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You should read the following discussion of our financial condition and results
of operations in conjunction with the financial statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Annual
Report on Form 10-K, including information with respect to our plans and
strategy for our business and financial performance, includes forward-looking
statements that are based on current beliefs, plans and expectations and involve
risks, uncertainties and assumptions. You should read the "Special note
regarding forward-looking statements" and "Risk Factors" section of this Annual
Report on Form 10-K for a discussion of important factors that could cause our
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis.



Overview
We are dedicated to transforming the care continuum for patients suffering from
debilitating and chronic autoimmune diseases by enabling timely differential
diagnosis and optimizing therapeutic intervention. We have developed and are
commercializing a portfolio of innovative testing products under our AVISE®
brand, several of which are based on our proprietary CB-CAPs technology. Our
goal is to enable rheumatologists to improve care for patients through the
differential diagnosis, prognosis and monitoring of complex autoimmune and
autoimmune-related diseases, including 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 business model of integrating testing products and
therapeutics positions us to offer targeted solutions to rheumatologists and,
ultimately, better serve patients.
We currently market 10 testing products under our AVISE® brand that allow for
the differential diagnosis, prognosis and monitoring of complex autoimmune and
autoimmune-related diseases. Our lead testing product, AVISE® CTD, enables
differential diagnosis for patients presenting with symptoms indicative of a
wide variety of CTDs and other related diseases with overlapping symptoms. We
commercially launched AVISE® CTD in 2012 and revenue from this product comprised
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.
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. Our laboratory is certified for performance of
high-complexity testing by CMS in accordance with CLIA. We are approved to offer
our products in all 50 states. Our clinical laboratory reports all AVISE®
testing product results within five business days. In the fourth quarter of
2020, we completed the build-out of approximately 2,000 additional square feet
to our clinical laboratory.
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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 payors, such as insurance companies and health
maintenance organizations, government payors, such as Medicare, and patients.
Reimbursement rates vary by product and payor. We continue to focus on expanding
coverage among existing contracted rheumatologists and to achieve coverage with
commercial payors, laboratory benefit managers and evidence review
organizations.
Since inception we have devoted substantially all our efforts developing and
marketing products for the diagnosis, prognosis and monitoring of autoimmune
diseases. Although our revenue has increased sequentially year over year, we
have never been profitable and, as of December 31, 2020 we had an accumulated
deficit of $181.3 million. We incurred net losses of $16.7 million and $12.0
million for the years ended December 31, 2020 and 2019, respectively. We expect
to continue to incur operating losses in the near term as our operating expenses
will increase to support the growth of our business, as well as additional costs
associated with being a public company. We have funded our operations primarily
through equity and debt financings and revenue from sales of our products.
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. 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,
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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
In addition to the impact of COVID-19, we believe there are several important
factors that have impacted, and that we expect will impact, our operating
performance and results of operations, including:

?Continued Adoption of Our Testing Products.  Since the launch of AVISE® CTD in
2012 and through 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 payors, including both
commercial and government payors such as Medicare. Payment from third-party
payors differs depending on whether we have entered into a contract with the
payors as a "participating provider" or do not have a contract and are
considered a "non-participating provider." Payors will often reimburse
non-participating providers, if at all, at a lower amount than participating
providers. We have received a substantial portion of our revenue from a limited
number of third-party commercial payors, most of which have not contracted with
us to be a participating provider. Historically, we have experienced situations
where commercial payors proactively reduced the amounts they were willing to
reimburse for our tests, and in other situations, commercial payors have
determined that the amounts they previously paid were too high and have sought
to recover those perceived excess payments by deducting such amounts from
payments otherwise being made. When we contract to serve as a participating
provider, reimbursements are made pursuant to a negotiated fee schedule and are
limited to only covered indications. If we are not able to obtain or maintain
coverage and adequate reimbursement from third-party payors, we may not be able
to effectively increase our testing volume and revenue as expected.
Additionally, retrospective reimbursement adjustments can negatively impact our
revenue and cause our financial results to fluctuate.
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?Promotion of SIMPONI®.  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.  We rely on sales of our AVISE® CTD
test to generate the significant majority of our revenue. We expect to continue
to invest in research and development in order to develop additional testing
products and expect these costs to increase. Our success in developing new
testing products will be important in our efforts to grow our business by
expanding the potential market for our testing products and diversifying our
sources of revenue.
?Maintain Meaningful Margin.  We realized an increase to our gross margins
beginning in the first quarter of 2020 following the expiration of a 10% annual
royalty on our CB-CAPs technology. We believe we are well positioned to maintain
meaningful margin through a continued focus on increasing operating leverage
through the implementation of certain internal initiatives, such as conducting
additional validation and reimbursement oriented clinical studies to facilitate
payor coverage of our testing products, capitalizing on our growing reagent
purchasing to negotiate improved volume-based pricing and automation in our
clinical laboratory to reduce material and labor costs. However, our efforts to
maintain a meaningful margin may be partially offset by our ability to generate
meaningful co-promotion revenue in 2021.
?Timing of Our Research and Development Expenses.  Our spending on experiments
and clinical studies may vary substantially from quarter to quarter. We also
expend funds to secure clinical samples that can be used in discovery, product
development, clinical validation, utility and outcome studies. The timing of
these research and development activities is difficult to predict. If a
substantial number of clinical samples are obtained in a given quarter or if a
high-cost experiment is conducted in one quarter versus the next, the timing of
these expenses will affect our financial results. We conduct clinical studies to
validate our new testing products, as well as ongoing clinical and outcome
studies to further expand the published evidence to support our commercialized
AVISE® testing products. Spending on research and development for both
experiments and studies may vary significantly by quarter depending on the
timing of these various expenses.
?How We Recognize Revenue.  We record revenue on an accrual basis based on our
estimate of the amount that will be ultimately realized for each test upon
delivery based on a historical analysis of amounts collected by test and by
payor. Changes to such estimates may increase or decrease revenue recognized in
future periods.
While each of these areas present significant opportunities for us, they also
pose significant risks and challenges that we must address. We discuss many of
these risks, uncertainties and other factors in the section entitled "Risk
Factors."
Janssen Promotion Agreement
In December 2018, we entered into the Janssen Agreement, under which we are
responsible for the costs associated with our 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,
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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.
Seasonality
Based on our experience to date, we expect some seasonal variations in our
financial results due to a variety of factors, such as the year-end holiday
period and other major holidays, vacation patterns of both patients and
healthcare providers, including medical conferences, climate and weather
conditions in our markets, seasonal conditions that may affect medical practices
and provider activity, including for example influenza outbreaks that may reduce
the percentage of patients that can be seen, and other factors relating to the
timing of patient benefit changes, as well as patient deductibles and
co-insurance limits.
Financial Overview
Revenue
To date, we have derived nearly all of our revenue from the sale of our testing
products, most of which is attributable to our AVISE® CTD test. We primarily
market our testing products to rheumatologists in the United States. The
rheumatologists who order our testing products and to whom results are reported
are generally not responsible for payment for these products. The parties that
pay for these services, or payors, consist of healthcare insurers, government
payors (primarily Medicare and Medicaid), client payors (i.e. hospitals, other
laboratories, etc.), and patient self-pay. Our service is completed upon the
delivery of test results to the prescribing rheumatologists which triggers
billing for the service.
We recognize revenue in accordance with the provisions of ASC Topic 606, Revenue
from Contracts with Customers. We record revenue on an accrual basis based on
our estimate of the amount that will be ultimately realized for each test upon
delivery based on a historical analysis of amounts collected by test and by
payor. These assessments require significant judgment by management.
Our ability to increase our revenue will depend on our ability to further
penetrate the market for our current and future testing products, and increase
our reimbursement and collection rates for tests delivered, as well as our
ability to continue to generate meaningful co-promotion revenue. We expect to
encounter difficulties promoting SIMPONI® above the predetermined baseline
potentially resulting in us receiving the minimum promotion fee of $0.3 million
in the 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
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2020. However, the continued spread of COVID-19 may adversely affect testing
volumes in future periods, the extent of which is highly uncertain.
Operating Expenses
Costs of Revenue
Costs of revenue represents the expenses associated with obtaining and testing
patient specimens. The components of our costs of revenue include materials
costs, direct labor, equipment and infrastructure expenses associated with
testing specimens, shipping charges to transport specimens, blood specimen
collections fees, royalties, depreciation and allocated overhead, including rent
and utilities.
Each payor, commercial third-party, government, or individual, reimburses us at
different amounts. These differences can be significant. As a result, our costs
of revenue as a percentage of revenue may vary significantly from period to
period due to the composition of payors for each month's billings.
Assuming future testing volumes are not negatively impacted by the spread of
COVID-19, we expect that our costs of revenue will increase in absolute dollars
as the number of tests we perform increases. However, we expect that the cost
per test will decrease over time due to volume discounts on materials and
shipping costs and other volume efficiencies we may gain as the number of tests
we perform increases. As discussed above, the continued spread of COVID-19 may
adversely affect testing volumes which may result in an increase in cost per
test due to our inability to realize volume efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel costs,
including stock-based compensation expense, direct marketing expenses,
accounting and legal expenses, consulting costs, and allocated overhead
including rent, information technology, depreciation and utilities.
We expect that our selling, general and administrative expenses will increase in
absolute dollars in 2021 as compared to 2020, as we continue to evaluate the
reach and frequency of our sales and sales support functions, expected additions
to headcount and increases for personnel costs, including stock-based
compensation.
Research and Development Expenses
Research and development expenses include costs incurred to develop our
technology, testing products and product candidates, collect clinical specimens
and conduct clinical studies to develop and support our testing products and
product candidates. These costs consist of personnel costs, including
stock-based compensation expense, materials, laboratory supplies, consulting
costs, costs associated with setting up and conducting clinical studies and
allocated overhead including rent and utilities. We expense all research and
development costs in the periods in which they are incurred.
We expect that our research and development expenses will increase in absolute
dollars in 2021 as compared to 2020, as we continue to invest in research and
development activities related to our existing testing products and product
candidates, 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 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).
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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 and an amount received under the CARES Act.
Income Tax Benefit (Expense)
Income taxes include federal and state income taxes in the United States.


Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019:
                                                                          

Years completed the 31st of December,

                                                                          2020                    2019             Change
                                                                                        (in thousands)
Revenue                                                           $      41,975$  40,387$  1,588
Operating expenses:
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

Total operating expenses                                                 57,160                  49,686             7,474
Loss from operations                                                    (15,185)                 (9,299)           (5,886)
Interest expense                                                         (2,565)                 (3,491)              926
Change in fair value of financial instruments                                 -                     267              (267)
Other income, net                                                           984                     510               474
Loss before income taxes                                                (16,766)                (12,013)           (4,753)
Income tax benefit (expense)                                                 79                     (25)              104
Net loss                                                          $     (16,687)$ (12,038)$ (4,649)


Revenue
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
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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 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 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 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.
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.
Liquidity and Capital Resources
We have incurred net losses since our inception. For the years ended
December 31, 2020 and 2019, we incurred a net loss of $16.7 million and
$12.0 million, respectively, and we expect to incur additional losses and
increased operating expenses in future periods. As of December 31, 2020, we had
an accumulated deficit of $181.3 million. To date, we have generated only
limited revenue, and we may never achieve revenue sufficient to offset our
expenses.
Through the date of our IPO in September 2019, our operations were financed
primarily from sales of our common 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. 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.
As of December 31, 2020, we had $57.4 million of cash and cash equivalents. Cash
in excess of immediate requirements is invested in accordance with our
investment policy, primarily with a view to liquidity and capital preservation.
Currently, our funds are held in cash and money market funds.
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In September 2017, we entered into the loan and security agreement with
Innovatus under which we immediately drew down $20.0 million. In December 2018,
we borrowed an additional $5.0 million under the loan agreement. In November
2019, we amended the loan and security agreement with Innovatus, which we
collectively refer to as the Amended Loan Agreement. Pursuant to the Amended
Loan Agreement, the loan term is for five years with a final maturity date of
November 2024. The Amended Loan Agreement accrues interest at an annual rate of
8.5%, of which 2.0%, during the first 36 months, will be treated as paid in-kind
interest. Paid in-kind interest is added to the principal balance each period.
After the initial 36 months of the loan, the entire 8.5% will be paid in cash at
the end of each period. On or after the first anniversary of the Loan Amendment,
but before the second anniversary of the Loan Amendment, we may, at our option,
prepay the term loan borrowings by paying the lender a prepayment premium.
Prepayment before the second anniversary of the Loan Amendment may only occur
for specified reasons in the Amended Loan Agreement. The prepayment premium
decreases by 1% during each subsequent twelve-month period after the first
anniversary of the Loan Amendment.
Our obligations under the Amended Loan Agreement are secured by a security
interest in substantially all of our assets, including our intellectual
property. The Amended Loan Agreement contains customary conditions to borrowing,
events of default, and covenants, including covenants requiring us to maintain
certain levels of minimum liquidity of $2.0 million and achieve certain minimum
amounts of revenue, and limiting our ability to dispose of assets, undergo a
change in control, merge with or acquire other entities, incur debt, incur
liens, pay dividends or other distributions to holders of our capital stock,
repurchase stock and make investments, in each case subject to certain
exceptions. The consequences of failing to achieve the performance covenant will
be cured if, within sixty days of failing to achieve the performance covenant,
we issue additional equity securities or subordinated debt with net proceeds
sufficient to fund any cash flow deficiency generated from operations, as
defined. 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
Our primary uses of cash are to fund our operations as we continue to grow our
business. We expect to continue to incur operating losses in the near term as
our operating expenses will be increased to support the growth of our business.
We expect that our costs of revenue, selling, general and administrative
expenses, and research and development expenses will continue to increase as we
increase our test volume, expand our marketing efforts and increase our internal
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 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. 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
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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). Based
on our current business plan, we believe that our existing cash and cash
equivalents and our anticipated future revenue, will be sufficient to meet our
anticipated cash requirements for at least the next 12 months from the date of
this filing.
Our estimate of the period of time through which our financial resources will be
adequate to support our operations is a forward-looking statement and involves
risks and uncertainties, and actual results could vary as a result of a number
of factors, including:
•the impact of the COVID-19 pandemic on our business, including challenges
resulting from social distancing and stay-at-home orders through a reduction in
testing volumes;
•our ability to maintain and grow sales of our AVISE® testing products, as well
as the costs associated with conducting clinical studies to demonstrate the
utility of our products and support reimbursement efforts;
?our ability to achieve sufficient market acceptance, coverage and adequate
reimbursement from third-party payors and adequate market share and revenue for
our testing products;
?fluctuations in working capital;
?the costs of developing our product pipeline, including the costs associated
with conducting our ongoing and future validation studies;
?the additional costs we may incur as a result of operating as a public company;
?the costs associated with our promotion of SIMPONI®, including the expansion of
our sales capabilities, and the extent and timing of generating revenue from
such promotion; and
?the extent to which we establish additional partnerships or in-license, acquire
or invest in complementary businesses or products.
Until such time, if ever, as we can generate revenue to support our costs
structure, we expect to finance our operations through equity offerings, debt
financings or other capital sources, including potentially collaborations,
licenses and other similar arrangements. Debt financing, if available, may
involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, the ownership
interest of our stockholders may be diluted, and the terms of these securities
may include liquidation or other preferences that adversely affect the rights of
our common stockholders. If additional funding is required or desired, there can
be no assurance that additional funds will be available to us on acceptable
terms on a timely basis, if at all, or that we will generate sufficient cash
from operations to adequately fund our operating needs or achieve or sustain
profitability. If we are unable to raise additional capital or generate
sufficient cash from operations to adequately fund our operations, we will need
to delay, reduce or eliminate some or all of our research and development
programs, product portfolio expansion plans or commercialization efforts. Doing
so will likely have an unfavorable effect on our ability to execute on our
business plan and could have a negative impact on our relationships with parties
such as Janssen. If we cannot expand our operations or otherwise capitalize on
our business opportunities because we lack sufficient capital, our business,
financial condition, and results of operations could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
                                                                            

Years completed the 31st of December,

                                                                                  2020                  2019
(in thousands)
Net cash provided by (used in):
Operating activities                                                        $      (14,084)$  (9,711)
Investing activities                                                                  (455)              (103)
Financing activities                                                                   (97)            68,734

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

Cash flow from operating activities

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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.
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.
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.
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. 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.
Our estimates are based on our historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions and any
such differences may be material. We believe that the accounting policies
discussed below are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving
management's judgement and estimates.
Revenue Recognition
To date, substantially all of our revenue has been derived from sales of our
testing products. We primarily market our testing products to rheumatologists
and their physician assistants in the United States. 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. hospitals, other laboratories, etc.)
and patient self-pays.
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. Further adjustments to the allowances, based on actual
receipts, is recorded upon settlement. The transaction price is estimated using
an expected value method on a portfolio basis.
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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.
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.
Long-Lived Assets
Our long-lived assets are comprised principally of our property and equipment,
finite lived intangible assets, and goodwill.
We amortize all finite lived intangible assets over their respective estimated
useful lives. In considering whether intangible assets are impaired, we combine
our intangible assets and other long-lived assets (excluding goodwill), into
groupings, a determination which we principally make on the basis of whether the
assets are specific to a particular test offered by us or technology we are
developing. If we identify events or circumstances indicate that the associated
carrying amount of assets within a group may not be recoverable, we will
consider the assets in the group impaired if the carrying value of the group's
assets and directly associated liabilities exceed the estimated cash flows
expected to be generated over the estimated useful life of the assets in the
group. Management's estimates of future cash flows are impacted by projected
levels of tests and levels of reimbursement, as well as expectations related to
the future cost structure of the entity.
Goodwill is not amortized but is tested for impairment at least annually or more
frequently whenever a triggering event or change in circumstances occurs, at the
reporting unit level. For our goodwill impairment analysis, we operate in a
single reporting unit, and allocate all goodwill to this reporting unit. We are
required to recognize an impairment charge if the carrying amount of the
reporting unit exceeds its fair value. 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.
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. No goodwill impairments were recorded during the
years ended December 31, 2020 and 2019.
Following the completion of our IPO in September 2019, our stock price and
associated market capitalization will also be considered in the determination of
reporting unit fair value. A prolonged or significant decline in our share price
could provide evidence of a need to record a material impairment to goodwill.
Stock-Based Compensation
We recognize compensation expense related to stock-based awards to employees and
directors based on the estimated fair value of the awards on the date of grant
over the requisite service period of the awards (usually the vesting period) on
a straight-line basis. The grant date fair value, and the resulting stock-based
compensation expense, is estimated using the Black-Scholes option pricing model.
The grant date fair value of stock-based awards is expensed on a straight-line
basis over the vesting period of the respective award.
We recorded stock-based compensation expense of approximately $2.7 million and
$0.6 million for the years ended December 31, 2020 and 2019, respectively. We
expect to continue to grant stock options and other equity-based awards in the
future, and to the extent that we do, our stock-based compensation expense
recognized in future periods will likely increase.
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The Black-Scholes option pricing model requires the use of highly subjective and
complex assumptions, which determine the fair value of stock-based awards. 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.
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.
Income Taxes
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. 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
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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. We must use judgment in assessing the potential need for a valuation
allowance, which requires an evaluation of both negative and positive evidence.
The weight given to the potential effect of negative and positive evidence
should be commensurate with the extent to which it can be objectively verified.
In determining the need for and amount of our valuation allowance, if any, we
assess the likelihood that we will be able to recover our deferred tax assets
using historical levels of income, estimates of future income and tax planning
strategies. As a result of historical cumulative losses and uncertainties
surrounding our ability to generate future taxable income and, based on all
available evidence, we believe it is more likely than not that our recorded net
deferred tax assets will not be realized. Accordingly, we have recorded a
valuation allowance against all of our net deferred tax assets at December 31,
2020. We will continue to maintain a full valuation allowance on our deferred
tax assets until there is sufficient evidence to support the reversal of all or
some portion of this allowance.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP. 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 Annual Report on Form 10-K, which
contain accounting policies and other disclosures required by GAAP.
Recent Accounting Pronouncements
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
The JOBS Act contains provisions that, among other things, reduce certain
reporting requirements for an "emerging growth company." The JOBS Act permits an
"emerging growth company" such as us to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public
companies. We have elected to use this extended transition period under the JOBS
Act until the earlier of the date we (i) are no longer an emerging growth
company or (ii) affirmatively and irrevocably opt out of the extended transition
period provided in the JOBS Act. As a result, our audited financial statements
may not be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
We will remain an emerging growth company until the last day of our fiscal year
following the fifth anniversary of the date of the first sale of our common
equity securities pursuant to an effective registration statement under the
Securities Act, which such fifth anniversary will occur in 2024. However, if
certain events occur prior to the end of such five-year period, including if we
become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange
Act, our annual gross revenues exceed $1.07 billion or we issue more than
$1.0 billion of non-convertible debt in any three-year period, we will cease to
be an emerging growth company prior to the end of such five-year period.

© Edgar Online, source Previews

LONDON (Reuters) – When a payroll problem left Natalie Gallagher so cash-strapped this month that she couldn’t afford her bus ticket to work, she turned to her regular lender Amigo for an emergency complementary loan.

But she was out of luck. Like many lenders on which thousands of high-risk borrowers in Britain depend, Amigo had tightened its criteria for distributing money in the wake of the coronavirus.

“They approved my top-up, but 10 minutes later I got a message saying my reason for the top-up was not what they were doing right now,” she said. “Amigo was my only real option.”

While traditional banks have been forced to give customers three-month mortgage payment holidays and reduced overdrafts, less support has been offered to so-called subprime borrowers who often need extra cash just to stay afloat. .

Some lenders have closed their doors to new clients while others have been unable to extend cash reserves to borrowers since foreclosure restrictions prohibited weekly visits by home loan officers to their homes. .

According to the Money Advice Service, around 17 million people in Britain have less than 100 pounds ($ 122) in savings to draw from in a crisis and those working in some of the sectors worst affected by the pandemic are particularly vulnerable .

More than 6 million workers in the retail, travel, hospitality and beauty industries are 25% more likely than people in other industries not to have the money to fall back on, the the Center for Social Justice think tank last month.

“At the end of the day, these people have nowhere to go,” said Roger Gewolb, founder of the FairMoney loan comparison site. “The consumer credit market is at a standstill.”

Gallagher, 29, of Manchester, northern England, said while debts to payday lenders such as Wonga damaged her credit rating, she was surprised to be dismissed this month .

“I would understand if I wanted a new loan or if I had missed payments, but I never missed a payment,” said Gallagher, who works with delinquents.

A spokesperson for Amigo said Gallagher’s request was turned down because the purpose of the loan was not covered in his current loan criteria, which have been tightened since the pandemic.

“An Amigo loan is for thoughtful purchases, rather than daily expenses; that’s why the minimum loan we offer is 1,000 pounds ($ 1,225). “

FEW OPTIONS

While some low-income borrowers just struggle to budget, others have been blacklisted by the traditional financial system and rely on alternative credit providers such as the guarantor or home lenders to make ends meet. .

Credit score provider ClearScore, which shows consumers what offers are available based on their circumstances, said subprime borrowers could on average only access 0.17 of loans in a market snapshot on May 16. . On January 1, the average was 1.

As of the same date in May, senior borrowers on average found 1.79 loans available, while those of middle and non-senior borrowers found on average 0.81 product.

Britain’s largest subprime lender, Provident Financial Group, has tightened its underwriting criteria while rival Non-Standard Finance now only lends to key workers such as doctors, nurses, supermarket staff and retailers. delivery drivers.

The subprime credit market had already contracted in recent years after tighter regulations and interest rate caps pushed large numbers of payday lenders out of business.

Without financial safety nets and affordable access to credit, millions of hardened Britons sought government social benefits, with 2.5 million applications for universal credit benefits between March 16 and May 5.

Nearly 11 million people have missed or expect to miss a bill that could lead to execution by bailiff and even eviction, according to a study by the Citizens Advice Bureau.

Debt charities say the lack of government programs to help Britons in debt at a time when subprime lenders are pulling out of the market has been keenly felt.

“High-cost short-term credit may seem like a short-term financial stopgap, but all too often it can become an expensive repeat trap,” said Sue Anderson of the debt charity StepChange.

“This is unlikely to represent a lasting solution to people’s financial pressures, when a well-designed interest-free loan program could potentially make a useful contribution,” she said.

Plans to offer interest-free loans to some distressed borrowers – a policy proposed by former finance minister Philip Hammond in 2018 – have yet to materialize.

A spokesperson for the Treasury said it remains committed to working with stakeholders to pilot a program to support the most vulnerable and sustainable over the long term.

Lenders are prohibited from selling credit to anyone who thinks they cannot repay it, which will likely exclude many people who have lost their jobs so far in the pandemic.

This means that those employed in hard-hit industries, or those who have seen their household income decline while on leave, find an increasingly narrow range of options among sub-prime lenders.

“I imagine that 35% of the population are now in that non-prime or subprime position and there is more to come,” said Gewolb of FairMoney. “All they can do is find a surety or have a chat with a guy down the boozer who has friends with baseball bats and doesn’t have a consumer credit license.”

SUBPRIME CUT

England’s illegal money lending team, which is investigating and prosecuting loan sharks, said it was launching a live chat on the website on May 26 to give victims another safe way to seek advice and support .

“These nasty individuals mean nothing but misery for those who borrow money from them,” said team leader Tony Quigley.

Based on data from 2018 and 2019, the organization said it took an average of 2.75 years for a person targeted by predatory lenders to engage with authorities, suggesting that any spike in activity loan sharks may not be visible until 2023.

Analysts say it’s no surprise that subprime lenders are acting with caution. Even under favorable market conditions, companies that serve subprime clients typically absorb higher defaults than banks that focus on higher quality borrowers.

In 2019, 13.6% of loans made by Provident’s subprime credit card company Vanquis deteriorated, while the depreciation rate on its home loans was 39%.

But for loans from the Royal Bank of Scotland, for example, which tends to lend to people with better credit scores and focuses on mortgages, the rate was only 0.21%.

With little consensus on the outlook for the UK economy, few mainstream lenders say they are ready to help borrowers who weren’t up to the task before the pandemic.

David Duffy, managing director of Virgin Money, said the bank prioritizes existing customers and has not considered changing its lending criteria to offer credit to subprime borrowers.

A spokesperson for the UK Finance trade banking organization said: “Lenders are working hard to ensure the right balance is struck between helping clients budget effectively and meeting their payment needs. while lending responsibly and ensuring long-term accessibility. ”

Others have been more direct about a subprime laundering.

“It’s almost certain that people won’t be able to get credit,” said a senior bank official. “Clearly if you are in this category you are in a much more difficult scenario.”

(1 USD = 0.8156 pounds)

When covid-19 began to infect the world, India’s economy was already under pressure from moderate demand. Subsequent lockdowns, disruptions in value chains and the demand shock have only made matters worse for most Indian companies.

It was to cover the resulting cash flow shortages that the RBI announced a series of measures, including a moratorium on debt repayment by all eligible borrowers. The moratorium window was two-stage – first from March 1 to May 31, then extended to August 31.

The response has been good, with no less than 2,300 of Crisil’s rated universe total, or around 8,000 companies, taking advantage of this opportunity. The constraint, however, has tended to differ, depending on the degree of the pandemic’s impact on individual businesses and their ratings, sectors and sizes.

Here are the main takeaways from the analysis:

Sub-investment grade companies are more vulnerable: of the 2,300 companies, three-quarters have sub-investment grade ratings (rated BB + or less by Crisil), leaving only a fourth in investment grade.

Lower quality companies, which otherwise have stable business models, struggle with leveraged balance sheets and stretched liquidity. Already struggling due to muted economic conditions, these have been the hardest hit by lockdowns caused by the pandemic and increased demand pressures. With business operations severely reduced, cash flow has almost dried up for most of these entities, which typically have few funding avenues beyond bank lines. Indeed, the average use of the bank limit for these actors is greater than 90%, which leaves very little cushion to absorb these cash deficits.

For these players, the moratorium was therefore the real oxygen.

Even companies rated in the investment category (BBB or higher) have benefited from the moratorium, albeit to a much smaller extent. These companies typically have stronger balance sheets, an adequate liquidity profile and more leeway to borrow, and also amortize their bank limit usage rates.

These actors have used the moratorium to build a cushion for any unforeseen demands amid the protracted lockdown and uncertainty around the trajectory of the pandemic.

Heavily affected sectors need a moratorium more: a sector’s resilience to the pandemic is assessed by its ability to return to normal. This directly depends on the nature of its products (essential / non-essential), the elasticity of demand, the strength of the balance sheet in terms of debt and liquidity, and the extent of government or regulatory support; and indirectly on the availability of manpower, logistical issues, bureaucratic and local authority requirements, etc.

As a result, heavily affected sectors such as gemstones and jewelry, hotels, automotive components, car dealerships, power (electric utilities, independent power producers and energy traders), packaging and capital goods and components saw one in five companies rated Crisil take advantage of the moratorium.

Low impact sectors such as pharmaceuticals, fast moving consumer goods, chemicals, agriculture, dairy and secondary steel, on the other hand, saw a very low proportion (only one in 10 ) request a moratorium.

Size of operations matters, too: with size comes the means to absorb unprecedented shocks and variability, and there could not have been a better teacher than the pandemic to get this message across.

The number of companies taking advantage of the moratorium in the medium-sized business segment ( ₹300-1,500 crore in turnover) was more than triple that of their larger peers (turnover of ₹1500 crore and more).

Mid-sized players forced to take advantage of the moratorium generally have little leeway available on the profitability front, limited ability to control costs, and relatively less leeway on their balance sheets.

However, their larger counterparts generally have more leeway in terms of margins to absorb cost pressures. Likewise, larger balance sheets offer greater financial flexibility.

In the middle, what to watch out for: The road to recovery is unlikely to be smooth. It may well be two or three quarters more before demand picks up, operations normalize, and cash flow stabilizes for most businesses.

Even as the moratorium comes to an end on August 31, RBI introduced a one-time debt restructuring plan to support cash-strapped businesses. Banks will be the final decision makers.

In addition to the hard-hit low-resilience sectors, a significant number of players who faced cash flow disruptions in the first quarter of this fiscal year, as well as project-stage companies that may not have any other source of cash flow. , would be ideal candidates to opt for the restructuring of their bank loans.

Timely use of this facility can help businesses manage their cash flow, which in turn will support their credit profiles.

Meanwhile, the evolution of the waiver of interest on deferred payments charged during the moratorium period will be interesting to watch. If the Supreme Court rules in favor of a waiver, it remains to be seen who will finance the resulting losses to the banks. Wider advice and clarification on this subject is awaited.

The author is Senior Director, Crisil Ratings

Beirut

When Lebanon’s financial collapse began in late 2019, Hassan Shoumar was barred from accessing his dollar savings, like everyone else in the country, as banks cracked down on capital controls.

But the young engineer had an alternative. He could still withdraw the dollars from his account at the Al-Qard al-Hasan Association, the financial arm of the militant Hezbollah group.

Mr. Shoumar had kept an account at the association for years, since he had taken out a loan from the association to pay for university fees. Unlike Lebanese commercial banks, the association’s accounts did not earn any interest. But Mr. Shoumar didn’t care.

“What matters to me is that when I want my money, I can get it,” he said by phone from southern Lebanon.

By intervening where the state and financial institutions have failed, Hezbollah provides a vital lifeline for some Lebanese, even as the group has come under huge criticism over the past year among Lebanese. furious with the political elite. In the country’s crumbling economy, everyone is in desperate need of hard currency and cash as the value of the local currency crumbles. In commercial banks, depositors stand in line for hours and fight unsuccessfully with managers to access their dollar savings. Most banks have stopped lending.

But in Hezbollah’s al-Qard al-Hasan, people can take out small interest-free loans in dollars, which allows them to pay school fees, get married, buy a used car, or open the door. a little company. They can also open savings accounts there.

The association, officially a non-profit charitable organization, is one of the tools through which Hezbollah strengthens its support among the country’s Shiite population.

With poverty increasing across Lebanon, Hezbollah is providing its community with low cost schools and hospitals and distributing fuel oil to the poor. Hezbollah continues to pay its fighters and employees in its institutions in US dollars, while everyone else receives their salaries in Lebanese pounds, which lost around 80% of their value in the crisis.

Over the past year, the al-Qard al-Hasan association has seen a significant increase in the number of clients, despite being under US Treasury sanctions since 2007.

“People’s lack of confidence in the banking sector forced them to find other places,” said Batoul Tahini, spokesperson for the association.

She said the number of deposits was much higher than in 2019 and previous years, although lending has not increased much. She declined to give exact figures.

In a recent speech, Hezbollah chief Sayyed Hassan Nasrallah said around 300,000 people are currently dealing with the association on loans. The association claims that its clients come from different sects in Lebanon. But the vast majority are said to be Shia Muslims.

Roy Badaro, a Lebanese economist, said the association was part of Hezbollah’s state-within-a-state and “a disguised means of supplementing its business through microfinance, such as schools, hospitals, etc. managed by Hezbollah ”.

“The aim is to absorb the economic crisis among the poor Shiites,” he said.

Al-Qard al-Hasan, whose name in Arabic means “the benevolent loan,” offers interest-free loans up to $ 5,000 and, especially nowadays, grants them in dollars. Active for more than three decades, it is considered the largest non-bank financial institution in Lebanon providing microloans.

Customers have to put gold as collateral or bring a guarantor. They then repay the loan in monthly installments for up to 30 months, after which the collateral is returned. Customers can also open accounts to deposit money, which is then used to fund loans. The association operates under Islamic rules prohibiting interest.

Lebanon’s economic and financial crisis is the country’s worst in modern history, with an economy shrinking 19% in 2020. Tens of thousands of people across the country have lost their jobs and nearly half of the population of over 6 million is in poverty.

The crisis has shaken people’s confidence in the Lebanese banking system, once among the most respected in the region. As banks were hit, many people decided to keep their money at home, amounting to as much as $ 10 billion, according to central bank governor Riad Salameh.

This proved to be a boon for the al-Qard al-Hasan association, as some turned to it as an alternative to store their money.

The risk for Hezbollah is that as poverty increases and the economic crisis worsens, many people risk defaulting on their loans, economist Badaro said. If that happens, Hezbollah may have to use its own funds to cover the deposits, he said.

The notoriety of the association has also made it a target.

A hacking group calling itself “Spiderz” claimed to have broken into the association’s system and displayed the identities of some customers and footage from security cameras of some of its branches. He warned customers to withdraw their money or face US sanctions.

Al-Qard al-Hasan confirmed that there was a cyberattack at the end of December described as “partial and limited”. He told customers not to worry about their identity being revealed. Ms Tahini said the matter was under investigation.

The fact that the association’s clients get their money without a hitch has also sparked resentment about Hezbollah’s power in Lebanon.

“It shows that Hezbollah is safe and relaxed, while we are in a dilemma,” Walid Joumblatt, political leader of the Lebanese Druze community and critic of Hezbollah, said in an interview with Sky News Arabia. He joked that he grew his beard like conservative Muslims to get a loan from al-Qard al-Hasan.

In a speech a few days later, Hezbollah chief Nasrallah fired back, saying all anyone had to do was fill out an application and put the gold guarantee in place.

He also described the association as being strong, providing $ 3.7 billion in loans to some 1.8 million people since its inception. He boasted that US sanctions against Hezbollah officials only strengthened al-Qard al-Hasan, as some of them transferred their bank accounts to the association.

He first revealed that during the 2006 war with Israel, Israeli warplanes struck a site where silver and gold were being stored. Despite this, he boasted, every customer had their money.

“No one has ever lost a dime,” he said.

This story was reported by The Associated Press.

The real economy has only seen a small part of the injection of liquidity given by the European Central Bank to the Greek credit sector to combat the impact of the pandemic.

Although they drew up to 40 billion euros from the Eurosystem, the banks channeled only part of it into loans to the market. Instead, they invest most of these resources in government bonds, with the aim of safeguarding fragile profits.

Another part of their cash – in the absence of sustainable companies that could absorb it – is parked at the ECB in the form of available liquidity. In the first nine months of the year, Greek lenders invested a total of nearly € 35 billion in the purchase of government securities and the reduction of borrowing in the interbank market, as well as in deposits. with the central bank.

Thus, most of the liquidity circulates around the ECB, national governments and commercial banks, in a vicious circle that is maintained by all parties concerned: banks unable to take new risks under the weight of bad debts; the country’s businesses, which have low credit capacity due to their size and low competitiveness; and the state, which recycles policies of questionable effectiveness and incapable of forming a coherent growth strategy.

The problem is acute in Greece after the decade-long financial crisis, even though the expansion of business credit rose 8.5% in January-September, the highest level since 2010.

The absolute figure of 5 billion euros is very low and comes mainly from loans issued with state guarantees from the Hellenic Development Bank and thanks to the leverage effect of commercial lenders. In any event, it is well below the funds drawn from the Eurosystem.

Data from the Bank of Greece shows that a significant portion of liquidity in the credit system is spent on purchases of government bonds. The bond portfolio held by banks rose from less than 29.7 billion euros at the end of 2019 to more than 40.8 billion euros at the end of last September, an increase of almost 11.2 billion euros in just nine months.

Bloomberg

China’s swine fever lockdown is reshaping the $ 300 billion pork industry

(Bloomberg) – China’s plan to control the transport of live pigs to curb the spread of African swine fever is expected to reshape the market and create regional price differences among the world’s largest pork consumer and producer. five regions from May, the agriculture ministry said last week, and live pigs will not be allowed across borders. The move will lower pork prices in major northern production areas and increase the cost of popular protein in southern demand centers. If controls remain in place for the longer term, companies will be forced to open more pig farms closer to where their customers are. China’s pork industry was devastated by African swine fever in 2018 and, while herd sizes have since recovered, a recent resurgence pushed pork imports to an all-time high last month. However, prices fell as the slaughter of herds increased the domestic supply. Pigs are a very important source of protein in China with a pork sales market of around 2 trillion yuan ($ 308 billion) per year, according to figures from the Dalian Commodity Exchange. About 20% of Chinese pigs, or about 140 million live animals, are transported each year, mainly from the northeast to the south to meet the demand for fresh meat, said Lin Guofa, senior analyst at consultancy Bric Agriculture. Group. will have to build pig farms, ”he said. But the transportation of frozen meat instead of live pigs will be encouraged, which will lead to an expansion of the cold chain industry, Lin said. Northeast China is the top pork producing region due to abundant corn supply and relatively easy access to land. , while the northwestern region of Xinjiang has also been identified as an area in which to develop pork production. Wholesale pork prices are down about 30% this year, according to data from the Ministry of Commerce. They were 31.33 yuan per kilogram on April 16, the lowest since mid-2019. The controls will lower prices in the north in the short term and push them up in the south, according to Wang Zhong, chief consultant at Systematic, Strategic & Soft Consulting Co. This could potentially spur major pork producers – including Muyuan Foodstuff Co., New Hope Liuhe Co. and Wens Foodstuff Group Co. – to build more hog farms in the south and more slaughter facilities in the northeast and northwest The new rules are similar to systems developed in Brazil and Spain, which have succeeded in getting rid of African swine fever, said the Ministry of Agriculture. While “the virus is still widespread and difficult to eradicate in the short term,” regional controls are an “inevitable choice,” he said. (Updates on wholesale pork prices in 7th paragraph). For more articles like this, please visit us Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP

Bloomberg

China expands internet crackdown with Meituan Monopoly probe

(Bloomberg) – The Chinese government has extended its antitrust crackdown beyond Jack Ma’s tech empire, launching an investigation into the alleged monopoly practices of food delivery giant Meituan. choose one of the two, ”using the same language in a survey of Ma’s Alibaba Group Holding Ltd. which resulted in a fine of $ 2.8 billion. China’s third-largest internet company recovered from early losses to 3.1 percent on Tuesday after analysts at Nomura estimated Meituan may have to shell out more than 4.6 billion yuan ($ 709 million) on the basis of Alibaba’s punishment. Holding Ltd. and Ant Group Co., and threatens to dampen the ambitions of founder Wang Xing, one of China’s most aggressive entrepreneurs. The government has become increasingly concerned about the growing influence of titans like Alibaba, Tencent Holdings Ltd. and Meituan on all aspects of Chinese life as well as the vast amounts of data they have accumulated while providing services. like online shopping, chatting and commuting. The antitrust campaign has gathered pace in recent weeks, as regulators imposed a record fine on Alibaba, ordered its subsidiary Ant to review its operations, and ordered 34 of its biggest tech companies – including Meituan – to rectify any anti-competitive business practices. in a month. Following the meeting with SAMR, the Beijing-based company pledged to comply with antitrust laws, saying it would keep the market orderly and not force traders to ‘choose one of the two’ – forcing them to choose between Meituan or a rival. – by unreasonable methods. Meituan said in a statement on Monday that he would actively cooperate with the investigation and step up efforts to comply with the regulations. helped differentiate its restaurant supplies from those of its competitors, ”Nomura analysts Jialong Shi and Thomas Shen wrote in a research note. “Meituan’s strong market position and customer loyalty have allowed it to go beyond that.” What Bloomberg Intelligence Says: Meituan is unlikely to face tougher penalties than Alibaba’s recent $ 2.8 billion fine after being slapped with a monopoly probe, a sign that declining regulations ‘expands on the country’s technological behemoths. The interim period could be baffling for its investors, but we believe any penalty Meituan may pay will be commensurate with its smaller operational scale .– Vey-Sern Ling and Tiffany Tam, analystsClick here for researchIt remains uncertain whether regulators will target Other aspects The company, founded by billionaire Wang, 42, has long been criticized by rivals and traders for alleged excesses such as forced exclusivity deals. The company – which competes with Alibaba’s Ele.me for food delivery – had already been found guilty of unfair competition in at least two court cases this year and ordered to pay compensation, local media reported. The company had also dismissed allegations that it charged expensive commissions to restaurants during the Covid-19 outbreak last year. Beside Ele.me, Meituan also faced an online backlash after that several delivery people were killed or injured as they tried to meet strict deadlines. He was one of a handful of operators fined by the antitrust watchdog in March for providing inappropriate subsidies to grow in the hot community e-commerce arena. our initial thought, ”Nomura analysts wrote. Ahead of the investigation, Meituan said he would raise $ 10 billion in another record-breaking share sale by a Hong Kong-listed company as well as through a convertible bond offering. The company had said it would use the funds to boost investment in new technology such as standalone delivery as well as general purpose.Read more: Meituan CEO Who Beat Jack Ma gets $ 10 billion for the next fight Under antitrust laws, Meituan could face a penalty of up to 10% of his earnings if he is found to have violated the regulations. Its 2020 revenue was around 114.8 billion yuan ($ 17.7 billion). In contrast, rival Alibaba was fined $ 2.8 billion, or roughly 4% of its national revenue in 2019. Wang, a coding guru whose methodical obsession with data and algorithms has grown. proved key to humiliating Alibaba’s rival restaurant service, Ele.me, has openly telegraphed its ambitions. In an interview with local media in 2017, he said Meituan could join Alibaba and Tencent as the third member of a Chinese internet triumvirate in five to ten years, due to the value it creates in food, travel and other services. in a lengthy article online, how he’ll channel the raised capital into research into autonomous drones and delivery systems – which analysts expect to fuel Meituan’s foray into the hot community commerce arena, where buyers in a local neighborhood get wholesale discounts. Meituan was expected to lead a pitched subsidy and sweetener battle with Alibaba, JD.com Inc. and Pinduoduo Inc. for food and product sourcing. Meituan’s shares nearly tripled in 2020 , making it one of the top performing Chinese tech stocks. It fell about 31% from a February record, in part as China’s antitrust campaign gained momentum and after the company signaled it would suffer more losses from its investments. in new businesses like online grocery shopping. Its dollar bond spreads widened on Monday after the watchdog was announced. (Updates with share action and analyst commentary in second paragraph) For more articles like this please visit us at bloomberg.com 2021 Bloomberg LP