other factors, to estimate allowances and implicit price concessions, recording adjustments in the current period as changes in estimates.

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The transaction price is estimated using an expected value method on a portfolio basis.

Our portfolios are grouped per payer (i.e.

each individual third party insurance, Medicare, client payers, patient self-pay, etc.) and per test basis.

Collection of our net revenues from payers is normally a function of providing complete and correct billing information to the healthcare insurers and generally occurs within 30 to 90 days of billing.

Our portfolios are grouped per payor (i.e.

each individual third-party insurance, Medicare, client payors, patient self-pay, etc.) and per test basis.

Collection of our net revenues from payors is normally a function of providing complete and correct billing information to the healthcare insurers and generally occurs within 30 to 90 days of billing.

The process for estimating revenues and the ultimate collection of accounts receivable involves significant judgment and estimation by management.

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The method for measuring progress towards satisfying the performance obligations is based on prescribed units in excess of the contractual baseline at the contractual rate earned per unit since the agreement is cancelable.

As of December 31, 2018, there were no performance obligations under the agreement and no consideration had been received.

Long-Lived Assets

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Management first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative assessment.

If a quantitative assessment is deemed necessary, management uses all available information to make this fair value

determination, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets and observed market multiples of operating cash flows.

If a quantitative assessment is deemed necessary, management uses all available information to make this fair value determination, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets and observed market multiples of operating cash flows.

The judgments and estimates involved in identifying and quantifying the impairment of long-lived assets or goodwill involve inherent uncertainties, and the measurement of the fair value is dependent on the accuracy of the assumptions used in making the estimates and how those estimates compare to our future operating performance.

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Following the closing of our initial public offering, our board of directors determines the fair value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.

Estimated Fair Value of Share Purchase Rights, Redeemable Convertible Preferred Stock Warrants and Other Financial Instruments

Estimated Fair Value of Redeemable Convertible Preferred Stock Warrants and Other Financial Instruments

Prior to the IPO, we entered into agreements with existing stockholders of our redeemable convertible preferred stock that contained future purchase obligations of redeemable convertible preferred stock at a fixed price.

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If we had made different assumptions, the carrying value of these liabilities, net loss and net loss per share attributable to common stockholders could have been significantly different.

Acquisition-Related Liabilities

In connection with the acquisition of the medical diagnostics division of Cypress in 2010, we initially agreed to pay an additional amount not to exceed $9.0 million in the event specified revenue, contractual and product launch milestones are achieved.

This contingent liability required the use of inputs which were not observable in the market to assess its fair value at the end of each reporting period.

For this liability, fair value was determined based on probabilities assigned to the milestones being achieved, revenue projections, and interest rates.

Changes in fair value were recorded in the statement of operations and comprehensive loss.

In February 2017, we amended two of the remaining agreements for which a contingent payment amount had been originally agreed to.

One contingent payment amount remains outstanding.

We operate in, and are subject to tax authorities in, various tax jurisdictions in the United States.

To date, we have not been audited by the Internal Revenue Service or any state income tax authority, however all tax years remain open for examination by federal tax authorities.

At December 31, 2019, our deferred tax assets are primarily comprised of federal and state tax net operating loss carryforwards.

We completed a formal study through the year ended December 31, 2019 and determined ownership changes within the meaning of Internal Revenue Code (IRC), Section 382 had occurred in 2003, 2008, 2012, 2017 and 2019.

Therefore, our ability to utilize our net operating losses incurred prior to December 31, 2017 are limited.

Our ability to utilize net operating loss carryforwards generated after December 31, 2017 will not expire under the Tax Cuts and Jobs Act of 2017.

To date, we have not been audited by the Internal Revenue Service or any state income tax authority.

All tax years remain open for examination by federal and state tax authorities.

At December 31, 2020, our deferred tax assets are primarily comprised of federal and state tax NOL carryforwards.

We previously completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from our formation through December 31, 2019.

Based upon this study, we determined that ownership

changes had occurred in 2003, 2008, 2012, 2017 and 2019, and that our ability to use a significant portion of our NOL carryforwards is subject to limitation under Section 382 of the Code as a result of a prior ownership change.

In addition, federal NOL carryforwards generated in periods after December 31, 2017, may be carried forward indefinitely but, in taxable years beginning after December 31, 2020, may only be used to offset 80% of our taxable income.

We are required to reduce our deferred tax assets by a valuation allowance if it is more likely than not that some or all of our deferred tax assets will not be realized.

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There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result.

Please see our audited financial statements and notes thereto included elsewhere in this prospectus, which contain accounting policies and other disclosures required by GAAP.

Please see our audited financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis