The following discussion of our financial condition and results of operations should be read together with our unaudited condensed financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our final prospectus datedOctober 29, 2020 that forms a part of our Registration Statement on Form S-1 (File No. 333-249260), as filed with theSecurities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"), onOctober 29, 2020 (Prospectus). In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements 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, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" under Part II, Item 1A below. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), is provided to supplement the financial statements and the related notes in Item 1 of this Quarterly Report on Form10-Q. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to year and the primary factors that accounted for those changes. Data for the three months endedSeptember 30 , and 2019 and for the nine months endedSeptember 30, 2020 and 2019 has been derived from our unaudited condensed financial statements for the three months endedSeptember 30, 2020 and 2019 and for the nine months endedSeptember 30, 2020 and 2019 included in Item 1 of this Quarterly Report on Form 10-Q.
Overview
We are a leading data-driven diagnostic solutions company leveraging state of the art technologies with our proprietary AI platform to discover, develop, and commercialize solutions for clinical unmet needs, with a primary focus in lung disease. By combining a technology agnostic approach with a holistic view of the patient's disease state, we believe our solutions provide physicians with greater insights to help personalize their patient's care and meaningfully improve disease detection, evaluation, and treatment. Our unique approach to precision medicine provides timely and actionable clinical information, which we believe helps improve overall patient outcomes and lowers the overall healthcare cost by reducing the use of ineffective and unnecessary treatments and procedures. In addition to our diagnostic tests, we provide biopharmaceutical companies with services that include diagnostic research, clinical trial testing, and the discovery, development, and commercialization of companion diagnostics. Our core belief is that no single technology will answer all clinical questions that we encounter. Therefore, we employ multiple technologies, including genomics, transcriptomics, proteomics, and radiomics, and leverage our proprietary AI platform, the Diagnostic Cortex, to discover innovative diagnostic tests for clinical use. The Diagnostic Cortex is an extensively validated deep learning platform optimized for the discovery of diagnostic tests, which we believe overcomes standard machine learning challenges faced in life sciences research. Our data-driven and technology agnostic approach is designed to enable us to discover diagnostic tests that answer critical clinical questions faced by physicians, researchers, and biopharmaceutical companies. We continuously incorporate new market insights and patient data to enhance our platform through a data-driven learning loop. We regularly engage with our customers, key opinion leaders, and scientific experts to stay ahead of the rapidly evolving diagnostic and therapeutic landscape to identify additional clinical unmet needs where a diagnostic test could help improve patient care. Additionally, we incorporate clinical and molecular profiling data from our commercial clinical testing, research studies, clinical trials, and biopharmaceutical customers or academic partnerships, to continue to advance our platform. We have over 140,000 samples and data in our biobank, including tumor profiles and immune profiles, which are used for both internal and external R&D initiatives. We have commercialized six diagnostic tests which are currently available for use by physicians. Our Nodify XL2 and Nodify CDT tests, marketed as part of our Nodify Lung Nodule Risk Assessment testing strategy, assess the risk of lung cancer to help identify the most appropriate treatment pathway. We believe we are the only company to offer two commercial blood-based tests to help physicians reclassify risk of malignancy in patients with suspicious lung nodules. Our GeneStrat and VeriStrat tests, marketed as part of ourBiodesix Lung Reflex testing strategy, are used following diagnosis of lung cancer to measure the presence of mutations in 30 -------------------------------------------------------------------------------- the tumor and the state of the patient's immune system to establish the patient's prognosis and help guide treatment decisions. The GeneStrat tumor profiling test and the VeriStrat immune profiling test have a three-day average turnaround time, providing physicians with timely results to facilitate treatment decisions. In response to the COVID-19 pandemic, through our partnership with Bio-Rad, we commercialized the Biodesix WorkSafe testing program. Our scientific diagnostic expertise, technologies, and existing commercial infrastructure enabled us to rapidly commercialize two FDA EUA-authorized tests, a part of our customizable program. Both diagnostic tests are owned and were developed by Bio-Rad and Bio-Rad has granted us permission to utilize both tests for commercial diagnostic services. HHS Secretary Azar declared a public health emergency for COVID-19 inFebruary 2020 which justified the authorization of emergency use of diagnostic tests for the detection and/or diagnosis of COVID-19. The Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test have been granted FDA EUA pursuant to the current emergency declaration. The Bio-Rad SARS-CoV-2 ddPCR test was FDA EUA authorized onMay 1, 2020 , authorizing performance of the test in laboratories certified under Clinical Laboratory Improvement Amendments ("CLIA") to perform high complexity tests. The second test is the Platelia SARS-CoV-2 Total Ab test, which is an antibody assay intended for detecting a B-cell immune response to SARS-CoV-2, indicating recent or prior infection. The Platelia SARS-CoV-2 Total Ab test was FDA EUA authorized onApril 29, 2020 . Medical products that are granted an EUA are only permitted to commercialize their products under the terms and conditions provided in the authorization. The FDA may revoke an EUA where it is determined that the underlying health emergency no longer exists or warrants such authorization, if the conditions for the issuance of the EUA are no longer met, or if other circumstances make revocation appropriate to protect the public health or safety, and we cannot predict how long the EUAs for the SARS-CoV-2 tests will remain in place. Using the Bio-Rad SARS-CoV-2 ddPCR test and the Platelia SARS-CoV-2 Total Ab test, we operate and have commercialized the Biodesix WorkSafe testing program. Prior to using the Bio-Rad tests as part of our testing program, we performed feasibility, verification, and validation studies, including developing software for process automation, sample accessioning, data management and reporting, all required to demonstrate the test operated as claimed by the manufacturer and as required by our certifying regulatory agencies for high complexity laboratory testing. We secured independent reference specimens run with EUA tests to validate these tests as fit for diagnostic use in our laboratories. Post-launch development support for these tests have included improvements in on-boarding new personnel, logistics of sample collection, sample receipt and data reporting, all required to support our testing program. Additional releases of the laboratory data management software are ongoing and planned for the foreseeable future. These tests are utilized by healthcare providers, including hospitals and nursing homes, and are also offered to businesses and educational systems to assist in their back-to-work or back-to-school strategies. Recently we announced multiple partnerships for COVID-19 testing, and have entered into an agreement with theState of Colorado to be one of the diagnostic companies to support widespread COVID-19 testing for the State. Additionally, we recently announced that we will oversee and manage onsite testing and validating testing for theBig Ten Conference athletic competitions. To date, we have not derived significant revenues from these partnerships. In addition to the six diagnostic tests currently on the market, we perform over 30 assays for research use as part of our laboratory services that have been used by over 50 biopharmaceutical customers and academic partners. All of our diagnostic testing is performed at one of our two certified, high-complexity clinical laboratories inBoulder, Colorado andDe Soto, Kansas . Since our inception, we have performed over 245,000 tests and continue to generate a large and growing body of clinical evidence consisting of over 275 clinical and scientific peer-reviewed publications and presentations. Through ongoing study of each of our tests, we continue to grow our depth of understanding of disease biology and the broad utility of each of our tests. We believe we are poised for rapid growth by leveraging our scientific development and laboratory operations expertise along with our commercial infrastructure which includes sales, marketing, reimbursement, and regulatory affairs. Inthe United States , we market our tests to clinical customers through our targeted sales organization, which includes sales representatives that are engaged in sales efforts and promotional activities primarily to pulmonologists, oncologists, cancer centers and nodule clinics. We market our tests and services to biopharmaceutical customers globally through our targeted business development team, which promotes the broad utility of our tests and testing capabilities throughout drug development and commercialization which is of value to pharmaceutical companies and their drug-development process. 31 -------------------------------------------------------------------------------- We have funded our operations to date principally from net proceeds from the sale of convertible preferred stock, revenue from diagnostic testing and services, and the incurrence of indebtedness. We had cash and cash equivalents of$6.3 million as ofSeptember 30, 2020 and$5.3 million as ofDecember 31, 2019 .
Factors Affecting Our Performance
We believe there are several important factors that have impacted our operating performance and results of operations, including:
• Testing volume and customer mix. Our revenues and costs are affected by
the volume of testing and mix of customers from period to period. We evaluate both the volume of our commercial tests, or the number of tests
that we perform for patients on behalf of clinicians, as well as tests for
biopharmaceutical companies. Our performance depends on our ability to
retain and broaden adoption with existing customers, as well as attract
new customers. We believe that the test volume we receive from clinicians
and biopharmaceutical companies are indicators of growth in each of these
customer verticals. Customer mix for our tests has the potential to
significantly impact our results of operations, as the average selling
price for biopharmaceutical sample testing is currently significantly
greater than our average selling price for clinical tests since we are not
a contracted provider for, or our tests are not covered by all clinical
patients' insurance. We evaluate our average selling price for tests that
are covered by Medicare, Medicare Advantage and commercial payers to understand the trends in reimbursement and apply those trends to our revenue recognition policies. We expect our costs to significantly
increase in 2020 and the beginning of 2021 due to a significant increase
in demand for COVID-19 diagnostic testing and we expect our related revenues from such tests to also increase.
• Reimbursement for clinical diagnostic testing. Our revenue depends on
achieving broad coverage and reimbursement for our tests from third-party
payers, including both commercial and government payers. Payment from third-party payers differs depending on whether we have entered into a contract with the payers as a "participating provider" or do not have a contract and are considered a "non-participating provider." Payers will often reimburse non-participating providers, if at all, at a lower rate than participating providers. Historically, we have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract to serve as a participating provider, reimbursements are made pursuant to a negotiated fee schedule and are limited to only covered indications. Becoming a participating provider generally results in higher reimbursement for covered indications and lack of reimbursement for non-covered indications. As a result, the impact of becoming a participating provider with a specific payer will vary. If we are not able to obtain or maintain coverage and adequate reimbursement from third-party payers, we may not be able to effectively increase our testing volume and revenue as expected. Additionally, retrospective reimbursement adjustments can negatively impact our revenue and cause our financial results to fluctuate.
• Investment in clinical studies and product innovation to support growth. A
significant aspect of our business is our investment in research and
development, including the development of new products and our investments
in clinical utility studies. We have invested heavily in clinical studies
for our on market and pipeline products. Our studies focus primarily on
the clinical utility of our tests including the ongoing INSIGHT study
which seeks to enroll up to 5,000 patients to continue our clinical
understanding of the predictive and prognostic value of the VeriStrat
test. Our recently launched ALTITUDE study seeks to further demonstrate
the efficacy of the Nodify XL2 and Nodify CDT test. A secondary focus of
our studies is understanding the economic impact of our tests in guiding
treatment choices and the potential impact of our tests in reducing
overall healthcare costs.
Our clinical research has resulted in over 80 peer-reviewed publications for our tests. In addition to clinical studies, we are collaborating with investigators from multiple academic cancer centers. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers and expect our investments in research and development to increase. Further we also expect to increase our research and development expenses to fund further innovation and develop new clinically relevant tests.
• Ability to attract new biopharmaceutical customers and maintain and expand
relationships with existing customers. Our business development team
promotes the broad utility of our products for biopharmaceutical companies
in
opportunities and growth depend in part on our ability to attract new
biopharmaceutical customers and to maintain and expand relationships with
existing biopharmaceutical customers. We expect to increase our sales and
marketing expenses in furtherance of this goal. As we continue to develop
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these relationships, we expect to support a growing number of
investigations and clinical trials. If our relationships expand, we
believe we may have opportunities to offer our platform for companion
diagnostic development, novel target discovery and validation efforts, and
to grow into other commercial opportunities. For example, we believe our
multi-omic data including genomic and proteomic data, in combination with
clinical outcomes or claims data, has revenue-generating potential, including for novel target identification and companion diagnostic discovery and development.
• Motivating and expanding our field sales force and customer support team.
Our field sales force is the primary point of contact in the clinical
setting. These representatives of the company must cover expansive
geographic regions which limits their time for interaction and education
of our products in the clinical setting. We plan to invest heavily in the
field sales force to increase the total number of sales representatives
and thereby reduce the geographic footprint each representative must
cover. This investment will allow the larger sales force to maximize their
education and selling efforts and achieve greater returns. Additionally,
we plan to invest in the
teams to continue to provide the field team with the resources to be successful in the field. Furthermore, as we increase testing volume for our COVID-19 diagnostic testing program, we plan to hire additional project support members to assist us in expanding testing capacity. While each of these areas present significant opportunities for us, they also pose significant risks and challenges that we must address. See Part II, Item 1A. "Risk Factors" for more information.
COVID-19 Pandemic
The COVID-19 pandemic has disrupted, and we expect will continue to disrupt, our operations. To protect the health and well-being of our workforce, partners, vendors and customers, we provide voluntary COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed the States ofColorado andKansas' public health orders and the guidance from theCenters for Disease Control and Prevention . Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts have also been constrained by our operational response to the COVID-19 pandemic due to travel restrictions. We expect to continue to adjust our operational norms in an effort to help slow the spread of COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. The COVID-19 pandemic also has started to negatively affect, and we expect will continue to negatively affect, our non-COVID-19 testing-related revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half ofMarch 2020 , we have received fewer samples for non-COVID-19 testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, such as our ongoing INSIGHT study and our recently launched ALTITUDE study, as well as our arrangements with our biopharmaceutical customers, are expected to take longer to complete than what we expected before the outbreak of the COVID-19 pandemic. We are also experiencing an increase in revenues related to an increase in the demand for our Biodesix WorkSafe testing program. We expect that our costs to expand capacity for COVID-19 testing will increase for the remainder of 2020 and the first quarter of 2021 and we expect that the revenue that we generate from this expansion will comprise a significant portion of our revenue for these periods. However, there is no assurance that our COVID-19 testing program will continue to be accepted by the market or that other diagnostic tests will become more accepted, produce quicker results or are more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. If the pandemic were to dissipate, whether due to a significant decrease in new infections, due to the availability and rapid distribution of vaccines, or otherwise, the need for a COVID-19 diagnostic test could decrease significantly and this could have an adverse effect on our results of operations and profitability. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue.
See Part II., Item 1A. "Risk Factors" for a description of how the COVID-19 pandemic may adversely affect our business, financial condition and results of operations.
Components of Operating Results
Revenues
We derive our revenue from two sources: (i) providing diagnostic testing in the clinical setting ("Diagnostic Tests"); and (ii) providing biopharmaceutical companies with services that include diagnostic research, clinical research, clinical trial testing, 33
-------------------------------------------------------------------------------- development and testing services generally provided outside the clinical setting and governed by individual contracts with third parties as well as development and commercialization of companion diagnostics ("Services").
Diagnostic Tests
Diagnostic test revenue is generated from delivery of results from our
diagnostic tests. In
We consider diagnostic testing to be completed upon the delivery of test results to the prescribing physician, which is considered the performance obligation. The fees for such services are billed either to a third party such as Medicare, medical facilities, commercial insurance payers, or to the patient. We determine the transaction price related to our contracts by considering the nature of the payer, the historical amount of time until payment by a payer and historical price concessions granted to groups of customers.
Services
Services revenue is generated from the delivery of our on-market tests, pipeline tests, custom diagnostic testing, and other scientific services for a purpose as defined by any individual customer. At times we collaborate with large biopharmaceutical companies in an attempt to discover biomarkers that would be helpful in their drug development or marketing. The performance obligations and related revenue for these sales is defined by a written agreement between us and our customer. These services are generally completed upon the delivery of testing results, or other contractually defined milestone(s), to the customer, which is considered the performance obligation. Customers for these services are typically large pharmaceutical companies where collectability is reasonably assured and therefore revenue is accrued upon completion of the performance obligations. Revenue derived from services is often unpredictable and can cause dramatic swings in our overall net revenue line from quarter to quarter.
Operating Expenses
Direct costs and expenses
Cost of diagnostic testing generally consists of cost of materials, direct labor, including bonus, benefit and stock-based compensation, equipment and infrastructure expenses associated with acquiring and processing test samples, including sample accessioning, test performance, quality control analyses, charges to collect and transport samples; curation of test results for physicians; and in some cases, license or royalty fees due to third parties. Costs associated with performing our tests are recorded as the tests are processed regardless of whether revenue was recognized with respect to the tests. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. Under these license agreements, we are obligated to pay aggregate royalties ranging from 1% to 8% of sales in which the patents or know-how are used in the product or service sold, sometimes subject to minimum annual royalties or fees in certain agreements. We expect the aggregate cost of diagnostic testing to increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions.
Cost of services includes costs incurred for the performance of development services requested by our customers. Cost of development services will vary depending on the nature, timing and scope of customer projects.
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Research and development
Research and development expenses consist of costs incurred to develop technology and include salaries and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, clinical studies, other outside costs and costs to develop our technology capabilities. Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop our technology capabilities are recorded as research and development. We expect our research and development expenses to increase in absolute dollars as we continue to innovate and develop additional products and expand our data management resources. As our services revenue grows, an increasing portion of research and development dollars are expected to be allocated to cost of goods for biopharma service contracts. This expense, though expected to increase in absolute dollars, is expected to decrease as a percentage of revenue in the long term, though it may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses.
Sales, marketing, general and administrative
Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel and stock-based compensation, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales force, increase our presence withinthe United States , and increase our marketing activities to drive further awareness and adoption of our tests and our future products. These expenses, though expected to increase in absolute dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage of our revenues from period to period due to the timing and extent of these expenses. Our general and administrative expenses include costs for our executive, accounting, finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in absolute dollars, primarily due to increased headcount and costs associated with operating as a public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of theSEC , director and officer insurance premiums and investor relations. These expenses, though expected to increase in absolute dollars, are expected to decrease as a percentage of revenue in the long term, though they may fluctuate as a percentage from period to period due to the timing and extent of these expenses.
Accretion and Change in Fair Value of Contingent Consideration
In connection with the purchase transaction of Indi, we recorded contingent consideration pertaining to the amounts potentially payable to Indi shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statement of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including probability of successful achievement of that Milestone, the estimated timing in which the Milestone is achieved, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions.
Interest Expense and Interest Income
Interest expense consists of interest from our term loan and convertible debt, and interest income consists of income earned on our cash and cash equivalents. Our term loan does not begin principal payments untilMarch 2021 . Our interest income has not been significant to date, but we expect our interest income to increase primarily as we invest the net proceeds from our recent offering. 35 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth the significant components of our results of operations for the periods presented (in thousands, except percentages).
Three Months Nine Months Ended September 30, Change Ended September 30, Change 2020 2019 $ % 2020 2019 $ % (unaudited) (unaudited) Revenues$ 9,193 $ 3,942 $ 5,251 133$ 18,528 $ 16,281 $ 2,247 14 Operating expenses Direct costs and expenses 3,891 1,503 2,388 159 7,346 4,244 3,102 73 Research and development 2,706 2,359 347 15 7,713 7,966 (253 ) (3 ) Sales, marketing, general and administrative 7,879 8,212 (333 ) (4 ) 22,793 24,080 (1,287 ) (5 ) Accretion of contingent consideration 957 896 61 7 2,901 2,525 376 15 Change in fair value of contingent consideration - - - - (1,944 ) 663 (2,607 ) (393 ) Total operating expenses 15,433 12,970 2,463 19
38,809 39,478 (669 ) (2 ) Loss from operations (6,240 ) (9,028 ) 2,788 31
(20,281 ) (23,197 ) 2,916 13 Other income (expense) Interest expense (2,658 ) (706 ) (1,952 ) (276 ) (6,899 ) (2,005 ) (4,894 ) (244 ) Other, net 53 133 (80 ) (60 )
363 1,001 (638 ) (64 ) Total other expense (2,605 ) (573 ) (2,032 ) (355 )
(6,536 ) (1,004 ) (5,532 ) (551 ) Net loss$ (8,845 ) $ (9,601 ) $ 756 8$ (26,817 ) $ (24,201 ) $ (2,616 ) (11 ) Revenue
We generate revenue from our diagnostic tests and services that we provide (in thousands, except percentages).
Three Months Ended Nine Months Ended September 30, Change September 30, Change 2020 2019 $ % 2020 2019 $ % (unaudited) (unaudited) Diagnostic revenue$ 8,552 $ 3,770 $ 4,782 127 %$ 15,798 $ 12,716 $ 3,082 24 % Services revenue 641 172 469 273 % 2,730 3,565 (835 ) (23 )% Total revenue$ 9,193 $ 3,942 $ 5,251 133 %$ 18,528 $ 16,281 $ 2,247 14 %
Total revenue was
Diagnostic test revenue increased to$8.6 million for the three months endedSeptember 30, 2020 compared to$3.8 million for the three months endedSeptember 30, 2019 , a net increase of$4.8 million or 127%. This increase was due to$5.5 million of revenue from our two COVID-19 diagnostic tests, partially offset by a modest decline in our non-COVID-19 diagnostic test volumes of$0.7 million as health care practitioners, including pulmonologists, were increasingly diverted to pandemic-related care. In addition, company sales efforts continued to be impacted by travel and other COVID-19 pandemic related restrictions. Services revenue increased to$0.6 million for the three months endedSeptember 30, 2020 compared to$0.2 million for the three months endedSeptember 30, 2019 , an increase of$0.5 million or 273%.
Total revenue was
Diagnostic test revenue increased to$15.8 million for the nine months endedSeptember 30, 2020 compared to$12.7 million for the nine months endedSeptember 30, 2019 , a net increase of$3.1 million or 24%. This increase was due to$6.9 million of revenue from our two new COVID-19 diagnostic tests. Offsetting this increase was a decline in our non-COVID-19 diagnostic tests of 36 --------------------------------------------------------------------------------$3.8 million because COVID-19 caused our primary pulmonology call point to be diverted to pandemic-related care and our sales force being quarantined, and in many cases being locked out of call points due to the pandemic. Services revenue decreased to$2.7 million for the nine months endedSeptember 30, 2020 compared to$3.6 million for the nine months endedSeptember 30, 2019 , a decrease of$0.8 million or 23%. The decrease was partially attributed to the completion of a contract in the first half of 2019 for which we did not have a comparable contract in 2020. Costs and Operating Expenses Direct Cost and Expenses Cost of revenue was$3.9 million for the three months endedSeptember 30, 2020 compared to$1.5 million for the three months endedSeptember 30, 2019 , an increase of$2.4 million , or 159%. The increase in costs were primarily driven by the release of our CDT test and our COVID-19 testing program in 2020 offset by reductions in costs related to our non-COVID-19 tests. Cost of revenue was$7.3 million for the nine months endedSeptember 30, 2020 compared to$4.2 million for the nine months endedSeptember 30, 2019 , an increase of$3.1 million , or 73%. The increase in costs were primarily driven by the release of our CDT test and our COVID-19 testing program in 2020 offset by reductions in costs related to our non-COVID-19 tests.
Research and Development
Research and development expenses were$2.7 million for the three months endedSeptember 30, 2020 compared to$2.4 million for the three months endedSeptember 30, 2019 , an increase of$0.3 million , or 15%. This increase was primarily related to an increase in clinical trial costs related to existing trials partially offset by a reduction in travel costs and spend on development and pipeline projects primarily due to the COVID-19 pandemic. Research and development expenses were$7.7 million for the nine months endedSeptember 30, 2020 compared to$8.0 million for the nine months endedSeptember 30, 2019 , a decrease of$0.3 million , or 3%. This decrease was primarily related to a reduction in external costs related to the studies and development efforts for pipeline products, partially driven by slowdowns related to the COVID-19 pandemic and partially offset by an increased spend on clinical trials The following table summarizes our external and internal costs for the three and nine months endedSeptember 30, 2020 and 2019 (in thousands, except percentages). Three Months Ended Nine Months Ended September 30, Change September 30, Change 2020 2019 $ % 2020 2019 $ % (in thousands) External expenses: Clinical trials and associated costs$ 729 $ 167 $ 562 337 %$ 2,021 $ 1,241 $ 780 63 % Other external costs 758 997 (239 ) (24 %) 2,002 2,891 (889 ) (31 )% Total external costs 1,487 1,164 323 28 % 4,023 4,132 (109 ) (3 )% Internal expenses 1,219 1,195 24 2 % 3,690 3,834 (144 ) (4 )% Total research and development expenses$ 2,706 $ 2,359 $ 347 15 %$ 7,713 $ 7,966 $ (253 ) (3 )%
Research and development expenses account for a significant portion of our operating expenses and consist primarily of external and internal costs incurred in connection with the discovery and development of our product candidates.
External expenses include:
• payments to third parties in connection with the clinical development of
our product candidates, including contract research organizations and consultants;
• the cost of manufacturing products for use in our preclinical studies and
clinical trials, including payments to contract manufacturing organizations ("CMOs") and consultants; 37
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• payments to third parties in connection with the preclinical development
of our product candidates, including outsourced professional scientific
development services, consulting research fees and for sponsored research
arrangements with third parties; • laboratory supplies; and
• allocated facilities, depreciation and other expenses, which include
direct or allocated expenses for IT, rent and maintenance of facilities.
Internal expenses include employee-related costs, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions.
We expense research and development costs in the periods in which they are incurred. External expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers or our estimate of the level of service that has been performed at each reporting date. We track external costs by the stage of program, clinical or preclinical. We do not track internal costs by product candidate because these costs are deployed across multiple programs and, as such, are not separately classified.
Sales, Marketing, General and Administrative
Sales, marketing, general and administrative expenses were$7.9 million for the three months endedSeptember 30, 2020 compared to$8.2 million for the three months endedSeptember 30, 2019 , a decrease of$0.3 million , or 4%. This reduction was driven by reductions in the travel and related expenses as the COVID-19 pandemic reduced or eliminated the travel and related expenses. Sales, marketing, general and administrative expenses were$22.3 million for the nine months endedSeptember 30, 2020 compared to$24.1 million for the nine months endedSeptember 30, 2019 , a decrease of$1.3 million , or 5%. This reduction was driven by reductions in the travel and related expenses as the COVID-19 pandemic reduced or eliminated the travel and related expenses.
Accretion of and Change in Fair Value of Contingent Consideration
The amounts recorded for accretion and change in fair value reflect the passage of time as well as estimates in when the milestones that trigger the payment of contingent consideration will be achieved. Accretion of and change in fair value of contingent consideration netted to$1.0 million and$0.9 million for the three months endedSeptember 30, 2020 and 2019, respectively, resulting from the accretion of the liability. Accretion of and change in fair value of contingent consideration netted to$1.0 million and$3.2 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The change to contingent consideration during the nine months endedSeptember 30, 2020 was primarily due to$2.9 million resulting from the accretion of the liability offset by$1.9 million due to the impact of the deceleration of expected revenue and decreases in expected costs. The$3.2 million change to the contingent consideration during the nine months endedSeptember 30, 2019 was primarily due to$0.7 million resulting from the impact of the acceleration of expected revenue and decreases in expected costs as a result of events occurring after the acquisition date, as well as$2.5 million resulting from the from the accretion of the liability.
Interest Expense
Interest expense was$2.7 million for the three months endedSeptember 30, 2020 compared to$0.7 million for the three months endedSeptember 30, 2019 , an increase of$2.0 million . This increase was due to the addition of interest expense related to convertible notes issued to certain shareholders fromAugust 2019 throughMarch 2020 . Interest expense was$6.9 million for the nine months endedSeptember 30, 2020 compared to$2.0 million for the nine months endedSeptember 30, 2019 , an increase of$4.9 million , or 244%. This increase was primarily due to payment in kind interest accruing 38
-------------------------------------------------------------------------------- to principal on our existing term loan as well as addition of interest expense related to convertible notes issued to certain shareholders fromAugust 2019 throughMarch 2020 . Other Income and Expense
Other income and expense was
Other income and expense was$0.4 million for the nine months endedSeptember 30, 2020 compared to$1.0 million for the nine months endedSeptember 30, 2019 , an increase of$0.6 million , which was primarily proceeds related to a non-recurring legal settlement in our favor.
Liquidity and Capital Resources
We have funded our activities primarily through private equity placement offerings, convertible debt, long-term debt and most recently, our IPO. Based on cash and cash equivalents on hand as ofSeptember 30, 2020 and the proceeds of$63.0 million from our recent offering, we believe that our existing cash, cash equivalents, and cash generated from sales of our products, will be sufficient to meet our anticipated needs for at least the next 12 months from the issuance of these unaudited interim condensed financial statements. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses through at leastDecember 2021 while we make investments to support our anticipated growth. We may raise additional capital through the issuance of additional equity financing, debt financings or other sources. If this financing is not available to us at adequate levels, we may need to reevaluate our operating plans. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
Cash Flows
The following is a summary of our cash flows for the nine months ended
Nine months ended September 30 2020 2019 (unaudited - in thousands) Net cash flows (used in) provided by: Operating activities$ (12,610 ) $ (15,997 ) Investing activities (2,384 ) (994 ) Financing activities 16,055 20,031 Net increase in cash and cash equivalents and restricted cash$ 1,061 $ 3,040 Our cash flows resulted in a net increase in cash of$1.1 million and$3.0 million during the nine months endedSeptember 30, 2020 and 2019, respectively. The net cash used in operating activities decreased primarily due to a$2.6 million increase in net losses, offset by an increase in non-cash charges of$3.0 million and an increase in cash provided by working capital items of$3.0 million .
Net cash used in investing activities during the nine months ended
Net cash provided by financing activities during the nine months endedSeptember 30, 2020 totaled$16.1 million , a decrease of$4.0 million compared to the same period in 2019. The net cash provided by financing activities for the nine months endedSeptember 30, 2020 primarily resulted from$13.0 million in proceeds from the issuance of convertible notes payable and$3.1 from proceeds from our Paycheck Protection Program note payable. The net cash provided by financing activities for the nine month period endedSeptember 30, 2019 primarily resulted from$10.0 million in proceeds from the issuance of Series H preferred stock and$10.0 million in proceeds from the issuance of convertible notes payable. 39
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
Payments due by period(5) More Less than 1 to 3 4 to 5 than Total 1 year years years 5 years Operating lease obligations(4)$ 1,915 $ 1,074 $ 841 $ - $ - Term loan(1)(3) 24,781 7,203 17,578 - - Convertible debt(1)(2) 26,600 26,600 - - -$ 53,296 $ 34,877 $ 18,419 $ - $ -
(1) Reflected in accompanying balance sheets.
(2) Convertible debt was converted to common stock at the completion of our IPO.
(3) The term loan is subject to a 3% prepayment penalty. In addition, upon
maturity, a 2% back-end facility fee of
(4) We are obligated under non-cancellable operating leases for all of our
facilities. Lease terms for our facilities in effect as of
2020, ranged from less than one to three years and generally require us to
pay the real estate taxes, certain insurance and operating costs.
(5) Royalty payments that we may owe are not included as the timing of such
payments is uncertain.
InFebruary 2018 , we entered into the 2018 Notes withInnovatus to refinance long-term debt carried over from earlier loan agreements. The initial amount borrowed under the 2018 Notes was$23 million and the maturity date isFebruary 2023 . We are required to make quarterly interest payments that began inJune 2018 and outstanding principal is due in 24 equal installments commencing inMarch 2021 . The agreement has been amended multiple times to adjust terms to account for our acquisitions and growth. Further, we granted the lender a security interest in all of our assets through a pledge and security agreement, patent security agreement and trademark security agreement, each between us and the lender. The loan may be prepaid by us at any time, subject to a prepayment penalty of up to 3% of the principal amount, depending on the date of prepayment. Upon payment of the 2018 Notes at maturity or prepayment on any earlier date, unless waived, a 2% back-end facility fee will apply to the amounts paid or prepaid. The 2% fee is being recorded as additional interest expense over the term of the 2018 Notes. The 2018 Notes contain customary affirmative and negative covenants for a loan, requires us to comply with a minimum daily liquidity covenant, and has a rolling monthly revenue requirement. Failure to comply with the covenants and loan requirements may result in early amortization of the loan in a 24- or 36-month payment schedule. The 2018 Notes also contain certain covenants that prevent us from making acquisitions, incurring additional indebtedness, or making or terminating any agreement valued above a certain dollar threshold without the prior written consent of the lender. These covenants may restrict our ability to pursue new business opportunities and access additional capital. In connection with the purchase transaction of Indi, we recorded contingent consideration pertaining to the amounts potentially payable to Indi's shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statement of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including probability of successful achievement of the Milestone, the estimated timing in which the Milestone is achieved, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions. AtSeptember 30, 2020 , the amount that would be due in cash at the option of the seller at the time the Milestone is met would be approximately$37 million . For a description of our other indebtedness, please see Notes 6 and 7 in the Notes to Condensed Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Significant Judgments and Estimates
In accordance with accounting principles generally accepted inthe United States , we are required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain of these estimates significantly influence the portrayal of our financial condition and results of operations and require us to make difficult, subjective or 40 -------------------------------------------------------------------------------- complex judgments. Our critical accounting policies primarily relate to our fair value estimates, and are described in greater detail in Note 1 to our condensed financial statements in Part 1 of this Quarterly Report on Form 10-Q.
Revenue Recognition
InMay 2014 , the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", and has subsequently issued several supplemental and/or clarifying ASUs (collectively, ASC 606). ASC 606 prescribes a single common revenue standard that replaces most existingU.S. GAAP revenue recognition guidance. ASC 606 is intended to provide a more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. We adopted the new standard using the modified retrospective method onJanuary 1, 2018 for contracts that are not completed as of the adoption date. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We examined our revenue recognition policies specific to revenue streams for the provisioning of services and providing research and development services to third parties and came to conclusions on the impact of the new standard using the 5-step process prescribed by ASC 606. As noted above, we used the modified retrospective method to adopt the new standard which means we did not restate previously issued financial statements but recorded a one-time adjustment to accumulated deficit and accounts receivable of$0.4 million . This adjustment reflected our ability to establish a transaction price for our non-Medicare pay arrangements as ofJanuary 1, 2018 as a result of having sufficient history to determine the transaction price under these contracts. ASC 606 did not have an aggregate impact our net cash provided by operating activities but resulted in offsetting changes in certain assets and liabilities presented within net cash used in operating activities in the accompanying statement of cash flows, as noted above. Diagnostic service revenues are generally completed upon the delivery of test results to the prescribing physicians, which is considered the performance obligation. Testing services are generally completed upon the delivery of testing results for assay development and testing services, which is considered the performance obligation.
Change in fair value of contingent consideration
In connection with the purchase transaction with Indi, we recorded contingent consideration pertaining to the amounts potentially payable to Indi's shareholder pursuant to the terms of the asset purchase agreement. The fair value of contingent consideration is assessed at each balance sheet date and changes, if any, to the fair value are recognized as operating expenses within the statements of operations. The estimated fair value of the contingent consideration is based upon significant assumptions including probabilities of successful achievement of the related Milestone, the estimated timing in which the Milestone is achieved, and discount rates. The estimated fair value could materially differ from actual values or fair values determined using different assumptions.
Accounting for convertible debt
During 2020 and 2019, we issued$26.0 million in convertible debt that are now scheduled to mature onJune 30, 2021 . The terms of the convertible debt provided discounts upon conversion to the note holders in certain situations, including upon the completion of this offering. The discounts included in the convertible debt created a put option liability that was separated from the convertible debt and reflected as a liability in our balance sheet. Subsequent to the creation of the put options, changes in the fair value of the put options will be reflected as other income or expense in the statement of operations. During the nine months endedSeptember 30, 2019 , we recorded a$2 million increase in the fair value of the put options as other expense due to the increase in the conversion discount rate provided to note holders resulting from an amendment to terms of the convertible debt issued in August andSeptember 2019 . We will estimate the fair value of the put options until they are exercised or expire. The fair value of put options are based on the value of the discounts embedded in the convertible debt and the probability of various settlement scenarios. 41 --------------------------------------------------------------------------------
Stock-based compensation and common stock valuation
Stock-based compensation related to stock options granted to our employees, directors and nonemployees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for stock options with performance metrics is calculated based upon expected achievement of the metrics specified in the grant.
Starting
We use the Black-Scholes option-pricing model to estimate the fair value of our stock options and stock purchase rights under our 2016 Incentive Plan. The Black-Scholes option-pricing model requires assumptions to be made related to expected term of an award, expected volatility, risk-free rate and expected dividend yield. StartingJanuary 1, 2017 , forfeitures were accounted for as they occur. We account for restricted stock units issued to employees based on the grant date fair value which is determined based on the closing market price of the common stock on the date of grant. The expense is recognized in our statement of operations on a straight-line basis over the requisite vesting period. In the absence of an active market for our common stock, the fair value of our common stock was determined by our Board of Directors in accordance with the methodologies outlined in theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation Practice Aid ("Practice Aid"). In doing so, our Board of Directors determined the best estimate of fair value of our common stock, exercising reasonable judgment and considering numerous objective and subjective factors, including:
• valuations of our common stock performed by independent third-party
valuation specialists;
• our stage of development and business strategy, including the status of
research and development efforts, of our products and product candidates,
and the material risks related to our business and industry;
• our results of operations and financial position, including our levels of
available capital resources;
• the valuation of publicly traded companies in the life sciences and
diagnostic testing sectors, as well as recently completed mergers and
acquisitions of peer companies; • the lack of marketability of our common stock as a private company;
• the prices of our convertible preferred stock sold to investors in arm's
length transactions and the rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;
• the likelihood of achieving a liquidity event for the holders of our
common stock, such as an initial public offering or a sale of our company,
given prevailing market conditions; • trends and developments in our industry; and
• external market conditions affecting the life sciences and medical device
industry sectors.
Our Board of Directors determined the fair value of our common stock by first determining the enterprise value of our business, and then allocating the value among the various classes of our equity securities to derive a per share value of our common stock. The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In allocating enterprise value among the various classes of stock prior toJuly 2020 , we utilized the Option Pricing Method (OPM) given our early stage of development and the absence of a near term liquidity event. Under the OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options. FromJuly 2020 onwards, we have utilized a hybrid OPM and the Probability Weighted Expected Return Method (PWERM). The PWERM is a scenario-based analysis that 42 -------------------------------------------------------------------------------- estimates the value per share based on the probability-weighted present value of expected future investment returns, considering a number of discrete possible outcomes of the business, as well as the economic and control rights of each share class. Under this hybrid method, we considered expected initial public offering liquidity scenarios as well as other market-based non-initial public offering scenarios in the event a near-term initial public offering does not occur. Additionally, in determining the estimated fair value of our common stock, our Board of Directors also considered the fact that our stockholders could not previously freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. Following the completion of our IPO, our Board of Directors has determined the fair value of our common stock is based on our closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our condensed financial statements included in Part I of this Quarterly Report on Form 10-Q.
Implications of Being an
We are an "emerging growth company" within the meaning of the Jumpstart Our Business Startups Act ("JOBS Act"). As an emerging growth company, we may take advantage of certain exemptions from various public company reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), certain requirements related to the disclosure of executive compensation and in our periodic reports and proxy statements, the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our financials to those of other public companies more difficult. We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than$1.07 billion in annual revenue; (ii) the date we qualify as a "large accelerated filer," with at least$700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than$1.0 billion in non-convertible debt securities; and (iv) untilDecember 31, 2025 (the year endedDecember 31st following the fifth anniversary of our IPO). Additionally, we are a "smaller reporting company" as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common shares held by non-affiliates exceeds$250 million as of the end of that year's second fiscal quarter, or (ii) our annual revenues exceeded$100 million during such completed fiscal year and the market value of our common shares held by non-affiliates exceeds$700 million as of the end of that year's second fiscal quarter.
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