What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-22 compared with 2021-03-16 · 127 added, 170 removed, 230 unchanged (56% of the section changed)

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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 SLE and RA.

Our strategy includes leveraging our portfolio of testing products to market therapeutics through our sales channel, targeting the approximately 5,000 rheumatologists across the United States.

Our goal is to enable healthcare providers to improve care for patients through the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases, including SLE and RA.

Our business model of integrating testing products and therapeutics positions us to offer targeted solutions to rheumatologists and, ultimately, better serve patients.

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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 also have agreements with GSK, Labcorp Drug Development and Parexel, among others, that leverage our testing products and/or the information generated from such tests.

We provide GSK, a leader in lupus therapeutics, our test result data to 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 partner with academic research centers and patient advocacy organizations, such as Brigham and Women's Hospital, Hospital for Special Surgery, Duke University and Emory University as well as the Lupus Foundation of America, to help improve the quality of life for people affected by autoimmune diseases through programs of research, education, support and advocacy.

We plan to pursue additional strategic partnerships that are synergistic with our evolving portfolio of testing products.

We perform all of our AVISE ® tests in our approximately 10,000 square foot clinical laboratory, which is certified by CLIA and accredited by CAP, and located in Vista, California.

Our laboratory is certified for performance of high-complexity testing by CMS in accordance with CLIA.

We are approved to offer our products in all 50 states.

Our 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 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.

In the second half of 2021, we began the conversion of approximately 8,000 square feet of warehouse space into additional clinical laboratory space and approximately 6,000 square feet of warehouse space into additional research and development facility space, and expect to complete such conversions by the first quarter of 2022 and mid 2022, respectively.

The expansion of our clinical laboratory and research and development facility are expected to allow us to enhance our testing capacity and improve efficiencies as well as allow us to develop molecular and multiomic capabilities and advance our product pipeline, including support of development of tests for fibromyalgia, RA, thrombosis and lupus nephritis.

We market our AVISE ® testing products using our specialized sales force.

As of December 31, 2021, we have a sales force of 61 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.

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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.

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 of December 31, 2021 we had an accumulated deficit of $208.1 million.

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We have funded our operations primarily through equity and debt financings and revenue from sales of our products.

Through the date of our initial public offering (IPO) in September 2019, our operations were financed primarily from sales of our common and redeemable convertible preferred stock and borrowings under various debt financings.

In September 2019, we completed our IPO of 4,140,000 shares of our common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 540,000 additional shares of our common stock.

Including the option exercise, the aggregate net proceeds to us from the offering was approximately $50.4 million, net of underwriting discounts, commissions and other offering expenses, for aggregate expenses of approximately $7.5 million.

We completed our initial public offering, or IPO, in September 2019, raising net proceeds from the offering of approximately $50.4 million, net of underwriting discounts, commissions and other offering expenses, for aggregate expenses of approximately $7.5 million.

In March 2021, we completed a public offering of 4,255,000 shares of our common stock at a public offering price of $16.25 per share.

Net proceeds from the offering were approximately $64.7 million, net of underwriting discounts and commissions and offering costs of $4.4 million.

As of December 31, 2021, we had $99.4 million of cash and cash equivalents.

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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.

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.

While many jurisdictions have fully reopened or have begun a phased re-opening, the potential to return to prior restrictions remain if there are future increases (or, in some jurisdictions, continued increases) in new cases of COVID-19 or any of its viral variants, including the Delta and Omicron variants.

Even in areas that have fully reopened and where the number of COVID-19 cases has 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.

healthcare system, a reduction in patient flow occurred and our test volumes began to decrease in the second half of March 2020 and we experienced an AVISE ® CTD volume decrease of approximately 5% in the year ended December 31, 2020 as compared to 2019.

In the fourth quarter of 2020, our volume of AVISE ® CTD tests delivered exceeded our pre-COVID-19 levels.

For the three months ended December 31, 2021 as compared to the same period in 2020, we experienced an AVISE ® CTD volume increase of approximately 19%.

For the year ended December 31, 2021 as compared to the same period in 2020, we experienced an AVISE ® CTD test volume increase of approximately 28%.

However, the continued spread of COVID-19 and patient hesitancy in seeking preventative medical care, each of which are dependent on circumstances that are 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 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.

We have also experienced delays, beginning in the first quarter of 2021, in procurement of our testing supplies due in part to disruptions to the global supply chain resulting from the COVID-19 pandemic, 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 are facing and may continue to face increased competition for laboratory and scientific employees due to the increased demand in the industry for such personnel.

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.

In response to the COVID-19 pandemic, we initially curtailed non-essential travel and have equipped most of our employees with the ability to work remotely with the exception of our clinical laboratory employees, and implemented measures to protect the health of our employees and to support the functionality of our clinical laboratory, such as providing personal protective equipment (including face masks or shields) and maintaining social distancing.

In addition, in the second quarter of 2020, our sales force recommenced certain field-based interactions and scaled marketing spend, although access to healthcare providers remains limited and the use of virtual sales tools has increased.

From March 2020 through December 31, 2020, as a result of the COVID-19 pandemic, we terminated our temporary employees and 18 full-time employees, which included three employees at the vice president level.

The full extent of which the COVID-19 pandemic will directly or indirectly continue to impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets.

During 2021, we returned to normalized personnel levels.

The full extent of which the COVID-19 pandemic will directly or indirectly continue to impact our business, results of operations and financial condition and will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, including 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

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Since the launch of AVISE ® CTD in 2012 and through December 31, 2021, we have delivered over 615,000 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.

For the year ended December 31, 2021, 128,246 AVISE ® CTD tests were delivered, representing approximately 28% growth over the same period in 2020.

In the fourth quarter of 2021, the number of ordering healthcare providers reached a record 2,126, representing an approximate 26% increase over the same period in 2020, and we had a record 739 adopting healthcare providers (defined as those who previously prescribed at least 11 diagnostic tests in the corresponding period) compared to 635 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 third quarter of 2021 ordered at least one diagnostic test in the fourth 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.

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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.

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

Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate.

▪ Promotion of SIMPONI ® .

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

▪ Synergistic Partnerships .

In August 2021, we mutually agreed to terminate the Janssen Agreement regarding our promotion efforts with SIMPONI ® effective August 31, 2021.

Our SIMPONI ® promotion efforts contributed approximately $1.2 million and $5.1 million in revenue for the years ended December 31, 2021 and 2020, respectively.

We may continue to encounter difficulties in successfully promoting SIMPONI ® and generating significant revenue under the Janssen Agreement.

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

In interest of supporting these efforts we plan to continue to evaluate the reach and frequency of our 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.

We will continue to rely on our existing testing products to drive revenue growth.

▪ Development of Additional Testing Products.

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▪ 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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Janssen Promotion Agreement

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 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 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.

In December 2018, we entered into the Janssen Agreement, under which we were responsible for the costs associated with our sales force in promoting SIMPONI ® in the United States.

In August 2021, we and Janssen mutually agreed to terminate the Janssen Agreement effective August 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 year ended December 31, 2020, the tiered promotion fee ranged from $750 to $1,250 per prescription over a predetermined baseline.

Due in part to COVID-19, in June 2020 we amended the Janssen Agreement, to adjust the predetermined average baseline for the third and fourth quarters of 2020.

In December 2020, we further amended the Janssen Agreement, to adjust the average baseline for total prescribed units of SIMPONI ® for the quarters ending December 31, 2020, March 31, 2021, subject to further adjustment under certain circumstances.

In June 2021, the Janssen Agreement was again amended to proportionally increase the baseline for prescribed units for the quarter ending June 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 earned the minimum promotion fee of $0.3 million.

Upon termination of the Janssen Agreement on August 31, 2021, we became entitled to receive an aggregate $0.6 million in consideration, which was earned in the year ended December 31, 2021.

Pursuant to the terms of the termination, we are 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 until May 31, 2022.

We recognized approximately $1.2 million and $5.1 million in revenue for the years ended December 31, 2021 and 2020, 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 (for example excess sun exposure can cause flares in SLE), seasonal conditions that may affect medical practices and provider activity, including for example influenza outbreaks that may reduce the percentage of patients that can be seen, and other factors relating to the timing of patient benefit changes, as well as patient deductibles and co-insurance limits.

Financial Overview

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

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.

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These assessments require significant judgment by management.

Our ability to increase our revenue will depend on our ability to further penetrate the market for our current and future testing products, and increase our reimbursement and collection rates for tests delivered, as well as our ability to continue to generate meaningful co-promotion revenue.

We expect to encounter difficulties promoting SIMPONI ® above the predetermined baseline potentially resulting in us receiving the minimum promotion fee of $0.3 million in the 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.

As discussed above, our volume of AVISE ® CTD tests delivered substantially recovered to pre-COVID-19 levels in the fourth quarter of 2020.

However, the continued spread of COVID-19, including any of its viral variants, may adversely affect testing volumes in future periods, and the extent of any such adverse effects is highly uncertain.

Operating Expenses

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The components of our costs of revenue include materials costs, direct labor, equipment and infrastructure expenses associated with testing specimens, shipping charges to transport specimens, blood specimen collections fees, royalties, depreciation and allocated overhead, including rent and utilities.

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

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 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 a result, our costs of revenue as a percentage of revenue may vary significantly from period to period due to the composition of payors for each period's billings.

Assuming future testing volumes are not negatively impacted by the continued spread of COVID-19, we expect that our costs of revenue will increase in absolute dollars as the number of tests we perform increases.

However, we expect that the cost per test will decrease over time due to volume discounts on materials and other volume efficiencies we may gain as the number of tests we perform increases.

The decrease in cost per test may be partially offset due to increased depreciation and allocated overhead associated with our clinical laboratory expansion as well as increased labor, material and shipping costs (including as a result of inflation) associated with the commercialization of our portfolio products.

As discussed above, the continued spread of COVID-19 may adversely affect testing volumes which may result in an increase in cost per test due to our inability to realize volume efficiencies.

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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.

We expect that our selling, general and administrative expenses will increase in absolute dollars in 2022 as compared to 2021, due to expected additions to headcount and associated increases for personnel costs, including stock-based compensation.

Research and Development Expenses

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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 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.

We expect that our research and development expenses will increase in absolute dollars in 2022 as compared to 2021, as we continue to invest in research and development activities related to our existing testing products and product candidates, including the expansion of our clinical research and development facility, expected additions to headcount and associated increases for personnel costs, including stock-based compensation.

Interest Expense

Interest expense consists of cash and non-cash interest expense associated with our financing arrangements, including the borrowings under our Amended Loan Agreement with Innovatus.

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

Prior to the completion of our IPO, we classified our outstanding warrants to purchase shares of our redeemable convertible preferred stock as liabilities on our balance sheets at their estimated fair value since the underlying redeemable convertible preferred stock was classified as temporary equity.

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 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.

Interest expense consists of cash and non-cash interest expense associated with our financing arrangements, including the borrowings under our amended loan and security agreement with Innovatus Life Sciences Lending Fund I, LP, or Innovatus.

We expect interest expense to decrease in the near term due to lower interest rates related to our amended loan and security agreement with Innovatus.

Other Income, Net

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)

Other income, net, consists primarily of interest income earned on our cash and cash equivalents and an amount received under the CARES Act Provider Relief Fund in the second quarter of 2020.

Income Tax (Expense) Benefit

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

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Interest expense (2,625) (2,565) (60)

Change in fair value of financial instruments — 267 (267)

Other income, net 16 984 (968)

Loss before income taxes (26,676) (16,766) (9,910)

Income tax benefit (expense) 79 (25) 104

Income tax (expense) benefit (175) 79 (254)

Net loss $ (26,851) $ (16,687) $ (10,164)

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.

Revenue increased $6.3 million, or 15.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to an increase in the number of diagnostic tests delivered resulting in part from volume reductions experienced in late March 2020 as a result of the COVID-19 pandemic.

The number of AVISE ® CTD tests delivered, which accounted for 81% and 70% of revenue for the years ended December 31, 2021 and 2020, respectively, increased to 128,246 tests delivered in the year ended December 31, 2021 compared to 100,450 tests delivered in the same 2020 period.

The number of AVISE ® CTD tests increased to 34,147 for the three months ended December 31, 2021 compared to 28,601 tests delivered in the same 2020 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.

The number of ordering healthcare providers increased to 2,126 for the three months ended December 31, 2021 compared to 1,690 in the same 2020 period.

The increase in revenue was partially offset by a decrease in revenue resulting from the Janssen Agreement during the year ended December 31, 2021 to approximately $1.2 million compared to approximately $5.1 million for the year ended December 31, 2020.

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.

Costs of revenue increased $4.0 million, or 24.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This increase was primarily due to increased direct costs such as materials and supplies, labor and shipping and handling associated with the increase in test volume in 2021 compared to 2020, partially offset by decreased royalty costs.

Gross margin as a percentage of revenue decreased to 57.4% for the year ended December 31, 2021, compared to 60.6% for the year ended December 31, 2020.

This was primarily attributable to a decrease in revenue resulting from the Janssen Agreement.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.5 million, or 20.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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.

This increase was primarily due to an increase of $5.7 million of employee related expenses, including stock-based compensation and recruitment expenses, increases related to insurance expenses of $0.5 million, marketing expenses of $0.5 million and audit and professional services 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 $3.7 million, or 102.8%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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.

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

to clinical study expenses of $0.9 million, license fees of $0.8 million, laboratory supplies expense of $0.3 million and collaboration expenses of $0.3 million.

Interest Expense

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 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.

Interest expense remained substantially consistent for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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 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.

Other income, net, decreased $1.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This decrease was primarily driven by the $0.7 million we received under the CARES 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 (Expense) Benefit

Income tax expense increased $0.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 due to an expiration of benefits under the CARES Act.

Liquidity and Capital Resources

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To date, we have generated only limited revenue, and we may never achieve revenue sufficient to offset our expenses.

Through the date of our IPO in September 2019, our operations were financed primarily from sales of our common and redeemable convertible preferred stock and borrowings under various debt financings.

In September 2019, we completed our IPO of 4,140,000 shares of its common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 540,000 additional shares of our common stock.

Our primary sources of capital have primarily been sales of our common stock and redeemable convertible preferred stock, the sale of our common stock of our IPO, and, to a lesser extent, borrowings under various debt financings.

On November 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 on November 19, 2020.

In March 2021, we completed a public offering of 4,255,000 shares of our common stock at a public offering price of $16.25 per share, which shares were sold under the Shelf Registration Statement.

Net proceeds from the offering were approximately $64.7 million, net of underwriting discounts and commissions and other offering expenses of $4.4 million.

As of December 31, 2021, we had $99.4 million of cash and cash equivalents.

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In December 2018, we borrowed an additional $5.0 million under the loan agreement.

In November 2019, we amended the loan and security agreement with Innovatus, which we collectively refer to as the Amended Loan Agreement.

Pursuant to the Amended Loan Agreement, the loan term is for five years with a final maturity date of November 2024.

The Amended Loan Agreement accrues interest at an annual rate of 8.5%, of which 2.0%, during the first 36 months, will be treated as paid in-kind interest.

In each of November 2019 and November 2021, 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 nine years with a final maturity date of November 2026.

The Amended Loan Agreement accrues interest at an annual rate of 8.0%, of which 2.0% will be payable in-kind.

Paid in-kind interest is added to the principal balance each period.

After the initial 36 months of the loan, the entire 8.5% will be paid in cash at the end of each period.

On or after the first anniversary of the Loan Amendment, but before the second anniversary of the Loan Amendment, we may, at our option, prepay the term loan borrowings by paying the lender a prepayment premium.

Prepayment before the second anniversary of the Loan Amendment may only occur for specified reasons in the Amended Loan Agreement.

The prepayment premium decreases by 1% during each subsequent twelve-month period after the first anniversary of the Loan Amendment.

After December 1, 2024, the entire 8.0% will be paid in cash at the end of each period.

On or after November 1, 2022, we may, at our option, prepay the term loan borrowings by paying the lender a prepayment premium.

The prepayment premium was 3% as of November 2021 and decreases by 1% on each of November 1, 2022, November 1, 2023 and November 1, 2024.

Our obligations under the Amended Loan Agreement are secured by a security interest in substantially all of our assets, including our intellectual property.

The Amended Loan Agreement contains customary conditions to borrowing, events of default, and covenants, including covenants requiring us to maintain certain levels of minimum liquidity of $2.0 million and achieve certain minimum amounts of revenue, and limiting our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stock, repurchase stock and make investments, in each case subject to certain exceptions.

The consequences of failing to achieve the performance covenant will be cured if, within sixty days of failing to achieve the performance covenant, we issue additional equity securities or subordinated debt with net proceeds sufficient to fund any cash flow deficiency generated from operations, as defined.

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.

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.

At December 31, 2021, we were in compliance with all

covenants of the Amended Loan Agreement.

In addition, upon the occurrence of an event of default, Innovatus, among other things, can declare all indebtedness due and payable immediately, which would adversely impact our liquidity and reduce the availability of our cash flows to fund working capital needs, capital expenditures and other general corporate purposes.

In connection with the execution of the loan and security agreement with Innovatus in November 2017, we issued the lender a seven-year warrant to purchase 15,384,615 shares of our Series F redeemable convertible preferred stock at an exercise price of $0.078 per share, and in December 2018, in connection with the additional $5.0 million borrowed under the loan and security agreement, we issued to the lender a seven-year warrant to purchase 3,846,154 shares of our Series F redeemable convertible preferred stock at an exercise price of $0.078 per share.

In connection with the completion of our IPO in September 2019, the warrants were automatically converted into warrants exercisable for an aggregate of 104,722 shares of common stock at an exercise price of $14.32.

In April 2020, we received $0.7 million of funding under the CARES Act Provider Relief Fund, subject to our agreement to comply with the Department of Health & Human Services', or HHS, standard terms and conditions.

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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 salesforce to drive increased adoption of and reimbursement for our AVISE ® testing products, promote SIMPONI ® , prepare to commercialize new testing products, continue our research and development efforts and further develop our product pipeline.

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

We expect to make significant investments for laboratory equipment and capital expenditures in the near term related to our laboratory facilities and expansion of research capabilities, including an investment to convert approximately 8,000 square feet of warehouse space into additional clinical laboratory space and approximately 6,000 square feet of warehouse space into additional research and development facility space.

We began such conversion in the second half of 2021 and expect to complete the conversion for the clinical laboratory space by the first quarter of 2022 and expect to complete the conversion for the additional research and development facility by mid 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 the development of tests for fibromyalgia, RA, thrombosis and lupus nephritis.

Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

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).

We expect that our near- and longer-term liquidity requirements will continue to consist of working capital and general corporate expenses associated with the growth of our business, including payments we may be required to make upon the achievement of previously negotiated milestones associated with intellectual property we have licensed, payments related to non-cancelable purchase obligations with one supplier for reagents, payments related to our principal and interest under our long term borrowing arrangements, payments for operating leases related to our office and laboratory space in Vista, California and our office space in Carlsbad, California, and payments for capital leases related to our laboratory equipment (see Note 4 and Note 5 in the audited financial statements included in this Annual Report on Form 10-K).

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.

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▪ fluctuations in working capital;

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

▪ 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 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.

▪ 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;

▪ the costs associated with our promotion of other therapeutics, if any, including the expansion of our sales capabilities, and the extent and timing of generating revenue from each such promotion, if any.

Until such time, if ever, as we can generate revenue to support our costs structure, we expect to finance our operations through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.

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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.

Doing so will likely have an unfavorable effect on our ability to execute on our business plan and could have a negative impact on our commercial and strategic relationships.

If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.

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Financing activities 64,683 (97)

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

Net change in cash, cash equivalents and restricted cash $ 41,994 $ (14,636)

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 and other current liabilities, partially offset by decreases in prepaid expenses and other current assets.

Net cash used in operating activities for the year ended December 31, 2021 was $20.3 million and primarily resulted from (i) our net loss of $26.9 million adjusted for non-cash charges of $6.6 million related to stock-based compensation, depreciation, amortization, non-cash interest and deferred income taxes and (ii) changes in our net operating assets of $0.1 million primarily related to net increases in accounts receivable, net and net decreases in accounts payable, partially offset by net decreases in prepaid expenses and other current assets and net increases in accrued liabilities and other current liabilities.

Net cash used in operating activities for the year ended December 31, 2020 was $14.1 million and primarily resulted from (i) 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 (ii) changes in our net operating assets of $1.3 million related to net increases in accounts receivables and prepaid expenses and other current assets, partially offset by net increases in accounts payable and accrued liabilities and other current liabilities.

Cash Flows from Investing Activities

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.

Net cash used in investing activities for the year ended December 31, 2021 and 2020 was $2.4 million and $0.5 million, respectively, and was primarily 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, 2021 was $64.7 million and primarily resulted from the net proceeds received from our public offering in March 2021 of $64.7 million and proceeds from the Exagen Inc.

2019 Employee Stock Purchase Plan, or the ESPP, purchases, partially offset by principal payments on capital lease obligations.

Small Business Administration Paycheck Protection Program under the CARES Act, which we subsequently repaid in May 2020, partially offset by proceeds from ESPP purchases.

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.

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 accounting principles generally accepted in United States of America, or GAAP.

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.

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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 payors (primarily Medicare and Medicaid), client payors (i.e.

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

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

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

Our portfolios are grouped per payor (i.e.

Our portfolios are grouped per payor (e.g.

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

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

We continually assess the state of our cash collections in order to identify areas of risk and opportunity that allow us to appropriately estimate receivables and revenue.

Should we later determine the judgements underlying estimated collections change, our financial results could be impacted in future periods.

Revenue recognized during the years ended December 31, 2021 and 2020 related to performance obligations satisfied in prior periods was approximately $0.7 million and $0.8 million, respectively, which relates to a change in estimate of the transaction price.

In December 2018, we entered into the Janssen Agreement to co-promote SIMPONI ® in the United States.

Our obligations relating to sales and co-promotion services for SIMPONI ® is a series of single performance obligations since Janssen simultaneously receives and consumes the benefits provided by our sales and co-promotional services.

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.

Our obligations relating to sales and co-promotion services for SIMPONI ® were a series of single performance obligations since Janssen simultaneously received and consumed the benefits provided by our sales and co-promotional services.

In August 2021, we and Janssen mutually agreed to terminate the Janssen Agreement effective August 31, 2021.

Long-Lived Assets

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If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share attributable to common stockholders could have been significantly different.

See Notes 2 and 9 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2020 and 2019.

See Notes 2 and 8 to our audited financial statements included elsewhere in this Annual Report on Form 10-K for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted and purchases under our ESPP rights in the years ended December 31, 2021 and 2020.

Determination of the Fair Value of Our Common Stock

Prior to the completion of our IPO in September 2019, our board of directors, with the assistance of management, determined the fair value of our common stock on each grant date.

All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant.

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 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.

We evaluated these share purchase right agreements and assessed whether they meet the definition of a freestanding instrument and, if so, determined the fair value of the share purchase right liability and recorded it on the balance sheet.

The share purchase right liability was revalued at each reporting period with changes in the fair value of the liability recorded as a component of other income (expense) in the statement of operations.

The share purchase right liability was revalued at settlement and the resultant fair value was then reclassified to redeemable convertible preferred stock at that time.

The estimated fair value of the share purchase right liability was determined using valuation models that consider the probability of achieving the requisite milestones, our cost of capital, the estimated time period the preferred stock right would be outstanding, consideration received for the convertible preferred stock, the number of shares to be issued to satisfy the preferred stock purchase right and at what price, and probability of the consummation of an initial public offering, as applicable.

We accounted for our redeemable convertible preferred stock warrant liabilities as freestanding instruments for shares that were puttable or redeemable.

These warrants were classified as liabilities on our balance sheet and were recorded at their estimated fair values.

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

We continued to re-measure the fair value of the warrant liabilities until:

(i) exercise;

(ii) expiration of the related warrant;

or (iii) conversion of the preferred stock underlying the security into common stock, which occurred in connection with the completion of our IPO in September 2019.

We estimated the fair values of our warrant liabilities using an option pricing model based on inputs as of the valuation measurement dates, including the fair value of our redeemable convertible preferred stock, the estimated volatility of the price of our redeemable convertible preferred stock, the expected term of the warrants and the risk-free interest rates.

There were significant judgments and estimates inherent in the determination of the fair values of our preferred stock purchase right liabilities and redeemable convertible preferred stock warrant liabilities.

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.

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

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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.

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.

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See "Notes to the Financial Statements-Note 2-Recent Accounting Pronouncements" of our annual financial statements.

Off-Balance Sheet Arrangements

During the periods presented we did not have, nor do we currently have any off-balance sheet arrangements, as defined under the rules and regulations of the SEC.

JOBS Act Accounting Election

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As a result, our audited financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2024.

However, if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

However, if certain events occur prior to the end of this five-year period, including if we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to this anniversary.

Quantitative and Qualitative Disclosures About Market Risk.

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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