What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-11 · 171 added, 113 removed, 205 unchanged (58% of the section changed)

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We also have two late-stage proprietary products in development that address cutaneous squamous cell carcinoma, or SCC, and suspicious pigmented lesions.

We expect to commercially launch our SCC proprietary GEP test, DecisionDx-SCC, in the third quarter of 2020.

We expect to commercially launch our SCC proprietary GEP test, DecisionDx-SCC, at the beginning of September 2020.

As it relates to our proprietary GEP test for suspicious pigmented lesions, we believe we remain on track to launch this test in the second half of 2020.

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We have processed over 60,000 clinical samples since commercial launch and our annual revenue increased from $22.8 million in 2018 to $51.9 million in 2019.

For the three months ended March 31, 2020, year-over-year growth in new ordering clinicians for our DecisionDx-Melanoma test was 43%.

The numbers of DecisionDx-Melanoma and DecisionDx-UM test reports delivered by us during the three months ended March 31, 2020 and for the year ended December 31, 2019 are presented in the table below:

DecisionDx-UM

For the six months ended June 30, 2020, our revenue was $30.1 million compared to $19.5 million for the six months ended June 30, 2019.

The numbers of DecisionDx-Melanoma and DecisionDx-UM test reports delivered by us during the six months ended June 30, 2020 and 2019 and for the year ended December 31, 2019 are presented in the table below:

DecisionDx-UM Total

Q1 2020 4,574 361 4,935

Q2 2020 3,008 306 3,314

For the six months ended June 30, 2020 7,582 667 8,249

Q1 2019 3,232 360 3,592

Q2 2019 3,691 376 4,067

For the six months ended June 30, 2019 6,923 736 7,659

Q3 2019 4,126 356 4,482

Q4 2019 4,480 434 4,914

For the year ended December 31, 2019 15,529 1,526 17,055

For the three months ended March 31, 2020, new ordering clinicians (first time ordering a test) for our DecisionDx-Melanoma test grew by 43% compared to the same period in 2019.

However, for the three months ended June 30, 2020, new ordering clinicians for DecisionDx-Melanoma decreased by 43% as compared to the same period in 2019, and for the six months ended June 30, 2020, new ordering clinicians for Decision Dx-Melanoma decreased by 6% as compared to the same period in 2019.

We believe this is reflective of the impacts of the COVID-19 pandemic, as discussed further below.

For additional information on the metrics we disclose, refer to “Information about certain metrics ” below.

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On May 17, 2019, the Centers for Medicare & Medicaid Services, or CMS, determined that DecisionDx-UM meets the criteria for existing advanced diagnostic laboratory test, or ADLT, status, also referred to as “existing ADLT” status.

This means that beginning in 2021, the DecisionDx-UM Medicare rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

Accordingly, in 2021 the DecisionDx-UM Medicare rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

Specifically, the median private payor rate from January 1 to June 30, 2019 will be used to set the Medicare rate for the calendar year 2021.

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Also, on May 17, 2019, CMS determined that DecisionDx-Melanoma meets the criteria for ‘‘new ADLT’’ status.

This means that from July 1, 2019 through March 31, 2020 the Medicare reimbursement rate equaled the initial list price of $7,193.00 , subject to the possible recoupment provision described below .

The rate for April 1, 2020 through December 31, 2021 was calculated based upon the median private payor rate from July 1, 2019 to November 30, 2019.

We submitted this data in December 2019 and CMS has notified us that the rate for April 1, 2020 through December 31, 2021 will be $7,193.00.

Accordingly, from July 1, 2019 through March 31, 2020 the Medicare reimbursement rate was equal to the initial list price of $7,193.00 .

From April 1, 2020 through December 31, 2021, CMS notified us that the rate will also be $7,193.00, which was calculated based upon the median private payor rate for DecisionDx-Melanoma from July 1, 2019 to November 30, 2019.

B eginning in 2022, the rate for both DecisionDx-UM and DecisionDx-Melanoma will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

For example, the rate for 2022 will be set using median private payor rate data from January 1, 2020 to June 30, 2020.

To date, in addition to the revenue generated from the sale of our products, we have financed our operations through our initial public offering of common stock, or the IPO, private placements of preferred stock, convertible promissory notes and bank debt.

To date, in addition to the revenue generated from the sale of our products, we have financed our operations through our initial public offering of common stock in July 2019, or the IPO, a follow-on public offering of common stock in June 2020, private placements of preferred stock, convertible promissory notes and bank debt.

We believe that our existing cash and cash equivalents and anticipated cash generated from sales of our products will be sufficient to fund our operations for the foreseeable future.

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Impact of COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China.

Since then, COVID-19 has spread to multiple countries, including the United States.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

We are continuing to closely monitor the impact of the COVID-19 pandemic on our business and are taking proactive efforts designed to protect the health and safety of our workforce, continue our business operations and advance our corporate objectives.

We are providing the following update with respect to the impact of COVID-19 on our business:

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We have implemented adjustments to our operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing.

We have recently experienced a decline in orders, which we believe is linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19.

For example, from April 1, 2020 to May 6, 2020, orders for our lead product, DecisionDx-Melanoma, declined 43% from the same period in 2019.

We have observed a stabilization in the decline in orders beginning in the second week of April 2020, which parallel the stabilization of the melanoma diagnosis rate seen in weekly, third-party new melanoma claims data.

As it relates to the impact of COVID-19 on our uveal melanoma test, DecisionDx-UM, order volume has exhibited some softening since early April 2020.

Our future results will be dependent upon the extent and duration of the COVID-19 crisis as well as the timing and occurrence of rescheduled patient visits.

While we anticipate that a majority of these delayed and/or canceled patient visits will be subsequently rescheduled as state and local government restrictions and guidelines are eased, we are unable to predict the pace, timing or occurrence of any rescheduled patient visits.

• We have experienced declines in orders and test report volume beginning primarily in April 2020, which we believe is linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19.

Orders for our lead product, DecisionDx-Melanoma, declined 45% in April 2020 and 39% in May 2020, each compared to the same periods in 2019.

However, we saw year-over-year growth in the month of June 2020, with orders increasing by 10% compared to the same period in 2019, and also saw year-over-year growth in the month of July 2020.

We believe the improvement in DecisionDx-Melanoma test orders since April 2020 is driven in part by the reopening of dermatology practices and rescheduled patient visits, coinciding with the easing of state and local government restrictions.

Overall, for the second quarter of 2020, test reports delivered for DecisionDx-Melanoma decreased 18.5% compared to the second quarter of 2019.

For our uveal melanoma test, DecisionDx-UM, test report volume decreased by 18.6% for the second quarter of 2020 compared to the second quarter of 2019.

• In the second quarter of 2020, COVID-19 negatively impacted our year-over-year number of new ordering clinicians for DecisionDx-Melanoma.

The largest impact was seen in April, improving sequentially throughout the remainder of the quarter.

The improvement, over April figures, of our year-over-year number of new ordering clinicians for DecisionDx-Melanoma continued in July 2020.

• Our future results will be dependent upon the extent and duration of the COVID-19 crisis as well as the impact of ongoing state and local government restrictions, which are beyond our control, and which may be eased and/or reinstated from time to time depending on the circumstances, potentially impacting the flow of future patient visits.

• Based upon an analysis of our supply channel and current inventory levels, we believe we have adequate access to reagents and consumables needed for testing patient samples, and we expect to continue providing normal turnaround times for delivery of our test reports.

We continue to believe our cash and cash equivalents and anticipated cash generated from sales of our products will be sufficient to fund our operations for the foreseeable future.

• We continue to believe our cash and cash equivalents, including the approximately $79.5 million of net proceeds we received from our recent public offering of common stock, and anticipated cash generated from sales of our products, will be sufficient to fund our operations for the foreseeable future.

In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.

We have received the following payments, which are summarized below:

On April 10, 2020, we received an automatic payment of $1.9 million from the U.S.

Department of Health and Human Services, or HHS, pursuant to the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, or the CARES Act, out of relief funds allocated by HHS to healthcare providers to reimburse for healthcare related expenses or lost revenues attributable to COVID-19.

This automatic payment was calculated by HHS in proportion to the providers’ share of Medicare fee-for-service reimbursements in 2019 and was applicable to all facilities and providers that received Medicare fee-for-service reimbursements in 2019.

As determined by HHS, the funds will not need to be repaid.

On April 16, 2020, we received an advance payment of $8.3 million, or the Advance Payment, from CMS under its Accelerated and Advance Payment Program, which was recently expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

The Advance Payment will be applied to future Medicare claims we submit for reimbursement beginning August 14, 2020 (120 days after the Advance Payment was issued).

If the Advance Payment is not fully recovered by CMS by November 12, 2020 (within 210 days of the issuance of the Advance Payment), we will make arrangements with our MAC for CMS to recoup the remaining balance.

The effects of COVID-19 on our business caused us to anticipate noncompliance with our trailing three-month revenue covenant under our loan agreement at the next scheduled measurement date of June 30, 2020.

In response, on May 10, 2020, we entered into an amendment to our loan agreement to modify the structure of the covenant so that we are now required to comply with either the existing trailing three-month revenue target or a new liquidity ratio calculation.

For further discussion regarding the covenant, see “Long-Term Debt” under the Liquidity and Capital Resources section below.

As the overall effect of COVID-19 on our business is continuing to evolve, we cannot predict the extent to which our results of operations, financial condition or cash flows will be impacted by COVID-19.

Accordingly, the April 1 through May 6, 2020 order data presented above is not necessarily indicative of our results of operations that can be expected for the three months ending June 30, 2020, or any other interim period, or for the year ending December 31, 2020.

See “Sources of Liquidity” under the Liquidity and Capital Resources section below for more information on these payments.

As conditions are continuously evolving, we are unable to predict whether orders and test report volume will improve in the coming months or the extent to which our results of operations, financial condition or cash flows will be impacted.

Accordingly, the order and test report data presented above is not necessarily indicative of our results of operations that can be expected for future interim periods or for the year ending December 31, 2020.

For more information on the potential impact of the COVID-19 pandemic on our business, see the risk factors included under “Risks Related to Our Business” and the other risk factors included in Part II, Item 1A., “Risk Factors,” of this Quarterly Report on Form 10-Q.

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Our performance depends on our ability to retain and broaden adoption with existing prescribing physicians, as well as attract new physicians.

In the near term, we expect our report volume to be negatively impacted by the effects of the COVID-19 pandemic, as discussed above.

In the near term, our report volume may continue to be negatively impacted by the effects of the COVID-19 pandemic, as the crisis evolves, as discussed above.

• Reimbursement.

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We believe this metric is useful to investors in evaluating the volume of our business activity from period to period that may not be discernible from our reported revenues under ASC 606.

We also sometimes present, on a limited basis, data on the number of orders received.

We believe order data can provide additional insight on current demand trends, particularly during the COVID-19 pandemic, when considered in conjunction with test report volume.

However, orders received in a particular period do not necessarily correspond with actual delivered test reports or reported revenues for the same period or subsequent periods.

New ordering clinicians for DecisionDx-Melanoma represents the number of clinicians who ordered the DecisionDx-Melanoma test for the first time during the reporting period specified.

We believe this metric is useful in evaluating the effectiveness of our sales and marketing efforts in establishing new relationships with clinicians and increasing the adoption of our DecisionDx-Melanoma test.

We also believe this metric provides useful information to investors in assessing our ability to expand the use of

the DecisionDx-Melanoma test.

We also believe this metric provides useful information to investors in assessing our ability to expand the use of the DecisionDx-Melanoma test.

Since this metric is based upon the reporting period in which an order is placed, it does not necessarily correspond to the reporting period in which a test report was delivered or in which any revenue was recognized.

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Cost of Sales

The components of our cost of sales are material and service costs, personnel costs, which includes stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, third-party test fees, and allocated overhead including rent, information technology costs, equipment depreciation and utilities.

The components of our cost of sales are material and service costs, personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, third-party test fees, and allocated overhead including rent, information technology costs, equipment depreciation and utilities.

Costs associated with performing tests are recorded when the test is processed regardless of whether and when revenues are recognized with respect to that test.

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We expect cost of sales in absolute dollars to increase as the number of tests we perform increases.

Gross margin, calculated as net revenue minus cost of sales, and gross margin percentage, calculated as gross margin divided by net revenue, are key indicators we use to assess our business.

Gross margin, calculated as net revenues minus cost of sales, and gross margin percentage, calculated as gross margin divided by net revenues, are key indicators we use to assess our business.

Research and Development

Research and development expenses include costs incurred to develop our genomic tests, collect clinical samples and conduct clinical studies to develop and support our products.

These costs consist of personnel costs, including stock-based compensation expense, prototype materials, laboratory supplies, consulting costs, regulatory costs, electronic medical records set up costs, costs associated with setting up and conducting clinical studies and allocated overhead, including rent, information technology, equipment depreciation and utilities.

These costs consist of personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), prototype materials, laboratory supplies, consulting costs, regulatory costs, electronic medical records set up costs, costs associated with setting up and conducting clinical studies and allocated overhead, including rent, information technology, equipment depreciation and utilities.

We expense all research and development costs in the periods in which they are incurred.

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Selling, general and administrative, or SG&A, expenses include executive, selling and marketing, legal, finance and accounting, human resources, billing and client services.

These expenses consist of personnel costs, including stock-based compensation expense, direct marketing expenses, audit and legal expenses, consulting costs, training and medical education activities, payor outreach programs and allocated overhead, including rent, information technology, equipment depreciation, and utilities.

We expect continued increases in SG&A expenses related to compliance with the rules and regulations of the SEC

and The Nasdaq Stock Market LLC, or Nasdaq, investor relations activities, and additional insurance expenses.

These expenses consist of personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), direct marketing expenses, audit and legal expenses, consulting costs, training and medical education activities, payor outreach programs and allocated overhead, including rent, information technology, equipment depreciation, and utilities.

We expect continued increases in SG&A expenses related to compliance with the rules and regulations of the SEC and The Nasdaq Stock Market LLC, or Nasdaq, investor relations activities, and additional insurance expenses.

Other administrative and professional services expenses within SG&A are expected to increase with the scale of our business, but selling and marketing-related expenses are expected to increase significantly, consistent with our growth strategy.

In the near term, we expect these increases to be partially offset by temporarily reduced spending on travel and field-based sales activities as a result of COVID-19.

In the near term, we expect these increases may be partially offset by temporarily reduced spending on travel and field-based sales activities as a result of the COVID-19 crisis.

Other Operating Income

Other operating income consists of the automatic payment from HHS pursuant to the CARES Act, as discussed above.

Interest Income

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Results of Operations

Comparison of the three months ended March 31, 2020 and 2019

Comparison of the three months ended June 30, 2020 and 2019

The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):

Three Months Ended March 31,

Increase (Decrease)

Three Months Ended

June 30, Change

Net revenues $ 12,715 $ 10,739 $ 1,976 18.4 %

Cost of sales 2,146 1,993 153 7.7 %

Gross margin 10,569 8,746 1,823 20.8 %

Gross margin percentage 83.1 % 81.4 %

Operating expenses:

Operating expenses and other operating income:

Research and development 2,704 1,317 1,387 105.3 %

Selling, general and administrative 10,392 6,821 3,571 52.4 %

Total operating expenses

Other operating income (1,882) — (1,882) N/A

Total operating expenses, net 11,214 8,138 3,076 37.8 %

Operating income (loss) (645) 608 (1,253) (206.1) %

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Other expense, net — (189) 189 100.0 %

Income (loss) before income taxes

Loss before income taxes (1,376) (1,269) (107) (8.4) %

Income tax expense — — — — %

Net income (loss)

Net revenues increased by $8.7 million , or 99.8% , to $17.4 million due to a combination of increased test volume and higher per-unit revenues.

Essentially all of the increase is attributable to DecisionDx-Melanoma test revenues.

For the three months ended March 31, 2020 , we experienced an increase in DecisionDx-Melanoma and DecisionDx-UM test volume of 37.4%, compared to the three months ended March 31, 2019 .

Our 2020 per-unit revenues also benefited from the attainment of “new ADLT” status for our DecisionDx-Melanoma test, effective July 1, 2019, which resulted in a higher Medicare reimbursement rate for the test, as described above.

Additionally, for the three months ended March 31, 2020 and 2019 , we recorded net positive revenue adjustments of $3.2 million and $0.6 million , respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

The additional positive revenue adjustments in the current year primarily relate to recognition of revenue for certain tests delivered in prior periods for which no revenue was recognizable originally, but was recognized upon cash collection of payments for the tests in the current-year period.

Net loss $ (1,376) $ (1,269) $ (107) (8.4) %

For the three months ended June 30, 2020 net revenues increased by $2.0 million, or 18.4%, to $12.7 million compared to the three months ended June 30, 2019 primarily due to higher per-unit revenues partially offset by reduced test volume and reduced revenue adjustments related to prior periods.

The overall revenue increase is primarily attributable to higher DecisionDx-Melanoma test revenues, partially offset by lower DecisionDx-UM test revenues.

Our 2020 per-unit revenues benefited from the attainment of “new ADLT” status for our DecisionDx-Melanoma test, effective July 1, 2019, which resulted in a higher Medicare reimbursement rate for the test, as described above.

Offsetting the benefits of higher per-unit revenues were lower test report volumes.

For the three months ended June 30, 2020, we experienced an 18.5% decrease in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the three months ended June 30, 2019, which we believe is the result of delays and/or cancellations of patient visits due to the COVID-19 pandemic.

For the three months ended June 30, 2020 and 2019, we recorded net positive revenue adjustments of $2.3 million and $3.3 million, respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

The positive revenue adjustments include the recognition of revenue for certain tests delivered in prior periods for which no revenue was recognizable originally, but was recognized upon cash collection of payments for the tests in the respective periods.

Cost of Sales

Cost of sales for the three months ended March 31, 2020 increased by $0.8 million , or 49.6% , compared to the three months ended March 31, 2019 , primarily due to higher personnel costs associated with additional headcount in our laboratory testing operations and increases in expenses for supplies and services, which were attributable to the higher activity levels.

Our gross margin percentage was 86.3% for the three months ended March 31, 2020 , compared to 81.7% for the same period in 2019 , with the improvement principally a result of the increased operating leverage on the higher revenues.

Cost of sales for the three months ended June 30, 2020 increased by $0.2 million, or 7.7%, compared to the three months ended June 30, 2019, primarily due to higher personnel costs associated with additional headcount in our laboratory testing operations, partially offset by a decrease in expenses for supplies and services, consistent with the lower test report volume.

Our gross margin percentage was 83.1% for the three months ended June 30, 2020, compared to 81.4% for the same period in 2019, with the improvement primarily a result of increased operating leverage on the higher revenues.

Due to the nature of our business, a significant portion of our cost of sales expenses represent fixed costs associated with our testing operations.

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Research and Development

Research and development expenses increased by $1.5 million , or 109.0% , for the three months ended March 31, 2020 , compared to the three months ended March 31, 2019 , primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for clinical trials.

Research and development expenses increased by $1.4 million, or 105.3%, for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for clinical trials.

Selling, General and Administrative

SG&A expense increased by $5.0 million , or 83.2% , for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Approximately 60% of the increase is attributable to higher personnel costs, particularly due to increased headcount, which includes salaries, bonuses, benefits and stock-based compensation.

SG&A expense increased by $3.6 million, or 52.4%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Approximately 78% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

In early 2019, we expanded our sales organization from 14 territories to 23 territories and implemented an additional expansion to 32 territories beginning in December 2019.

The higher personnel costs also reflect expanded headcount in our administrative support functions.

The remainder of the increase was primarily associated with higher professional fees (principally attributable to reimbursement and accounting), higher insurance expense, increased travel costs, increased spending for events and conferences and other general increases.

The remainder of the increase was primarily associated with higher professional fees, higher insurance expense, increased board of director compensation and other general increases.

These increases were partially offset by reduced travel costs and reduced spending on events and conferences, due to cancellations and travel restrictions associated with the COVID-19 pandemic.

Stock-based compensation expense included in SG&A expense was $1.2 million for the three months ended June 30, 2020 compared to $0.1 million for the same period in 2019.

Other Operating Income

Other operating income for the three months ended June 30, 2020 of $1.9 million consists entirely of the automatic payment received from HHS for relief funds pursuant to the CARES Act.

Interest Expense

Interest expense decreased by $0.9 million, or 54.6%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The decrease is primarily attributable to interest expense on the Q1 2019 Notes during the three months ended June 30, 2019.

The outstanding principal amount and accrued interest on the Q1 2019 Notes converted into shares of common stock in connection with the IPO in July 2019.

Other Expense, Net

Other expense, net for the three months ended June 30, 2019 consisted of the change in fair value of our liability for convertible preferred stock warrants and the change in fair value of the embedded derivative liability associated with the Q1 2019 Notes.

In connection with the IPO, the preferred stock warrants became exercisable for common stock and are no longer adjusted for changes in fair value and the Q1 2019 Notes converted into shares of common stock.

Results of Operations

Comparison of the six months ended June 30, 2020 and 2019

The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):

Six Months Ended June 30, Change

Net revenues $ 30,133 $ 19,456 $ 10,677 54.9 %

Cost of sales 4,537 3,591 946 26.3 %

Gross margin 25,596 15,865 9,731 61.3 %

Gross margin percentage 84.9 % 81.5 %

Operating expenses and other operating income:

Research and development 5,617 2,711 2,906 107.2 %

Selling, general and administrative 21,470 12,868 8,602 66.8 %

Other operating income (1,882) — (1,882) N/A

Total operating expenses, net 25,205 15,579 9,626 61.8 %

Operating income 391 286 105 36.7 %

Interest income 336 26 310 1,192.3 %

Interest income increased by $0.3 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, as a result of higher balances of cash and cash equivalents.

The higher cash and cash equivalents were primarily attributable to proceeds from the IPO in July 2019.

Interest expense (1,533) (2,717) 1,184 43.6 %

Interest expense decreased by $0.3 million , or 25.4% , for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The decrease is primarily attributable to interest expense on the Q1 2019 Notes during the three months ended March 31, 2019.

Other expense, net — (222) 222 100.0 %

Loss before income taxes (806) (2,627) 1,821 69.3 %

Income tax expense — — — — %

Net loss $ (806) $ (2,627) $ 1,821 69.3 %

Net revenues increased by $10.7 million, or 54.9%, to $30.1 million due to a combination of higher per-unit revenues and increased test volume, partially offset by reduced revenue adjustments related to prior periods.

The overall revenue increase is primarily attributable to higher DecisionDx-Melanoma test revenues, partially offset by lower DecisionDx-UM test revenues.

For the six months ended June 30, 2020, we experienced a 7.7% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the six months ended June 30, 2019.

While we saw a year-over-year increase in test reports delivered of 37.4% during the first quarter of 2020, we experienced a year-over-year decrease in test reports delivered of 18.5% during the second quarter of 2020, reflecting the impacts of the COVID-19 pandemic, as discussed above.

Our per-unit revenues benefited from the attainment of “new ADLT” status for our DecisionDx-Melanoma test, effective July 1, 2019, which resulted in a higher Medicare reimbursement rate for the test, as described above.

For the six months ended June 30, 2020 and 2019, we recorded net positive revenue adjustments of $1.0 million and $2.8 million, respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

Cost of Sales

Cost of sales for the six months ended June 30, 2020 increased by $0.9 million, or 26.3%, compared to the six months ended June 30, 2019, primarily due to higher personnel costs associated with additional headcount in our laboratory testing operations and increases in expenses for supplies and services, which were attributable to the overall higher activity levels.

Our gross margin percentage was 84.9% for the six months ended June 30, 2020, compared to 81.5% for the same period in 2019, with the improvement primarily a result of the increased operating leverage on the higher revenues.

Due to the nature of our business, a significant portion of our cost of sales expenses represent fixed costs associated with our testing operations.

Accordingly, our cost of sales expense will not necessarily increase or decrease commensurately with the change in net revenues from period to period.

Research and Development

Research and development expenses increased by $2.9 million, or 107.2%, for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily associated with increases in personnel costs attributable to additional headcount, higher expenses for clinical trials and higher advisory board expenses.

Selling, General and Administrative

SG&A expense increased by $8.6 million, or 66.8%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Approximately 67% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

In early 2019, we expanded our sales organization from 14 territories to 23 territories and implemented an additional expansion to 32 territories beginning in December 2019.

The higher personnel costs also reflect expanded headcount in our administrative support functions.

The remainder of the increase was primarily associated with higher professional fees, insurance expense and increases in board of director compensation.

Stock-based compensation expense included in SG&A expense was $2.4 million for the six months ended June 30, 2020 compared to $0.2 million for the same period in 2019.

Other Operating Income

Other operating income for the six months ended June 30, 2020 of $1.9 million consists entirely of the automatic payment received from HHS pursuant to the CARES Act.

Interest Income

Interest income increased by $0.3 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily as a result of higher average balances of cash and cash equivalents, which were primarily attributable to proceeds from the IPO in July 2019.

Interest Expense

Interest expense decreased by $1.2 million, or 43.6%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The decrease is primarily attributable to interest expense on the Q1 2019 Notes during the six months ended June 30, 2019, partially offset by increased amortization of debt discount and issuance cost on our banking credit facility during the six months ended June 30, 2020.

The outstanding principal amount and accrued interest on the Q1 2019 Notes converted into shares of common stock in connection with the IPO in July 2019.

Other Expense, Net

Other expense, net for the six months ended June 30, 2020 consisted of the change in fair value of our liability for convertible preferred stock warrants and the change in fair value of the embedded derivative liability associated with the Q1 2019 Notes.

Liquidity and Capital Resources

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Our principal sources of liquidity are our cash and cash equivalents and cash generated from sales of our products.

As of March 31, 2020 and December 31, 2019, we had cash and cash equivalents of $98.7 million and $98.8 million , respectively.

date, in addition to the revenue generated from the sale of our products, we have financed our operations through the IPO, private placements of preferred stock, convertible promissory notes and bank debt.

As of June 30, 2020 and December 31, 2019, we had cash and cash equivalents of $179.8 million and $98.8 million, respectively.

To date, in addition to the revenue generated from the sale of our products, we have financed our operations through the IPO, a follow-on public offering of common stock in June 2020, private placements of preferred stock, convertible promissory notes and bank debt.

Our long-term debt is described further below.

June 2020 Follow-On Public Offering

On June 29, 2020, we issued and sold 2,000,000 shares of our common stock in a follow-on public offering at a price of $37.00 per share.

We received approximately $69.1 million in net proceeds, after deducting underwriting discounts and commissions and offering costs paid or payable by us.

In connection with the offering, we granted the underwriters a 30-day option to purchase up to 300,000 additional shares of common stock at the public offering price, less underwriting discounts and commissions.

On July 2, 2020, we issued and sold an additional 300,000 shares of common stock pursuant to the underwriters’ exercise in full of their option to purchase additional shares, which resulted in additional net proceeds to us of $10.4 million.

We expect to use a portion of these proceeds to further support and accelerate our research and development activities, including two important studies that we have recently commenced to support our DecisionDx-Melanoma test.

Relief Funds and Advance Payment

On April 10, 2020, we received an automatic payment of $1.9 million from HHS pursuant to the CARES Act out of relief funds allocated by HHS to healthcare providers to reimburse for healthcare related expenses or lost revenues attributable to COVID-19.

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On April 16, 2020, we received an advance payment of $8.3 million from CMS under its Accelerated and Advance Payment Program, which was recently expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

The Advance Payment will be applied to future Medicare claims we submit for reimbursement beginning August 14, 2020 (120 days after the Advance Payment was issued).

The Advance Payment will be applied to all future Medicare claims we submit for reimbursement beginning August 14, 2020 (120 days after the Advance Payment was issued).

If the Advance Payment is not fully recovered by CMS within November 12, 2020 (210 days of the issuance of the Advance Payment), we will make arrangements with our MAC for CMS to recoup the remaining balance.

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Since our inception, we have incurred significant operating losses and negative cash flows.

We had an accumulated deficit of $51.6 million as of March 31, 2020.

We had an accumulated deficit of $53.0 million as of June 30, 2020.

Our ability to generate revenue sufficient to achieve sustained profitability will depend heavily on the successful commercialization of our currently marketed products and the products we plan to launch in the future as well as our spending on research and development activities.

Although we generated positive operating income during the year ended December 31, 2019 and for the three months ended March 31, 2020 , we expect to incur additional expenses and operating losses in the future as we invest in the commercialization of our existing products, the development of our future product candidates and the commercialization of our product candidates.

Although we generated positive operating income during the year ended December 31, 2019 and for the six months ended June 30, 2020, we expect to incur additional expenses and operating losses in the future as we invest in the commercialization of our existing products, the development of our future product candidates and the commercialization of our product candidates.

We believe that our existing cash and cash equivalents and anticipated cash generated from sales of our products will be sufficient to fund our operations for the foreseeable future.

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Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

As a result of the COVID-19 crisis and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability.

As a result of the COVID-19 crisis and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including

diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability.

There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur.

If equity and credit markets deteriorate, it may make

any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product discovery and development activities or future commercialization efforts.

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Our long-term debt balances are presented in the table below (in thousands):

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Term debt $ 25,854 $ 26,688

Unamortized discount and issuance costs (1,113) (1,566)

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We have a Loan and Security Agreement, or the 2018 LSA, with Oxford Finance LLC, or Oxford, as collateral agent, and Oxford and Silicon Valley Bank, or SVB, as equal syndicated lenders, or the Lenders.

The 2018 LSA currently consists of a $25.0 million secured term loan credit facility, or the Term Loan.

Our obligations under the 2018 LSA are secured by substantially all of our assets, excluding intellectual property and subject to certain other exceptions and limitations.

We have the right to prepay the 2018 Term Loan in whole or in part at any time, subject to a prepayment fee of 1.50% prior to November 30, 2020 and 0.75% thereafter.

Upon prepayment, we are also obligated to pay a non-refundable early termination fee of $497,000 .

Amounts prepaid or repaid under the 2018 Term Loan may not be reborrowed.

Previously, the 2018 LSA contained a financial covenant that required us to achieve a monthly trailing three-month revenue target each month throughout the term of the agreement, but the covenant was amended in February 2020 and is now tested quarterly instead of monthly, as discussed further below.

As of March 31, 2020 and December 31, 2019, we were in compliance with this covenant.

For each month through December 31, 2019, the trailing three-month revenue requirements were calculated as a percentage of our previously approved applicable monthly revenue projections.

In February 2020, we entered into an amendment of the 2018 LSA, or the Second Amendment, that, among other things, changed the covenant from being tested monthly to quarterly testing.

In March 2020, we entered into an amendment of the 2018 LSA, or the Third Amendment, with the Lenders to establish revenue targets for the year ending December 31, 2020.

Such requirements, for the quarterly periods from January to December 2020, are equal to generally increasing dollar amounts, in millions, in the low double digits.

For quarterly periods ending after December 31, 2020, the trailing three-month revenue requirements will be determined by the Lenders upon receipt and review of our quarterly financial projections for the year, subject to certain specified criteria regarding minimum requirements.

Revenues, if any, that we recognize as a result of an ALJ appeal process from consolidated claims initiatives for DecisionDx-Melanoma do not count toward the minimum revenue requirements.

On May 10, 2020, we entered into an amendment of the 2018 LSA, or the Fourth Amendment, to modify the covenant structure such that we are required to comply with either (i) the trailing three-month revenue target or (ii) a liquidity ratio, in both cases measured quarterly.

The 2018 LSA consists of a $25.0 million secured term loan credit facility, or the Term Loan.

The Term Loan bears interest at a floating rate equal to the greater of (1) 8.55% and (2) the 30-day U.S.

LIBOR rate as reported in The Wall Street Journal on the last business day of the month that precedes the month in which the interest will accrue, plus 6.48%.

The applicable interest rate on the Term Loan was 8.55% as of June 30, 2020 and December 31, 2019.

We were permitted to make interest-only payments on the Term Loan through May 31, 2020.

As required, we began to repay the principal in 30 equal monthly installments of $833,333 each beginning on June 1, 2020.

All unpaid principal and accrued and unpaid interest are due at maturity on November 1, 2022.

We are also obligated to make an additional final payment of 6.75% of the aggregate original principal amount, or $1,687,500, upon any prepayment or on the maturity date.

We have the right to prepay the Term Loan at any time, subject to a prepayment fee of up to 1.50% and an early termination fee of $497,000.

On May 10, 2020, we entered into a fourth amendment of the 2018 LSA, or the Fourth Amendment, to, among other things, modify the covenant structure under the 2018 LSA such that we are now required to comply with either (i) a trailing three-month revenue target or (ii) a liquidity ratio, in both cases measured quarterly.

We requested the Fourth Amendment from the Lenders so that our liquidity position would also be considered when determining compliance, due to the impacts of COVID-19 on our revenues.

The liquidity ratio covenant requires that the ratio of (i) unrestricted cash and cash equivalents (as defined in the 2018 LSA) held at SVB or its affiliates to (ii) the outstanding obligations under the 2018 LSA be at least 2.00 to 1.00.

We requested the Fourth Amendment from the Lenders due to our anticipated noncompliance with the trailing three-month revenue covenant as of June 30, 2020 as a result of the impacts to our business attributable to COVID-19.

The liquidity ratio, had it been measured and effective as of March 31, 2020, would have been 3.66 to 1.00.

In addition, the 2018 LSA contains customary conditions of borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of our capital stock.

Should an event of default occur, including the occurrence of a material adverse change, we could be liable for immediate repay ment of all obligations under the 2018 LSA.

The Second Amendment included a waiver, by the Lenders, of an event of default by us attributable to maintaining a balance in a certain third-party deposit account, beyond the maximum level permitted, without obtaining a control agreement for such deposit account in favor of the collateral agent, Oxford.

In addition to the waiver, the Second Amendment also provided a modification to increase the maximum balance permitted for this deposit account.

We are currently in compliance with this provision of the 2018 LSA.

While we were able to obtain a waiver and amendment in this instance, there can be no assurance that the Lenders would agree to provide any future waivers or amendments if another event of default were to occur as result of noncompliance with this or any other covenant under the 2018 LSA.

As of June 30, 2020, we are in compliance with the covenant by satisfying the liquidity ratio test, with a liquidity ratio of 6.89 to 1.00 as of June 30, 2020.

Our ability to further amend the terms of the 2018 LSA is subject to the approval of Oxford and SVB.

Accordingly, should we seek to amend the 2018 LSA, there can be no assurance that an amendment would be available on terms acceptable to us or at all.

The 2018 Term Loan bears interest at a floating rate equal to the greater of (1) 8.55% and (2) the 30-day U.S.

LIBOR rate as reported in The Wall Street Journal on the last business day of the month that precedes the month in which the interest will accrue, plus 6.48%.

The applicable interest rate on the 2018 Term Loan was 8.55% as of March 31, 2020 and December 31, 2019.

Interest on the 2018 Term Loan is payable monthly in arrears.

We are permitted to make interest-only payments on the 2018 Term Loan through May 31, 2020.

The principal is required to be repaid in 30 equal monthly installments of $833,333 each beginning on June 1, 2020.

All unpaid principal and accrued and unpaid interest are due on November 1, 2022, or the 2018 Term Loan Maturity Date.

We are also obligated to make an additional final payment of 6.75% of the aggregate original principal amount, or $1,687,500, upon any prepayment or on the 2018 Term Loan Maturity Date.

The final payment amount is being amortized as additional interest expense using the effective interest method of the term of the debt.

For additional information on the 2018 LSA, refer to Note 7, “Long-Term Debt,” in the accompanying notes to our unaudited condensed financial statements included in this Quarterly Report on Form 10-Q.

The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented (in thousands):

Three Months Ended March 31,

Net cash (used in) provided by operating activities

Six Months Ended

Net cash provided by operating activities $ 13,250 $ 1,770

Net cash used in investing activities (2,256) (424)

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Operating Activities

Net cash used in operating activities was $0.3 million for the three months ended March 31, 2020 and was primarily attributable to a decrease in accrued compensation of $2.6 million and other minor variations, partially offset by non-cash charges of $1.9 million and net income of $0.6 million .

Non-cash charges consisted of stock compensation expense of $1.6 million , amortization of debt discount and issuance costs of $0.2 million and depreciation expense of $0.1 million .

Net cash provided by operating activities was $1.3 million for the three months ended March 31, 2019 and was primarily attributable to decreases in accounts receivable of $3.8 million and net non-cash charges of $0.6 million, partially offset by decreases in accrued compensation of $1.8 million and the net loss of $1.4 million .

Non-cash charges primarily consisted of $0.3 million in amortization of debt discount and issuance costs, stock compensation expense of $0.2 million and depreciation expense of $0.1 million.

Net cash provided by operating activities was $13.3 million for the six months ended June 30, 2020 and was primarily attributable to the receipt of the Advance Payment of $8.3 million described above, stock compensation expense of $3.2 million and decreases in accounts receivable of $2.3 million, partially offset by the net loss of $0.8 million.

The $1.9 million in relief funds from HHS discussed above were received and recognized in income during the six months ended June 30, 2020 and therefore also benefited net cash provided by operating activities during the period.

Net cash provided by operating activities was $1.8 million for the six months ended June 30, 2019 and was primarily attributable to decreases in accounts receivable of $3.6 million and net non-cash charges of $1.9 million (consisting primarily of $1.3 million in amortization of debt discount and issuance costs, stock compensation expense of $0.3 million, depreciation expense of $0.2 million and change in fair value embedded derivatives of $0.1 million) and increases in other accrued liabilities of $0.9 million, partially offset by the net loss of $2.6 million and decreases in accrued compensation of $1.8 million.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2020 and 2019 consisted entirely of purchases of property and equipment.

Net cash used in investing activities for the six months ended June 30, 2020 and 2019 consisted entirely of purchases of property and equipment.

The increase in purchases of property and equipment in the current year compared to the prior year is primarily associated with expansion of our facilities.

Financing Activities

Net cash provided by financing activities was $0.6 million for the three months ended March 31, 2020 and consisted of cash received from contributions to the employee stock purchase plan and proceeds from the exercise of stock options.

Net cash provided by financing activities was $10.7 million for the three months ended March 31, 2019 and consisted primarily of $11.7 million in net proceeds from the issuance of the Q1 2019 Notes, partially offset by $1.0 million in repayments on our line of credit.

Net cash provided by financing activities was $69.9 million for the six months ended June 30, 2020 and consisted primarily of $69.5 million in proceeds from our June 2020 follow-on public offering of common stock (net of underwriting discounts, commissions and offering costs, excluding $0.5 million of offering costs that were incurred but not paid as of June 30, 2020) and cash received associated with our equity compensation plans of $1.2 million, partially offset by principal repayments on the 2018 LSA of $0.8 million.

Net cash provided by financing activities was $11.6 million for the six months ended June 30, 2019 and consisted primarily of $11.7 million in net proceeds from the issuance of the Q1 2019 Notes, $1.8 million of net proceeds associated with an increase in the Term Loan in connection with an amendment to the 2018 LSA, partially offset by principal repayments of $1.8 million our line of credit.

The line of credit was terminated in June 2019.

Off-Balance Sheet Arrangements

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Critical Accounting Policies and Significant Judgments and Estimates

During the three months ended March 31, 2020 , there were no significant changes to the information discussed under “Critical Accounting Policies and Significant Judgments and Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2019.

During the six months ended June 30, 2020, there were no significant changes to the information discussed under “Critical Accounting Policies and Significant Judgments and Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis