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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 146 added, 209 removed, 185 unchanged (66% of the section changed)

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Forward-Looking Statements

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections.

The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections.

These forward-looking statements include, but are not limited to, statements concerning the impacts of COVID-19 on our business, our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management.

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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 first use immediately following diagnosis predicts a patient’s likelihood of having a sentinel lymph node negative biopsy result so that physicians and patients can discuss the risk and benefit of 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.

In a typical year, we estimate more than 130,000 patients are diagnosed with invasive cutaneous melanoma in the United States.

We launched DecisionDx-Melanoma in May 2013.

In August 2020, we commercially launched our cutaneous 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.

In April 2021, we entered into a definitive agreement to acquire all of the equity of Myriad myPath, LLC, or the Myriad myPath Laboratory, from Myriad Genetics.

The Myriad myPath Laboratory is a Clinical Laboratory Improvement Amendments of 1988, or CLIA-certified laboratory in Salt Lake City, where the myPath Melanoma 23-GEP test was developed and is currently owned and offered.

The acquisition, which is subject to customary closing conditions, is expected to close in late May 2021.

myPath Melanoma is a clinically validated GEP test designed to be used as an adjunct to histopathology when the distinction between a benign nevus and a malignant melanoma cannot be made confidently by histopathology alone.

We anticipate that this test will complement our current offerings and enable us to provide a comprehensive molecular testing solution for difficult-to-diagnose melanocytic lesions.

In May 2021, we announced the launch of our innovative pipeline initiative to develop a genomic test aimed at predicting systemic therapy response in patients with moderate to severe psoriasis, atopic dermatitis and related conditions.

alone, there are approximately 18 million patients diagnosed with psoriasis and atopic dermatitis, and approximately 450,000 of these patients annually are eligible for these systemic therapies, which has the potential to add approximately $1.9 billion to our current estimated U.S.

total addressable market.

We recently initiated a 4,800 patient, prospective, multi-center clinical study to develop and validate this pipeline test, and plan to enroll more than 50 centers with the leading experts in the field.

Based upon our current development and validation timelines, we expect to launch this pipeline test by the end of 2025.

We also market DecisionDx®-UM, which is a proprietary GEP test that predicts the risk of metastasis for patients with uveal melanoma, a rare eye cancer.

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 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 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

Based on the substantial clinical evidence that we have developed, we have received Medicare coverage for DecisionDx-Melanoma and DecisionDx-UM, which represents approximately 50% of the addressable patient population for both of these tests.

We have processed over 80,000 clinical samples since our inception.

For the three months ended March 31, 2021 our revenue was $22.8 million compared to $17.4 million for the three months ended March 31, 2020.

The numbers of DecisionDx-Melanoma, DecisionDx-SCC, DecisionDx-DiffDx and DecisionDx-UM test reports delivered by us during the three months ended March 31, 2021 and 2020 and for the year ended December 31, 2020 are presented in the table below:

Proprietary Dermatologic GEP Tests

DecisionDx-SCC (1)

DecisionDx DiffDx-Melanoma (2)

Dermatologic Total DecisionDx-UM Grand Total

Q1 2021 4,060 527 218 4,805 337 5,142

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

Q1 2020 4,574 — — 4,574 361 4,935

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Q3 2020 4,404 57 — 4,461 318 4,779

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

Q4 2020 4,246 428 73 4,747 410 5,157

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(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.

(2) We commercially launched the DecisionDx DiffDx on November 2, 2020.

We continue to see new clinicians order our dermatologic tests for the first time.

For the three months ended March 31, 2021, we saw approximately 410 new ordering clinicians for our dermatologic tests compared to 453 during the same period of 2020.

We believe the year-over-year decrease is due to the impact of reduced physician access since the spring of 2020 as a result of the COVID-19 pandemic, as discussed further below.

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.

In developing our DecisionDx-SCC and DecisionDx DiffDx-Melanoma tests, we believed that in addition to addressing significant unmet clinical needs, we would see leverage as many of the current DecisionDx-Melanoma clinicians would likely be the same clinicians who would find value in these other skin cancer tests.

The three months ended March 31, 2021 represented the second full quarter of clinical availability for our DecisionDx-SCC test and we found that over 80% of all DecisionDx-SCC ordering clinicians were clinicians that had ordered our DecisionDx-Melanoma test in the prior two and a half years.

commercialization activities for those products.

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

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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.

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.

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

Note that our rate for 2020 was set by Noridian, our local MAC, but our rate for 2021 for DecisionDx-UM will be $7,776 based on the median private payor.

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

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From April 1, 2020 through December 31, 2021, CMS notified us that the rate will also be $7,193, 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.

B eginning in 2022, the rate for both DecisionDx-Melanoma and UM 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 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.

In the second quarter of 2020, we submitted our technical assessment dossier for DecisionDx-SCC to Palmetto and Noridian.

The dossier was accepted as complete in the third quarter of 2020.

In early 2021, we submitted our technical assessment dossier for DecisionDx DiffDx-Melanoma.

The dossier was accepted as complete in the first quarter of 2021.

We expect that draft LCDs for each of these tests will be posted in 2021.

However, there is no assurance that the timing of any draft LCD or final LCD will match our expectations or our historical experience with LCDs for our other tests.

Since becoming a public company, we have financed our operations with the revenue generated from the sale of our products, proceeds from our July 2019 initial public offering, or IPO, follow-on public offerings of common stock in June 2020 and December 2020 and bank debt, which has since been repaid in full.

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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Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses.

Recent Development

On April 26, 2021, we signed a definitive agreement to acquire Myriad myPath Laboratory from Myriad Genetics for $32.5 million.

Myriad myPath Laboratory is a CLIA-certified laboratory in Salt Lake City where the myPath Melanoma 23-GEP test was developed and is currently offered.

We will finance the acquisition with cash and cash equivalents on hand.

The transaction is expected to close in late May 2021, subject to customary conditions.

Impact of COVID-19 Pandemic

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• 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 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.

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

• Following the onset of the COVID-19 pandemic, we began experiencing declines in orders and test report volume.

For the year ended December 31, 2020, our growth in DecisionDx-Melanoma test report volume was 4.5%, compared to year-over-year growth of 29.1% for the year ended December 31, 2019.

In the first quarter of 2021, test reports delivered for DecisionDx-Melanoma decreased by 11.2% compared to the first quarter of 2020.

We believe the decreases in our test report volume are linked to delays in the diagnoses as well as the cumulative impact on promotional responsiveness as a result of reduced sales calls per day and in-person sales call during the COVID-19 pandemic.

• Orders for DecisionDx-Melanoma have shown positive trends during the first three months of 2021.

Order volume for our DecisionDx-Melanoma test increased by approximately 30% in March 2021 compared to January 2021.

This positive trend of increasing orders continued through April 2021, with April order volume exceeding March.

• Our commercial team uses a combination of in-person, virtual, and non-personal promotional and educational efforts.

During the three months ended March 31, 2021, we saw improvement in both the number of promotional calls per day as well as a continued shift from virtual to in-person sales calls with in-person sales calls accounting for just over 75% of all calls during such period.

We have also seen increases in clinicians’ interest to attend and participate in peer-to-peer promotional and educational programs.

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 as well as telemedicine.

• 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.

Accordingly, the test report data presented above is not necessarily indicative of our results of operations that can be expected for future periods.

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

Test reports delivered for DecisionDx-Melanoma, DecisionDx-SCC, DecisionDx DiffDx-Melanoma and DecisionDx-UM 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 and with respect to new product launches, 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 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.

New ordering clinicians for our dermatologic tests represents the number of clinicians who ordered a dermatologic test from us for the first time during the reporting period specified.

A dermatologic test is DecisionDx-Melanoma, DecisionDx-SCC or DecisionDx DiffDx-Melanoma.

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

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.

Components of the Results of Operations

We generate revenues from the sale of our products, primarily from the sale of DecisionDx-Melanoma and DecisionDx-UM.

We generate revenues from the sale of our products.

Currently, our revenues are primarily derived from the sale of DecisionDx-Melanoma and DecisionDx-UM.

We bill third-party payors and patients for the tests we perform.

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Variable consideration is recognized only to the extent it is probable that a significant reversal of revenue will not occur in future periods when the uncertainties are resolved.

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

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 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.

For these fully constrained claims, we generally recognize revenue in the period the uncertainty is favorably resolved, if at all.

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.

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

Due to limited reimbursement experience, we are currently recognizing revenues for these two tests on the basis of actual cash collections.

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.

Cost of Sales

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.

The components of our cost of sales are material and service costs associated with testing samples, personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), 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 and facilities 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 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.

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

Also, as noted above, we recently initiated a 4,800 patient, prospective, multi-center clinical study to develop, validate and bring to market a pipeline test aimed at predicting systemic therapy response for patients with moderate to severe psoriasis, atopic dermatitis and related conditions.

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.

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

Interest income consists primarily of earnings on cash and cash equivalents, including money market funds.

Interest income consists primarily of earnings on cash and cash equivalents, primarily money market funds.

Interest Expense

Interest expense is attributable to borrowings under our term debt, revolving line of credit and the convertible promissory notes issued in January and February of 2019, or the Q1 2019 Notes, and also includes the amortization of debt discount and issuance costs.

Other Expense, Net

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.

Interest expense, if any, is attributable to borrowings under our term debt and also includes the amortization of debt discount and issuance costs.

Income Tax Expense

Our financial statements do not reflect any federal or state income tax benefits attributable to the net losses we have incurred, due to the uncertainty of realizing a benefit from those items.

As of December 31, 2019, we had federal net operating loss carryforwards of $57.4 million, of which $43.5 million will begin to expire in 2028 if not utilized to offset taxable income, and $13.9 million may be carried forward indefinitely.

As of December 31, 2020, we had federal net operating loss carryforwards of $55.9 million, of which $42.0 million will begin to expire in 2033 if not utilized to offset federal taxable income, and $13.9 million may be carried forward indefinitely.

Also, as of December 31, 2020, we had state net operating loss carryforwards of $41.6 million, which begin to expire in 2028 if not utilized to offset state taxable income.

Results of Operations

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

Comparison of the three months ended March 31, 2021 and 2020

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

Three Months Ended

September 30, Change

March 31, Change

Net revenues $ 22,813 $ 17,418 $ 5,395 31.0 %

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Gross margin percentage 86.7 % 86.3 %

Operating expenses and other operating loss:

Operating expenses:

Research and development 5,908 2,913 2,995 102.8 %

Selling, general and administrative 18,161 11,078 7,083 63.9 %

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

Total operating expenses 24,069 13,991 10,078 72.0 %

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

Operating (loss) income (4,284) 1,036 (5,320) NM

Interest income 4 298 (294) (98.7) %

Interest expense — (764) 764 100.0 %

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

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

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

(Loss) income before income taxes (4,280) 570 (4,850) NM

Income tax expense — — — — %

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.

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 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.

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 $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 $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 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 $0.4 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 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 nine months ended September 30, 2020 and 2019

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

Nine Months Ended

September 30, Change

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

Net (loss) income $ (4,280) $ 570 $ (4,850) NM

NM = not meaningful

The following table indicates the amount of stock-based compensation expense reflected in the line items above (in thousands):

Three Months Ended March 31,

2021 2020 Change

Cost of sales $ 510 $ 206 $ 304

Gross margin 38,338 28,931 9,407 32.5 %

Gross margin percentage 84.5 % 84.5 %

Operating expenses:

Research and development 1,058 234 824

Selling, general and administrative 3,345 1,137 2,208

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

Income tax expense — — — — %

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.

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 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.

Total stock-based compensation expense $ 4,913 $ 1,577 $ 3,336

For the three months ended March 31, 2021 net revenues increased by $5.4 million, or 31.0%, to $22.8 million compared to the three months ended March 31, 2020 and was primarily attributable to higher DecisionDx-Melanoma test revenues.

Overall, the increased revenues reflect higher positive revenue adjustments related to tests delivered in prior periods and higher per-unit revenues, partially offset by lower test report volumes for both DecisionDx-Melanoma and DecisionDx-UM.

The higher per-unit revenues include the effect of the expanded LCD for DecisionDx-Melanoma that became effective in the fourth quarter of 2020 and the higher Medicare rate for DecisionDx-UM that became effective January 1, 2021, as discussed above.

For the three months ended March 31, 2021, we experienced a 10.9% decrease in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the three months ended March 31, 2020, which we believe is attributable to the COVID-19 pandemic.

For the three months ended March 31, 2021 and 2020, we recorded net positive revenue adjustments of $5.3 million and $3.2 million, respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

The year-over-year increase is primarily attributable to favorable adjustments related to the settlement and collection during the three months ended March 31, 2021 of certain groups of receivables from prior years.

Cost of Sales

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.

Cost of sales for the three months ended March 31, 2021 increased by $0.6 million, or 26.6%, compared to the three months ended March 31, 2020, primarily due to higher personnel costs due to additional headcount in our laboratory testing operations.

Our gross margin percentage was 86.7% for the three months ended March 31, 2021, compared to 86.3% for the same period in 2020.

The slight increase in gross margin percentage reflects higher revenues related to prior periods and higher per-unit revenues, partially offset by the expansion of laboratory staff and related costs.

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 $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.

Research and development expenses increased by $3.0 million, or 102.8%, for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

Approximately 65% of the increase was associated with increased personnel costs, which were primarily attributable to additional headcount, with the remainder primarily associated with increased clinical study activity.

Selling, General and Administrative

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.

SG&A expense increased by $7.1 million, or 63.9%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Approximately 72% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

We expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test and further expanded our sales team during the first quarter of 2021.

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, 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.

The remainder of the increase was primarily associated with conferences and training events as well as higher professional fees.

Stock-based compensation expense included in SG&A expense was $3.3 million for the three months ended March 31, 2021 compared to $1.1 million for the same period in 2020, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth in headcount.

Interest Income

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 income decreased by $0.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease is primarily associated with significantly lower interest rates this year, despite our higher average balances of cash and cash equivalents.

Interest Expense

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 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.

Interest expense decreased by $0.8 million, or 100.0%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease is attributable to the repayment of our outstanding debt in full in December 2020.

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $4.9 million for the three months ended March 31, 2021 compared to $1.6 million for the three months ended March 31, 2020.

We expect material increases in stock-based compensation expense in future periods, reflecting both higher

post-IPO stock option valuations as well as additional awards outstanding due to growth in our headcount.

As of March 31, 2021, the total unrecognized stock-based compensation cost related to outstanding awards was $55.4 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.3 years.

We expect to continue granting stock-based compensation awards, which we expect to further contribute to increases in stock-based compensation expense in future periods.

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 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.

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.

As of March 31, 2021 and December 31, 2020, we had cash and cash equivalents of $407.0 million and $409.9 million, respectively.

In addition to the revenue generated from the sale of our products, we have financed our operations since July 2019 through the IPO and two follow-on public offerings of common stock in June 2020 and December 2020.

On December 14, 2020, we filed an automatically effective shelf registration statement on Form S-3 (File No.

333-251331) with the SEC as a “well-known seasoned issuer.” The registration statement allows us to issue an indeterminate number or amount of common stock, preferred stock, debt securities and warrants from time to time in one or more offerings.

However, there can be no assurance that we will complete any such offerings of securities.

Any future offerings under this registration statement will be dependent upon, among other factors, market conditions, available pricing, our financial condition, investor perception of our prospects, our capital needs and our ability to maintain status as a well-known seasoned issuer.

As mentioned above, we expect to use a portion of these proceeds to further support and accelerate our research and development activities, including the clinical studies noted above.

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.

We have recorded the Advance Payment as a liability, consisting of both a current and noncurrent portion, on our balance sheet as of March 31, 2021.

We will reduce the balance of the Advance Payment as it is applied to claims or is otherwise recouped by CMS.

Recoupment will commence April 2021 during which the first eleven months 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

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical research and development services, laboratory and related supplies, legal and other regulatory expenses, general administrative costs, and interest and principal payments on our debt.

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical research and development services, laboratory operations, equipment and related supplies, legal and other regulatory expenses, general administrative costs and, from time to time, expansion of our facilities in support of our growth.

We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on the commercialization of our existing products, the development of our future product candidates, the potential commercialization of our product candidates, should their development be successful, and general administrative costs.

Additionally, we anticipate using a portion of our capital resources to fund the expansion of our facilities in support of our growth strategy.

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

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, 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 may also, from time to time, consider various strategic opportunities, which may involve using a portion of our capital resources to fund acquisitions of businesses, assets, products or technologies.

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

For the three months ended March 31, 2021 we had a net loss of $4.3 million and an accumulated deficit of $66.8 million as of March 31, 2021.

Our ability to generate revenue sufficient to achieve 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.

We expect to incur additional expenses and 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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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.

Long-Term Debt

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

September 30, 2020 December 31, 2019

Term debt $ 23,354 $ 26,688

Unamortized discount and issuance costs (899) (1,566)

Total long-term debt 22,455 25,122

Current portion of long-term debt (10,000) (5,833)

Long-term debt, less current portion $ 12,455 $ 19,289

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 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 September 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.

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.

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.

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):

Nine Months Ended

September 30,

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

Three Months Ended

Net cash used in operating activities $ (3,631) $ (251)

Net cash used in investing activities (750) (500)

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Net change in cash and cash equivalents (2,871) (192)

Cash and cash equivalents, beginning of period 409,852 98,845

Cash and cash equivalents, end of period $ 406,981 $ 98,653

Operating Activities

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.

Net cash used in operating activities was $3.6 million for the three months ended March 31, 2021 and was primarily attributable to the net loss of $4.3 million, decreases in accrued compensation of $3.9 million, increases in accounts receivable of $1.6 million and decreases in other accrued liabilities of $0.3 million, partially offset by stock compensation expense of $4.9 million and decreases in prepayments and other current assets of $1.7 million.

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.

Investing Activities

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.

Net cash used in investing activities for the three months ended March 31, 2021 and 2020 consisted of purchases of property and equipment.

Financing Activities

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.

Off-Balance Sheet Arrangements

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

Net cash provided by financing activities was $1.5 million for the three months ended March 31, 2021 and primarily consisted of $1.0 million in proceeds from the exercise of stock options and $0.9 million in proceeds from contributions to the employee stock purchase plan.

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

Critical Accounting Policies and Significant Judgments and Estimates

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.

During the three months ended March 31, 2021, 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, 2020.

Recent Accounting Pronouncements

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JOBS Act Accounting Election

We are an emerging growth company within the meaning of the Jumpstart Our Business Startups Act, as amended, or the JOBS Act, enacted in April 2012.

We are an emerging growth company within the meaning of the Jumpstart Our Business Startups Act, as amended, or the JOBS Act.

Section 107(b) of the JOBS Act provides that an emerging growth company can leverage the extended transition period, provided in Section 102(b) of the JOBS Act, for complying with new or revised accounting standards.

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We have elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates.

We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley.

We will remain an emerging growth company until the earliest of (1) December 31, 2024, (2) the last day of the fiscal year (a) in which we have total annual gross revenue of at least $1.07 billion or (b) in which we are deemed to be a ‘‘large accelerated filer’’ as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the prior June 30 th , and (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

As of April 30, 2021, the market value of our common stock held by non-affiliates exceeded $700.0 million.

If the market value of our common stock held by non-affiliates exceeds $700.0 million as of June 30, 2021, we will cease to be an emerging growth company effective December 31, 2021.

Qualitative and Quantitative Disclosures About Market Risk.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis