What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 149 added, 131 removed, 245 unchanged (53% of the section changed)

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Our lead product, DecisionDx®-Melanoma, is a proprietary multi-gene expression profile, or GEP, test that predicts the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma, a deadly skin cancer.

This test has two current clinically actionable uses.

The first use immediately following diagnosis is based upon a patient’s likelihood of having a sentinel lymph node negative biopsy result so that physicians and patients can discuss the risk and benefit or undergoing sentinel lymph node biopsy, or SLNB, surgery.

The second use is to inform the appropriate treatment plan, regardless of the decision to undergo or avoid the SLNB surgery.

We estimate more than 130,000 patients are diagnosed with invasive cutaneous melanoma each year in the United States.

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We launched DecisionDx-UM in January 2010.

Based on the substantial clinical evidence that we have developed, we have received Medicare coverage for both of our products, which represents approximately 50% of our addressable patient population.

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, 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.

These indications are areas of high clinical need in dermatological cancer and, together, represent an additional addressable market of approximately 500,000 patients in the United States.

Based on the substantial clinical evidence that we have developed, we have received Medicare coverage for both of these products, which represents approximately 50% of our addressable patient population.

On August 31, 2020, we commercially launched our squamous cell carcinoma, or SCC, proprietary GEP test, DecisionDx® ‑ SCC, and on November 2, 2020, we commercially launched our proprietary GEP test for suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma.

These two indications are areas of high clinical need in dermatological cancer and, together, represent an addressable population of approximately 500,000 patients in the United States.

We have processed over 70,000 clinical samples since commercial launch and our annual revenue increased from $22.8 million in 2018 to $51.9 million in 2019.

For the 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

For the nine months ended September 30, 2020, our revenue was $45.4 million compared to $34.2 million for the nine months ended September 30, 2019.

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

DecisionDx-UM DecisionDx-SCC (1)

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

Q3 2020 4,404 318 57 4,779

For the nine months ended September 30, 2020 11,986 985 57 13,028

Q1 2019 3,232 360 — 3,592

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

Q2 2019 3,691 376 — 4,067

Q3 2019 4,126 356 — 4,482

For the nine months ended September 30, 2019 11,049 1,092 — 12,141

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.

(1) We commercially launched the DecisionDx-SCC test on August 31, 2020.

DecisionDx-SCC orders received from launch through October 30, 2020 totaled 282 from 193 clinicians.

We have not yet recorded any revenues associated with DecisionDx-SCC, pending the development of reimbursement experience and coverage decisions for the test.

While we continue to see new clinicians order the DecisionDx-Melanoma test for the first time, for the three months ended September 30, 2020, the number of new ordering clinicians (first time ordering a test) for our DecisionDx-Melanoma test decreased by 17% compared to the same period in 2019, and for the nine months ended September 30, 2020, the number of new ordering clinicians for Decision Dx-Melanoma decreased by 10% as compared to the same period in 2019.

We believe these decreases in the number of new ordering clinicians are the result of physician office closures and limited physician access due to the COVID-19 pandemic, as discussed further below.

Our commercial team is using a combination of in-person and virtual promotional efforts.

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

Since our inception in 2008, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, discovering product candidates, conducting clinical study activities to generate evidence demonstrating the clinical validity, clinical utility, economic benefits, and patient outcomes of our products, and commercialization activities for those products.

We currently market two proprietary GEP products and generate substantially all of our revenue from those activities.

We currently market four proprietary GEP products and generate substantially all of our revenue from DecisionDx-Melanoma and DecisionDx-UM.

The principal focus of our current commercial efforts is to distribute our molecular diagnostic testing products through our direct sales force in the U.S.

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The majority of our revenue collections is paid by third-party insurers, including Medicare.

We have received Local Coverage Determinations, or LCDs, which provide coverage for our tests that meet certain criteria for Medicare and Medicare Advantage beneficiaries, representing approximately 60 million covered lives.

We have received Local Coverage Determinations, or LCDs, which provide coverage for our DecisionDx-Melanoma and DecisionDx-UM tests that meet certain criteria for Medicare and Medicare Advantage beneficiaries, representing approximately 60 million covered lives.

As it relates to DecisionDx-UM, we have contracts or have received positive medical policy decisions from additional payors representing approximately 83 million covered lives.

A ‘‘covered life’’ means a subscriber, or a dependent of a subscriber, who is insured under an insurance policy for such an insurance carrier.

Palmetto GBA MolDx, or Palmetto, the Medicare Administrative Contractor, or MAC, responsible for administering MolDX, the program that assesses molecular diagnostic technologies, issued a final expanded LCD for DecisionDx-Melanoma, effective November 22, 2020.

With this expanded LCD and the accompanying billing and coding articles, we estimate that a significant majority of the DecisionDx-Melanoma tests performed for Medicare patients will meet the coverage criteria.

Noridian Healthcare Solutions, LLC, or Noridian, the MAC responsible for administering claims for laboratory services performed in

Arizona, has adopted the same coverage policy as Palmetto and also issued an expanded final LCD for DecisionDx-Melanoma, effective December 6, 2020.

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.

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.

We submitted this data in January 2020.

Note that our rate for 2020 will be set by Noridian Healthcare Solutions, LLC, or Noridian, our local Medicare Administrative Contractor, or MAC.

Note that our rate for 2020 is set by Noridian, our local MAC.

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

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However, we have based these estimates on assumptions, including those related to the impact of COVID-19 on our financial condition, that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

Our net income (losses) may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers , or ASC 606.

Our net (loss) income may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers , or ASC 606.

We expect our expenses will increase substantially over time as we:

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

• To date, we have maintained uninterrupted business operations with normal turnaround times for our delivery of test reports.

• We have maintained and expect to continue to maintain uninterrupted business operations, with adequate access to reagents and consumables needed for testing patient samples and normal turnaround times for our delivery of test reports.

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 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.

• We experienced declines in orders and test report volume primarily in the second quarter of 2020, which we believe was 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 the second quarter of 2020, test reports delivered for our lead product, DecisionDx-Melanoma, decreased 18.5% compared to the second quarter of 2019.

In the third quarter of 2020, DecisionDx-Melanoma test reports increased by 6.7% compared to the third quarter of 2019 and increased by 46.4% compared to the second quarter of 2020.

• We believe the recent improvement in DecisionDx-Melanoma test report volume is driven in part by the reopening of dermatology practices and rescheduled patient visits, coinciding with the easing of state and local government restrictions.

• 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, 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.

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.

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.

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.

Even with the easing of state and local restrictions, patient visits and diagnosis of cutaneous melanoma may be impacted by continued apprehension regarding possible exposure to the virus.

For example, our analysis of third party data from Symphony Health indicates that in the third quarter of 2020, cutaneous melanoma diagnoses decreased by approximately 12% compared to the third quarter of 2019.

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

As conditions are continuously evolving, we are unable to predict how our future test report volume will be impacted or the extent to which our results of operations, financial condition or cash flows will be impacted by the COVID-19 pandemic, or other future public health crises.

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

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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The following provides additional information about certain metrics we have disclosed in this Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Test reports delivered for DecisionDx-Melanoma and DecisionDx-UM represents the number of completed test reports delivered by us during the reporting period indicated.

Test reports delivered for DecisionDx-Melanoma, DecisionDx-UM and DecisionDx-SCC represents the number of completed test reports delivered by us during the reporting period indicated.

The period in which a test report is delivered does not necessarily correspond with the period the related revenue, if any, is recognized, due to the timing and amount of adjustments for variable consideration under ASC 606.

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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.

We believe order data can provide additional insight on current demand trends, particularly during the COVID-19 pandemic and with respect to new product launches, 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.

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Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues.

Variable consideration for Medicare claims that are not covered by an LCD, including those claims subject to approval by an Administrative Law Judge, or ALJ, at an appeal hearing, is deemed to be fully constrained due to factors outside the Company’s influence (i.e., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

Variable consideration for Medicare claims that are not covered by an LCD, including those claims subject to approval by an Administrative Law Judge, or ALJ, at an appeal hearing, is deemed to be fully constrained due to factors outside our influence (i.e., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

For these fully constrained claims, we generally recognize revenue upon receipt of a favorable appeal decision.

Due to potential future changes in Medicare coverage policies and appeal cycles, insurance coverage policies, contractual rates and other trends in the reimbursement of our tests, our revenues may fluctuate significantly from period to period.

Due to potential future changes in Medicare coverage policies and appe al cycles, insurance coverage policies, contractual rates and other trends in the reimbursement of our tests, our revenues may fluctuate significantly from period to period.

Additionally, our ability to recognize revenue for our recently launched tests is dependent on the development of reimbursement experience and coverage decisions for these tests.

Our ability to increase our revenues will depend on our ability to further penetrate our target market, and, in particular, generate sales through our direct sales force, develop and commercialize additional tests, obtain reimbursement from additional third-party payors and increase our reimbursement rate for tests performed.

In the near term, our financial performance will be highly dependent on reimbursement for DecisionDx-Melanoma.

The use of DecisionDx-Melanoma is not yet broadly covered under positive coverage policies, although many third-party payors have begun to reimburse for this test.

Cost of Sales

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

Additionally, we expect cost of sales to increase with the expansion of laboratory capacity and staffing in advance of anticipated growth of our recently launched tests.

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.

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We expect our research and development expenses to increase in absolute dollars as we continue to invest in research and development activities related to developing enhanced and new products.

We expect to use a portion of the proceeds from the June 2020 follow-on public offering 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.

The first is the PERSONALize study, in which we are evaluating DecisionDx-Melanoma for interactions with adjuvant therapies.

The second is the CONNECTION study, which is collecting long-term outcomes for up to 10,000 patients who have been tested with DecisionDx-Melanoma.

Selling, General and Administrative

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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 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.

Other Operating Loss

Other operating loss reflects the reversal of previously recognized other operating income associated with an automatic payment for relief funds received 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, as discussed further below.

Interest Income

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Other Expense, Net

Other expense, net reflects changes in the fair value of (i) our convertible preferred stock warrant liability and (ii) the embedded derivative associated with the Q1 2019 Notes.

Other expense, net reflects changes in the fair value of (i) a convertible promissory note we issued to an investor in July 2019, or the July 2019 Note, (ii) our convertible preferred stock warrant liability and (iii) the embedded derivative associated with the Q1 2019 Notes.

Gain on Extinguishment of Debt

The gain on extinguishment of debt is associated with the settlement of the Q1 2019 Notes in connection with the IPO.

Income Tax Expense

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Results of Operations

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

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

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

Three Months Ended

June 30, Change

September 30, Change

Net revenues $ 15,217 $ 14,774 $ 443 3.0 %

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Gross margin percentage 83.7 % 88.4 %

Operating expenses and other operating income:

Operating expenses and other operating loss:

Research and development 3,058 1,515 1,543 101.8 %

Selling, general and administrative 11,703 7,122 4,581 64.3 %

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) %

Other operating loss 1,882 — 1,882 N/A

Total operating expenses 16,643 8,637 8,006 92.7 %

Operating (loss) income (3,901) 4,429 (8,330) (188.1) %

Interest income 18 6 12 200.0 %

Interest expense (706) (1,088) 382 35.1 %

Gain on extinguishment of debt — 5,213 (5,213) (100.0) %

Other expense, net — (2,711) 2,711 100.0 %

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

(Loss) income before income taxes (4,589) 5,849 (10,438) (178.5) %

Income tax expense — — — — %

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.

Net (loss) income $ (4,589) $ 5,849 $ (10,438) (178.5) %

For the three months ended September 30, 2020 net revenues increased by $0.4 million, or 3.0%, to $15.2 million compared to the three months ended September 30, 2019 primarily due to higher per-unit revenues and higher 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.

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.

For the three months ended September 30, 2020, we experienced a 5.4% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the three months ended September 30, 2019.

For the three months ended September 30, 2020 and 2019, we recorded net positive revenue adjustments of $1.5 million and $3.2 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 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.

Cost of sales for the three months ended September 30, 2020 increased by $0.8 million, or 44.9%, compared to the three months ended September 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 83.7% for the three months ended September 30, 2020, compared to 88.4% for the same period in 2019, reflecting the expansion of laboratory staff in preparation for both launches of DecisionDx-SCC and DiffDx-Melanoma as well as anticipated further volume growth for DecisionDx-Melanoma.

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 $1.4 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.

Research and development expenses increased by $1.5 million, or 101.8%, for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for professional fees.

Selling, General and Administrative

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.

SG&A expense increased by $4.6 million, or 64.3%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Approximately 68% of the increase is attributable to higher personnel costs, particularly due to increased headcount and higher stock-based compensation.

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.

Further, we expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test.

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, 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.

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

Stock-based compensation expense included in SG&A expense was $1.5 million for the three months ended September 30, 2020 compared to $0.2 million for the same period in 2019, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth.

Other Operating Loss

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

In the second quarter of 2020, based on guidance issued by HHS at the time that stated any reasonable method could be used to calculate lost revenues attributable to COVID-19, we concluded we would qualify to retain the relief funds and recognized the funds received as other operating income during the three months ended June 30, 2020.

On September 19, 2020, HHS issued a notice of reporting requirements that changed the methodology for determining lost revenues to be based on a patient care operating income metric, as defined by HHS.

Due to this change in methodology and uncertainty in its application, we determined we were no longer reasonably assured of keeping the funds.

Therefore, in the three months ended September 30, 2020, we reversed the previously recognized income.

As of September 30, 2020, the provider relief funds are reflected on the balance sheet as other accrued liabilities.

On October 22, 2020, HHS again revised the methodology for calculating lost revenues, which is now calculated as a negative change, if any, in calendar year 2020 revenues compared to calendar year 2019 revenues.

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.

Interest expense decreased by $0.4 million, or 35.1%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

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

Gain on Extinguishment of Debt

We recorded a non-cash extinguishment gain related to the Q1 2019 Notes totaling $5.2 million during the three months ended September 30, 2019, which was associated with the conversion of the Q1 2019 Notes into shares of common stock in connection with the IPO that was considered an extinguishment for accounting purposes.

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.

Other expense, net for the three months ended September 30, 2019 consisted of losses associated with changes in fair value of the July 2019 Note, the liability for convertible preferred stock warrants and the embedded derivative associated with the Q1 2019 Notes of $2.1 million, $0.5 million and $0.1 million, respectively.

These liabilities were adjusted to their current fair values each period, but effective with the IPO, the July 2019 Note and the Q1 2019 Notes automatically converted into shares of common stock and we reclassified our liability for convertible preferred stock warrants to stockholders’ equity.

Accordingly, no further changes in fair value for these items are reflected in periods after the IPO date.

Results of Operations

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

Comparison of the nine months ended September 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

Nine Months Ended

September 30, Change

Net revenues $ 45,350 $ 34,230 $ 11,120 32.5 %

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Gross margin percentage 84.5 % 84.5 %

Operating expenses and other operating income:

Operating expenses:

Research and development 8,675 4,226 4,449 105.3 %

Selling, general and administrative 33,173 19,990 13,183 65.9 %

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 %

Total operating expenses 41,848 24,216 17,632 72.8 %

Operating (loss) income (3,510) 4,715 (8,225) (174.4) %

Interest income 354 32 322 1,006.3 %

Interest expense (2,239) (3,805) 1,566 41.2 %

Gain on extinguishment of debt — 5,213 (5,213) (100.0) %

Other expense, net — (2,933) 2,933 100.0 %

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

(Loss) income before income taxes (5,395) 3,222 (8,617) (267.4) %

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.

Net (loss) income $ (5,395) $ 3,222 $ (8,617) (267.4) %

Net revenues increased by $11.1 million, or 32.5%, to $45.4 million primarily due to 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.

For the nine months ended September 30, 2020, we experienced a 6.8% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the nine months ended September 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 and a year-over-year increase in test reports delivered of 5.4% during the third quarter of 2020.

We believe the adverse impacts to our quarterly test report volume growth are 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, as noted above .

For the nine months ended September 30, 2020 and 2019, we recorded net positive revenue adjustments of $0.2 million and $2.4 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.

Cost of sales for the nine months ended September 30, 2020 increased by $1.7 million, or 32.3%, compared to the nine months ended September 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 84.5% for both the nine months ended September 30, 2020 and September 30, 2019.

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 $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.

Research and development expenses increased by $4.4 million, or 105.3%, for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily associated with increases in personnel costs attributable to additional headcount, higher expenses for clinical trials, advisory boards and professional fees.

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.

SG&A expense increased by $13.2 million, or 65.9%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Approximately 67% of the increase is attributable to higher personnel costs, particularly due to increased headcount and higher stock-based compensation.

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.

Further, we expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test.

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.

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

Stock-based compensation expense included in SG&A expense was $3.8 million for the nine months ended September 30, 2020 compared to $0.4 million for the same period in 2019, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth.

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 income increased by $0.3 million for the nine months ended September 30, 2020, compared to the nine months ended September 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 and the follow-on public offering in June 2020, partially offset by lower interest rates.

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.

Interest expense decreased by $1.6 million, or 41.2%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The decrease is primarily attributable to interest expense on the Q1 2019 Notes during the nine months ended September 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.

Gain on Extinguishment of Debt

We recorded a non-cash extinguishment gain related to the Q1 2019 Notes totaling $5.2 million during the nine months ended September 30, 2019, which was associated with the conversion of the Q1 2019 Notes into shares of common stock in connection with the IPO that was considered an extinguishment for accounting purposes.

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.

Other expense, net for the nine months ended September 30, 2020 consisted of losses associated with changes in fair value of the July 2019 Note, the liability for convertible preferred stock warrants and the embedded derivative associated with the Q1 2019 Notes of $2.1 million, $0.6 million and $0.2 million, respectively.

These liabilities were adjusted to their current fair values each period, but effective with the IPO, the July 2019 Note and Q1 2019 Notes automatically converted into shares of common stock and we reclassified our liability for convertible preferred stock warrants to stockholders’ equity.

Accordingly, no further changes in fair value for these items are reflected in periods after the IPO date.

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

As of September 30, 2020 and December 31, 2019, we had cash and cash equivalents of $183.1 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.

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 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 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.

Follow-On Public Offering

On June 29, 2020 and July 2, 2020, we issued and sold 2,000,000 and 300,000 shares, respectively, of our common stock in a follow-on public offering at a price of $37.00 per share.

We received $79.5 million in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs.

The shares issued and sold on July 2, 2020 reflect the underwriters’ exercise in full of their 30-day option to purchase additional shares at the public offering price, less underwriting discounts and commissions.

As mentioned above, 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.

Medicare Advance Payment

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 expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

We have recorded the Advance Payment as a current liability on our balance sheet.

Originally, CMS was to recoup the Advance Payment from August 2020 through November 2020.

However, the enactment on October 1, 2020 of the Continuing Appropriations Act, 2021 and Other Extensions Act, or the Appropriations Act, modified the repayment terms such that recoupment will now commence in April 2021.

For the first eleven months of recoupment, CMS will apply 25% of the Medicare payments otherwise owed to us against the balance of the Advance Payment.

After that eleven-month period, CMS will recoup at a rate of 50% of the Medicare payments otherwise owed to us for an additional six months.

The classification of the Advance Payment on our balance sheet at September 30, 2020 does not consider the effect of the Appropriations Act.

If the Advance Payment is not fully recovered by CMS after this recoupment period, we will be required to repay any remaining balance.

Funding Requirements

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

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

We had an accumulated deficit of $57.6 million as of September 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 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.

Although we generated positive operating income during the year ended December 31, 2019, 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.

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Term debt $ 23,354 $ 26,688

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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.

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

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

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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.

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.

As of September 30, 2020, we are in compliance with the covenant.

Our liquidity ratio was 7.76 to 1.00 as of September 30, 2020.

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

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

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by operating activities $ 10,295 $ 2,522

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Operating Activities

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.

Net cash provided by operating activities was $10.3 million for the nine months ended September 30, 2020 and was primarily attributable to the receipt of the Advance Payment of $8.3 million and the HHS relief funds of $1.9 million described above, stock compensation expense of $5.3 million and decreases in accounts receivable of $1.9 million, partially offset by the net loss of $5.4 million and increases in prepayments and other assets of $1.8 million.

Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2019 and was primarily attributable to net income of $3.2 million, a decrease in accounts receivable of $0.8 million and net non-cash charges of $0.6 million (consisting of $2.9 million of fair value adjustments, $1.7 million in amortization of debt discount and issuance costs, stock compensation expense of $0.5 million and $0.7 million of other items, partially offset by $5.2 million of a debt extinguishment gain), an increase in prepaid expenses and other current assets of $1.5 million and a decrease in accrued compensation of $0.9 million.

Investing Activities

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

Net cash used in investing activities for the nine months ended September 30, 2020 and 2019 primarily consisted 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 $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.

Net cash provided by financing activities was $78.1 million for the nine months ended September 30, 2020 and consisted primarily of $79.5 million in proceeds from our follow-on public offering of common stock (net of underwriting discounts, commissions and offering costs) and cash received associated with our equity compensation plans of $1.9 million, partially offset by principal repayments on the 2018 LSA of $3.3 million.

Net cash provided by financing activities was $88.1 million for the nine months ended September 30, 2019 and consisted primarily of $65.9 million of proceeds from our IPO (net of underwriting discounts, commissions and issuance costs), $11.7 million in net proceeds from the issuance of the Q1 2019 Notes, $9.2 million of net proceeds from the issuance of the July 2019 Note, $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 on our line of credit.

The line of credit was terminated in June 2019.

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Critical Accounting Policies and Significant Judgments and Estimates

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.

During the nine months ended September 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