The following Discussion and Analysis of Financial Condition and Results of
Operations of DermTech, Inc. (together with its subsidiaries, "DermTech," "we,"
"us," "our" or the "Company") should be read in conjunction with the condensed
consolidated financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and the audited condensed
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the fiscal
year ended December 31, 2020, included in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, or the SEC, on March 5, 2021.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including the following Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements 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, that are intended to be covered by the
"safe harbor" created by those sections. All statements, other than statements
of historical facts, contained in this report, including statements regarding
DermTech's or its management's intentions, beliefs, expectations and strategies
for the future, are forward looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "expect,"
"plan," "anticipate," "believe," "estimate," "intend," "potential" or "continue"
or the negative of these terms or other comparable terminology. Forward-looking
statements are made as of the date of this report, deal with future events, are
subject to various risks and uncertainties, and actual results could differ
materially from those anticipated in those forward-looking statements. The risks
and uncertainties that could cause actual results to differ materially are more
fully described under the heading "Item 1A. Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2020 and in Part II, Item 1A-Risk
Factors of this Quarterly Report on Form 10-Q. We may disclose changes to risk
factors or additional risk factors from time to time in our future filings with
the SEC. We assume no obligation to update any of the forward-looking statements
after the date of this report or to conform these forward-looking statements to
actual results.
Overview
We are an emerging growth molecular diagnostic company developing and marketing
novel, non-invasive genomics tests that seek to transform the practice of
dermatology and related fields. Our platform may change the diagnostic paradigm
in dermatology from one that is subjective, invasive, less accurate and
higher-cost to one that is objective, non-invasive, more accurate and
lower-cost. Our initial focus is skin cancer. We currently have two clinical
commercial tests that enhance the early detection of skin cancer and related
conditions. Our scalable genomics platform has been designed to work with a
proprietary Smart Sticker adhesive patch sample collection kit that provides a
skin sample collected non-invasively. We process our tests in a Clinical
Laboratory Improvement Amendments of 1988, or CLIA, certified and College of
American Pathologists accredited commercial laboratory located in La Jolla,
California that is licensed by the State of California and all states requiring
out-of-state licensure. We also provide our technology platform on a contract
basis to large pharmaceutical companies who use the technology in their clinical
trials to test for the existence of genetic targets of various diseases and to
measure the response of new drugs under development. We have a history of net
losses since our inception.
Events, Trends and Uncertainties
The Pigmented Lesion Assay, which we refer to as PLA, became eligible for
Medicare reimbursement on February 10, 2020. In late October 2019, the American
Medical Association, or AMA, provided us with a Proprietary Laboratory Analyses
Code, or PLA Code. Pricing of $760 for the PLA Code was published on December
24, 2019 as part of the Centers for Medicare and Medicaid Services Laboratory
Fee Schedule, or CLFS, for 2020. The Medicare Final Coverage Decision, or Final
LCD, expanded the coverage proposal in the Draft LCD from one to two tests per
date of service and it allows clinicians to order our PLA if they have
sufficient skill and experience to decide whether a pigmented lesion should be
biopsied. Our local Medicare Administrative Contractor, Noridian Healthcare
Solutions, LLC, or Noridian, has issued its own Local Coverage Decision, or LCD,
announcing coverage of our PLA. Even though the effective date of Noridian's LCD
was June 7, 2020, Noridian began reimbursing us for our PLA as of February 10,
2020. With Medicare coverage granted, we have the opportunity to approach
commercial payors and as a result, we believe that the PLA test may generate
significant revenues in 2021 and 2022.
Despite the grant of Medicare coverage for the PLA, uncertainty surrounds
commercial payor reimbursement, including governmental and commercial payors, of
any test incorporating new technology, including tests developed using our
technologies. Because each payor generally determines for its own enrollees or
insured patients whether to cover or otherwise establish a policy to reimburse
our tests, seeking payor approvals is a time-consuming and costly process. We
cannot be certain that coverage for our current tests and our planned future
tests will be provided in the future by additional commercial payors or that
existing policy decisions or reimbursement levels will remain in place or be
fulfilled under existing terms and provisions. If we cannot obtain or maintain
coverage and reimbursement from private and governmental payors such as Medicare
and Medicaid for our current tests, or
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new tests or test enhancements that we may develop in the future, our ability to
generate revenues could be limited. This may have a material adverse effect on
our business, financial condition, results of operation, and cash flows.
Revenue Effects Related to COVID-19 Pandemic
Assay Revenue
Beginning in March 2020 and continuing through the third quarter of 2021, the
ongoing COVID-19 pandemic has reduced patient access to clinician offices for
in-person testing and reduced access by our sales force for in-office sales
calls, which has resulted in a reduced volume of billable samples received
relative to our pre-pandemic expectations. April 2020 billable sample volume was
down by approximately 80%, commensurate with the closure of dermatology offices,
compared to the average monthly billable sample volume for the two months
preceding the beginning of the COVID-19 stay-at-home orders. Despite the
downturn in billable samples in April 2020, we saw a stabilization of billable
sample volume throughout the rest of the second quarter of 2020 and through the
third quarter of 2021 as various states and dermatology offices opened
throughout the country. Despite not all dermatology practices returning to full
operations, billable sample volume first exceeded prepandemic levels in July
2020. There was no material change in billable sample volume for the three
months ended September 30, 2021 compared to billable sample volume for the three
months ended June 30, 2021 due to the Delta variant that drove the surge of
cases during the third quarter of 2021. Billable sample volume for the three
months ended September 30, 2021 was 75% higher than billable sample volume for
the three months ended September 30, 2020 and 109% higher for the nine months
ended September 30, 2021 compared to the same period in 2020. Billable sample
volumes could continue to be impacted by the ongoing COVID-19 pandemic and
further impacted by a potential resurgence of the virus or its variants in the
future.
We have made available beginning in late April 2020 a telemedicine option for
the DermTech Melanoma Test (as defined below), but the telemedicine market is
relatively new and unproven, especially within dermatology, and it is uncertain
whether it will achieve and sustain high levels of demand, consumer acceptance
and market adoption. While the COVID-19 pandemic is ongoing (including as a
result of clinician offices closing again due to the rolling back of reopening
plans in various states, or patients avoiding in person visits to the
dermatology clinic for fear of contracting COVID-19 or any of its viral
variants), we expect that our revenues will depend to an extent on the
willingness of clinicians and their patients to use our telemedicine option for
the DermTech Melanoma Test (as defined below), as well as on our ability to
demonstrate the value of our telemedicine option to health plans and other
purchasers of healthcare for beneficiaries. We also expect that the duration and
extent of the effects of the ongoing COVID-19 pandemic will continue to
adversely affect our revenues by reducing access to clinician offices by
patients for in-person testing and by our sales force for in-office sales calls.
Contract Revenue
Contract revenues with major pharmaceutical companies relate to ongoing clinical
trial contracts and new contracts. Contract revenue can be highly variable as it
is dependent on the pharmaceutical customers' clinical trial progress which can
be difficult to forecast due to variability of patient enrollment, drug safety
and efficacy and other factors. Many of our contracts with third parties are
structured to contain milestone billing payments, which typically are advance
payments on work yet to be performed. These advanced payments are structured to
help fund operations and are included in deferred revenue as the work has not
yet been performed. These advance payments will remain in deferred revenue until
we process the laboratory portion of the contracts allowing us to recognize the
revenue.
The ongoing COVID-19 pandemic has negatively affected and will continue to
negatively affect our pharmaceutical customers' clinical trials. The extent of
such effect on our future revenue is uncertain and will depend on the duration
and extent of the effects of the ongoing COVID-19 pandemic on our pharmaceutical
customers' clinical trials.
DermTech PLAplus Launch
During the second quarter of 2021, the Company announced the launch of PLAplus,
its next generation test for the enhanced early detection of melanoma. PLAplus
delivers objective and actionable information to guide clinical management
decisions for skin lesions suspicious of melanoma. The new PLAplus test adds
Telomerase Reverse Transcriptase, TERT, promoter DNA driver mutation analyses as
a reflex test to the current RNA gene expression PLA test. TERT is individually
associated with histopathologic features of aggressiveness and poor survival in
melanoma. The combined tests elevate the sensitivity from 91% to 97% and
maintain a negative predictive value of >99%, resulting in a less than 1%
probability of missing melanoma. We refer to the PLA and the PLAplus
collectively as the DermTech Melanoma Test. By combining RNA gene expression and
DNA mutation analyses, the DermTech Melanoma Test provides a highly accurate
non-invasive genomic test for enhanced early melanoma detection. For a
discussion of the effects of the ongoing COVID-19 pandemic on recognized revenue
derived from our PLA and PLAplus, refer to "Assay Revenue" under "Revenue
Effects Related to COVID-19 Pandemic" above.
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Financial Overview
Revenue
We generate revenue through laboratory services that are billed to Medicare,
private medical insurance companies and to pharmaceutical companies who order
our laboratory services, which can include sample collection kits, assay
development, genomic analysis, data analysis and reporting. Our revenue is
generated from two revenue streams: contract revenue and assay revenue. Assay
revenue can be highly variable as it is based on payments received by private
insurance payors that are and are not under contract and can vary based on
patient insurance coverage, deductibles and co-pays. Our laboratory services are
ordered by customers on projects that may span over several years, which makes
our contract revenue highly variable. Segments of these contracts may be
increased, delayed or eliminated based on the success of each customers'
clinical trials or other factors.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses are primarily related to our specialty field sales
force, market research, reimbursement efforts, trade show attendance, public
relations, and general marketing. We expect these expenses to increase
significantly as we expand our direct consumer marketing efforts and continue to
add to our specialty sales force, marketing and payor access teams throughout
2021.
Research and Development Expenses
Our research and development, or R&D, expenses consist primarily of salaries and
fringe benefits, clinical trials, consulting costs, facilities costs, laboratory
costs, equipment expense, and depreciation. We also conduct clinical trials to
validate the performance characteristics of our tests and to show medical cost
benefit in support of our reimbursement efforts. We expect these expenses to
increase significantly as we continue to develop new products and expand the use
of our existing products.
General and Administrative Expenses
Our general and administrative expenses consist of senior management
compensation, consulting, legal, billing and collections, human resources,
information technology, accounting, insurance, and general business expenses. We
expect our general and administrative expenses, especially employee-related
costs, including stock-based compensation, insurance, accounting, and legal
fees, to continue to increase due to operating as a publicly traded company.
Financing Activities
Business Combination
On August 29, 2019, the Company and DermTech Operations, Inc. (formerly known as
DermTech, Inc.), or DermTech Operations, consummated the transactions
contemplated by the Agreement and Plan of Merger, dated as of May 29, 2019, by
and among the Company, DT Merger Sub, Inc., or Merger Sub, and DermTech
Operations. We refer to this agreement, as amended by that certain First
Amendment to Agreement and Plan of Merger dated as of August 1, 2019, as the
Merger Agreement. Pursuant to the Merger Agreement, Merger Sub merged with and
into DermTech Operations, with DermTech Operations surviving as a wholly-owned
subsidiary of the Company. We refer to this transaction as the Business
Combination.
Immediately following the completion of the Business Combination, the Company
changed its name from Constellation Alpha Capital Corp. to DermTech, Inc. and
effected a one-for-two reverse stock split of its common stock, or the Reverse
Stock Split. Prior to the closing of the Business Combination, the Company's
stock was listed on the Nasdaq Capital Market under the ticker symbol "CNAC." On
August 30, 2019, the Company's common stock commenced trading on the Nasdaq
Capital Market under the ticker symbol "DMTK."
2019 PIPE Financing
On August 29, 2019, immediately prior to the completion of the Business
Combination, the Company issued to certain accredited investors, in a private
placement transaction, or the 2019 PIPE Financing, an aggregate of 3,076,925
shares of common stock and 1,231 shares of Series A Convertible Preferred Stock
for aggregate gross proceeds of $24.0 million, or $6.50 per share of common
stock on an as-converted basis. The 2019 PIPE Financing was conducted pursuant
to the terms of separate Subscription Agreements and Amended and Restated
Subscription Agreements, dated between May 22, 2019 and August 1, 2019, entered
into by the Company and the investors. After giving effect to the Reverse Stock
Split, each share of Series A Convertible Preferred Stock was convertible into
500 shares of the Company's common stock, subject to conditions and adjustment
as provided in the Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock.
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On August 10, 2020, entities affiliated with Farallon Capital Management,
L.L.C., or the Farallon entities, converted an aggregate of 1,231 shares of
Series A Preferred Stock into 615,385 shares of common stock. On September 9,
2020, the Company filed a Certificate of Elimination of Series A Convertible
Preferred Stock with the Secretary of State of the State of Delaware to
eliminate its Series A Convertible Preferred Stock.
2020 PIPE Financing
On February 28, 2020, the Company entered into a securities purchase agreement
with certain institutional investors for a private placement of the Company's
equity securities, or the 2020 PIPE Financing. Cowen and Company, LLC served as
lead placement agent for the 2020 PIPE Financing with William Blair & Company,
L.L.C. acting as joint placement agent. Lake Street Capital Markets, LLC acted
as co-placement agent. The 2020 PIPE Financing closed on March 4, 2020.
Pursuant to the 2020 PIPE Financing, on March 4, 2020 the Company issued an
aggregate of 2,467,724 shares of common stock at a purchase price of $10.50 per
share, 3,199 shares of Series B-1 Convertible Preferred Stock, or the Series B-1
Shares, at a purchase price of $10.50 per share of common stock issuable upon
conversion thereof, which were convertible into an aggregate of up to 3,198,942
shares of common stock, and 524 shares of Series B-2 Convertible Preferred
Stock, or the Series B-2 Shares, at a purchase price of $10.50 per share of
common stock issuable upon conversion thereof, which are convertible into an
aggregate of up to 523,809 shares of common stock, for aggregate gross proceeds
of approximately $65.0 million.
At the Company's annual meeting held on May 26, 2020, the Company's stockholders
voted to approve the 2020 PIPE Financing, which resulted in the automatic
conversion of the Series B-1 Shares into 3,198,949 shares of common stock on
May 27, 2020. Each Series B-2 Share was convertible into 1,000 shares of the
Company's common stock, subject to conditions and adjustment as provided in the
Certificate of Designation of Preferences, Rights and Limitations of Series B-2
Convertible Preferred Stock. On August 10, 2020, entities affiliated with
Farallon Capital Management, L.L.C., or the Farallon entities, converted an
aggregate of 524 shares of Series B2 Preferred Stock into 523,814 shares of
common stock. On September 9, 2020, the Company filed a Certificate of
Elimination of Series B-1 Convertible Preferred Stock and Certificate of
Elimination of Series B-2 Convertible Preferred Stock with the Secretary of
State of the State of Delaware to eliminate its Series B-1 and B-2 Convertible
Preferred Stock.
2020 At-The-Market Offering
On November 10, 2020, the Company entered into a sales agreement with Cowen and
Company, LLC relating to the sale of shares of the Company's common stock from
time to time with an aggregate offering price of up to $50.0 million. During
2020, the Company issued an aggregate of 951,792 shares of common stock pursuant
to the sales agreement at a weighted average purchase price of $20.97, resulting
in aggregate gross proceeds of approximately $20.0 million. For the nine months
ended September 30, 2021, the Company issued an aggregate of 530,551 shares of
common stock pursuant to the sales agreement at a weighted average purchase
price of $46.33 resulting in aggregate gross proceeds of approximately $24.6
million, reduced by $0.7 million in issuance costs, resulting in net proceeds to
the Company of approximately $23.8 million.
2021 Underwritten Public Offering
On January 6, 2021, the Company, entered into an Underwriting Agreement with
Cowen and Company, LLC and William Blair & Company, L.L.C. as representatives of
several underwriters, or the Underwriters. The Company agreed to issue and sell
up to 4,237,288 shares of its common stock including up to 635,593 shares that
could be purchased by the Underwriters pursuant to a 30-day option granted to
the Underwriters by the Company.
On January 11, 2021, the Company closed the underwritten public offering of
4,872,881 shares of its common stock, which included the exercise in full by the
Underwriters of their option to purchase up to 635,593 additional shares, at a
price to the public of $29.50 per share. The Company's aggregate gross proceeds
from the offering, before deducting underwriting discounts and commissions and
other offering expenses, were $143.7 million.
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Results of Operations
Three Months Ended September 30, 2021 and September 30, 2020
Assay Revenue
Assay revenues grew $1.7 million, or 140%, to $3.0 million for the three months
ended September 30, 2021 compared to $1.2 million for the three months ended
September 30, 2020. Billable samples increased to approximately 11,720 for the
three months ended September 30, 2021 compared to approximately 6,700 for the
three months ended September 30, 2020. Sample volume is dependent on two major
factors: the number of clinicians who order an assay in any given quarter and
the number of assays ordered by each clinician during the period. The number of
ordering clinicians and the utilization per clinician can vary based on a number
of factors including the types of patients presenting skin cancer conditions,
clinician reimbursement, office workflow, market awareness, clinician education
and other factors. The ongoing COVID-19 pandemic has negatively affected and
will continue to negatively affect our assay revenue by, among other things,
limiting patient access to clinician offices for in-person testing and limiting
access by our sales force for in-office sales calls. Additionally, assay revenue
increased due to the effectiveness of our contracts with Blue Shield of
California, Blue Cross Blue Shield of Texas and Blue Cross Blue Shield of
Illinois.
Contract Revenue
Contract revenues with major pharmaceutical companies decreased $0.1 million, or
41%, to $0.1 million for the three months ended September 30, 2021, compared to
$0.1 million for the three months ended September 30, 2020. Contract revenue can
be highly variable as it is dependent on the pharmaceutical customers' clinical
trial progress, which can be difficult to forecast due to variability of patient
enrollment, drug safety and efficacy and other factors. The ongoing COVID-19
pandemic has negatively affected and will continue to negatively affect our
pharmaceutical customers' clinical trials. The extent of such effect on our
future revenue is uncertain and will depend on the duration and extent of the
effects of the ongoing COVID-19 pandemic on our pharmaceutical customers'
clinical trials. Many of our contracts with third parties are structured to
contain milestone billing payments, which typically are advanced payments on
work yet to be performed. These advanced payments are structured to help fund
operations and are included in deferred revenue as the work has not yet been
performed. As of September 30, 2021, the deferred revenue amount for these
contracts, which is the advanced payments minus the value of work performed, was
$1.4 million. Approximately $1.4 million was classified as short-term deferred
revenue as that portion of deferred revenue is expected to be recognized within
12 months after September 30, 2021. These advanced payments will remain in
deferred revenue until we process the laboratory portion of the contracts
allowing us to recognize the revenue.
Cost of Revenue
Cost of revenues increased $1.3 million, or 80%, to $2.9 million for the three
months ended September 30, 2021 compared to $1.6 million for the three months
ended September 30, 2020. The increase was largely attributable to a higher
billable sample volume in 2021, and higher consulting, software and equipment
costs. As of September 30, 2021, a large portion of the costs of revenue are
fixed, and these costs include the CLIA facility, quality assurance, management
and supervision and equipment calibration and depreciation. The variable cost of
revenue expenses incurred primarily relate to compensation-related costs for our
laboratory scientists and technicians, laboratory supplies, shipping costs,
equipment maintenance, and utilities. We remain committed to continuing the
automation of our laboratory processes in order to become more cost efficient
and productive.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $5.2 million, or 114%, to $9.8 million
for the three months ended September 30, 2021 compared to $4.6 million for the
three months ended September 30, 2020. The increase was primarily attributable
to higher compensation-related costs from the expansion of the commercial team,
increased spending on marketing and payor infrastructure and activities, and
additional consulting, software and travel expenses. We expect to add to our
specialty sales force, marketing and payor access teams throughout 2021 and
2022, and increase spending on direct-to-consumer marketing campaigns, which
would collectively increase our sales and marketing expenses significantly.
Research and Development
R&D expenses increased $2.8 million, or 173%, to $4.4 million for the three
months ended September 30, 2021 compared to $1.6 million for the three months
ended September 30, 2020. The increase was due to higher compensation costs of
expanding the R&D team, including the addition of a new Chief Scientific Officer
and Chief Medical Officer, increased clinical trial costs, increased spending on
laboratory supplies to support new product development, and additional
consulting expenses. We expect these expenses
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to increase as we continue to grow the R&D team and focus on the development of
our Luminate test, our basal and squamous cell skin cancer assays and other
products in our pipeline.
General and Administrative
General and administrative expenses increased $3.3 million, or 111%, to $6.2
million for the three months ended September 30, 2021 compared to $2.9 million
for the three months ended September 30, 2020. The increase was primarily due to
higher payroll-related costs and stock-based compensation as we continue to add
additional infrastructure such as human resources, billing, information
technology and legal resources, and higher consulting expenses, audit fees,
legal fees and insurance.
Interest Income, net
Interest income, net for the three months ended September 30, 2021 was $38,000
compared to interest income, net of $9,000 for the three months ended
September 30, 2020. Interest income, net for the three months ended September
30, 2021 consists primarily of interest earned on our short-term marketable
securities.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability for the three months ended
September 30, 2021 was a gain of $0.2 million compared to a gain of $0.1 million
for the three months ended September 30, 2020. The change in fair value of
warrant liability is calculated by adjusting the value of the outstanding
Private SPAC Warrants held by original holders to the current market value at
each reporting period.
Nine Months Ended September 30, 2021 and September 30, 2020
Assay Revenue
Assay revenues grew $5.4 million, or 201%, to $8.1 million for the nine months
ended September 30, 2021 compared to $2.7 million for the nine months ended
September 30, 2020. Billable samples increased to approximately 32,840 for the
nine months ended September 30, 2021 compared to approximately 15,700 for the
nine months ended September 30, 2020. The increase in assay revenue was
primarily due to higher billable sample volume and improved average selling
price, or ASP, resulting from better cash collections due to the effectiveness
of our new contracts with Blue Shield of California, Blue Cross Blue Shield of
Texas and Blue Cross Blue Shield of Illinois. The ongoing COVID-19 pandemic has
negatively affected and will continue to negatively affect our assay revenue by,
among other things, limiting patient access to clinician offices for in-person
testing and limiting access by our sales force for in-office sales calls.
Contract Revenue
Contract revenues decreased $0.5 million, or 43%, to $0.6 million for the nine
months ended September 30, 2021, compared to $1.1 million for the nine months
ended September 30, 2020. Contract revenue can be highly variable as it is
dependent on the pharmaceutical customers' clinical trial progress, which can be
difficult to forecast due to variability of patient enrollment, drug safety and
efficacy and other factors. The ongoing COVID-19 pandemic has negatively
affected and will continue to negatively affect our pharmaceutical customers'
clinical trials. The extent of such effect on our future revenue is uncertain
and will depend on the duration and extent of the effects of the ongoing
COVID-19 pandemic on our pharmaceutical customers' clinical trials.
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Cost of Revenue
Cost of revenues increased $3.2 million, or 77%, to $7.5 million for the nine
months ended September 30, 2021 compared to $4.3 million for the nine months
ended September 30, 2020. The increase was largely attributable to a higher
billable sample volume in 2021, and higher consulting, software and equipment
costs. As of September 30, 2021, a large portion of the costs of revenue are
fixed, and these costs include the CLIA facility, quality assurance, management
and supervision and equipment calibration and depreciation. The variable cost of
revenue expenses incurred primarily relate to compensation-related costs for our
laboratory scientists and technicians, laboratory supplies, shipping costs,
equipment maintenance, and utilities. We remain committed to continuing the
automation of our laboratory processes in order to become more cost efficient
and productive.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $13.3 million, or 121%, to $24.2 million
for the nine months ended September 30, 2021 compared to $11.0 million for the
nine months ended September 30, 2020. The increase was primarily attributable to
higher compensation-related costs from the expansion of the commercial team,
increased spending on marketing and payor infrastructure and activities, and
additional consulting, software and travel expenses. We expect to add to our
specialty sales force, marketing and payor access teams throughout 2021 and
2022, and increase spending on direct-to-consumer marketing campaigns, which
collectively would significantly increase our sales and marketing expenses.
Research and Development
R&D expenses increased $6.9 million, or 204%, to $10.3 million for the nine
months ended September 30, 2021 compared to $3.4 million for the nine months
ended September 30, 2020. The increase was due to higher compensation costs of
expanding the R&D team, including the addition of a new Chief Scientific Officer
and Chief Medical Officer, increased clinical trial costs, increased consulting,
software and travel expenses, and increased spending on laboratory supplies to
support new product development. We expect these expenses to increase as we
continue to grow the R&D team and focus on the development of our Luminate test,
our basal and squamous cell skin cancer assays and other products in our
pipeline.
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General and Administrative
General and administrative expenses increased $6.7 million, or 61%, to $17.7
million for the nine months ended September 30, 2021 compared to $11.0 million
for the nine months ended September 30, 2020. The increase was primarily due to
higher payroll-related costs and stock-based compensation as we continue to add
additional infrastructure such as human resources, billing, information
technology and legal resources, higher insurance, taxes, public company costs,
audit fees, consulting expenses, and facility costs, offset by lower loss
contingency and legal fees.
Interest Income, net
Interest income, net for the nine months ended September 30, 2021 was $0.1
million compared to interest income, net of $19,000 for the nine months ended
September 30, 2020. Interest income, net for the nine months ended September 30,
2021 consists primarily of interest earned on our short-term marketable
securities.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability for the nine months ended
September 30, 2021 was a loss of $1.4 million compared to a gain of $31,000 for
the nine months ended September 30, 2020. The change in fair value of warrant
liability is calculated by adjusting the value of the outstanding Private SPAC
Warrants held by original holders to the current market value at each reporting
period.
Liquidity and Capital Resources
We have never been profitable and have historically incurred substantial net
losses, including net losses of $36.5 million for the twelve months ended
December 31, 2020 and $52.3 million for the nine months ended September 30,
2021. As of September 30, 2021, our accumulated deficit was $180.3 million. For
the nine months ended September 30, 2021, we had negative operating cash flow of
$39.4 million. We completed the 2020 PIPE Financing in March 2020, which raised
a total of $65.0 million in gross proceeds. At the end of 2020 and through
September 30, 2021, we raised approximately $44.5 million in gross proceeds
facilitated through our At-The-Market Offering. In addition, we completed the
2021 Underwritten Public Offering in January 2021, which raised a total of
$143.7 million in gross proceeds. We have historically financed operations
through private and public placement equity offerings.
We expect our losses to continue as a result of costs relating to ongoing R&D
expenses, increased general and administrative expenses and increased sales and
marketing costs for existing and planned products. These losses have had, and
will continue to have, an adverse effect on our working capital. Because of the
numerous risks and uncertainties associated with our commercialization and
development efforts, we are unable to predict when we will become profitable,
and we may never become profitable. Our inability to achieve and then maintain
profitability would negatively affect our business, financial condition, results
of operations and cash flows.
As of September 30, 2021, our cash and cash equivalents totaled approximately
$204.1 million and short-term marketable securities totaled approximately $45.4
million. Based on our current business operations, we believe our current cash
and cash equivalents will be sufficient to meet our anticipated cash
requirements for at least the next 12 months. While we believe we have enough
capital to fund anticipated operating costs for at least the next 12 months, we
expect to incur significant additional operating losses over at least the next
several years. We anticipate that we will raise additional capital through
equity offerings, debt financings, collaborations or licensing arrangements in
order to support our planned operations and to continue developing and
commercializing genomic tests. We may also consider raising additional capital
in the future to expand our business, to pursue strategic investments or to take
advantage of financing opportunities. Our present and future funding
requirements will depend on many factors, including:
• our revenue growth rate and ability to generate cash flows from operating
activities;
• the willingness of clinicians and their patients to use our telemedicine
option for the DermTech Melanoma Test and the duration and extent of the
effects of the ongoing COVID-19 pandemic in reducing patient access to
clinician offices for in-person testing and access by our sales force for
in-office sales calls;
• the duration and extent of the effects of the ongoing COVID-19 pandemic on
our pharmaceutical customers' clinical trials;
• our sales and marketing and R&D activities;
• effects of competing technological and market developments;
• costs of and potential delays in product development;
• changes in regulatory oversight applicable to our tests; and
• timing of and costs related to future international expansion.
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There can be no assurances as to the availability of additional financing or the
terms upon which additional financing may be available to us. If we are unable
to obtain sufficient funding at acceptable terms, we may be forced to
significantly curtail our operations, and the lack of sufficient funding may
have a material adverse impact on our ability to continue as a going concern.
Cash Flow Analysis
Nine Months Ended September 30, 2021
Net cash used in operating activities for the nine months ended September 30,
2021 totaled $39.4 million, primarily driven by the $52.3 million net loss
offset partially by non-cash related items, including $9.4 million in
stock-based compensation, $1.4 million from the change in fair value of warrant
liability, $0.9 million in amortization of operating lease right of use assets
and $0.7 million in depreciation. In addition, we had a cash inflow of $1.9
million from the increase in accounts payable and accrued compensation and $1.1
million from the increase in accrued liabilities and deferred revenue, which was
offset by a cash outflow of $1.3 million through the increase of accounts
receivable and $1.1 million through the decrease of the operating lease
liability.
Net cash used in investing activities for the nine months ended September 30,
2021 totaled $8.0 million, which related to the outflow from the purchase of
$25.2 million of marketable securities and $1.7 million from the purchase of
equipment offset by the inflow from the sale and maturity of marketable
securities of $18.8 million. Additional laboratory equipment investment will be
needed to install complex automation systems and other genomic testing equipment
needed to expand testing capacity.
Net cash provided by financing activities for the nine months ended September
30, 2021 totaled $230.3 million, which was driven by $134.6 million in net
proceeds raised from the 2021 Underwritten Public Offering, $23.8 million in net
proceeds from the sale of securities under our At-The-Market Offering and $70.3
million in proceeds from the exercise of warrants, predominately from the
exercise of 12.1 million of our outstanding SPAC Warrants.
Nine Months Ended September 30, 2020
Net cash used in operating activities for the nine months ended September 30,
2020 totaled $21.9 million, primarily driven by the $25.8 million net loss
offset partially by non-cash related items, including $3.5 million in
stock-based compensation and $0.3 million in depreciation. In addition, we had a
cash inflow of $1.6 million from the increase in accrued liabilities and
deferred revenue, which was offset by a cash outflow of $0.9 million through the
increase of prepaid expenses and other current assets and $0.3 million through
the increase of accounts receivable.
Net cash used in investing activities for the nine months ended September 30,
2020 totaled $38.5 million, which related to the outflow from the purchase of
$36.9 million of marketable securities and $1.6 million from the purchase of
equipment.
Net cash provided by financing activities for the nine months ended September
30, 2020 totaled $59.7 million, which was driven by $59.9 million in net
proceeds raised from the 2020 PIPE Financing and $1.2 million from the exercise
of stock options and warrants. This was offset by the payment made by the
Company of the deferred underwriting fees of $1.4 million.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements, as
such term is defined under Item 303 of Regulation S-K, that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
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Critical Accounting Policies and Significant Judgments and Estimates
Critical accounting policies, significant judgments, and estimates are those
that we believe are most important for the portrayal of the Company's financial
condition and results, and that require management's most subjective and complex
judgments. Judgments and uncertainties regarding the application of these
policies may result in materially different amounts being reported under various
conditions or using different assumptions. There have been no material changes
to the critical accounting estimates previously disclosed in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and
disclosed in Note 1(k) and Note 1(q) of the condensed consolidated financial
statements herein.
The Company is an "emerging growth company," as defined in the Jumpstart Our
Business Startups Act of 2012, or the JOBS Act. The JOBS Act provides that an
emerging growth company can take advantage of the extended transition period
afforded by the JOBS Act for the implementation of new or revised accounting
standards. The Company elected not to "opt out" of such extended transition
period, which means that when a standard is issued or revised and it has
different application dates for public or non-public entities, the Company has
adopted the new or revised standard at the time non-public entities adopt the
new or revised standard. Because the market value of the Company's common stock
held by non-affiliates exceeded $700.0 million as of June 30, 2021, the Company
will have been public for more than one year and it has filed at least one
annual report, the Company will cease to be an emerging growth company as of
December 31, 2021. As a result, beginning with the Company's Annual Report on
Form 10-K for the year ending December 31, 2021, the Company will be subject to
certain requirements that apply to other public companies but did not previously
apply to the Company due to its status as an emerging growth company, including
the provisions of Section 404(b) of the Sarbanes-Oxley Act, which require that
the Company's independent registered public accounting firm provides an
attestation report on the effectiveness of the Company's internal control over
financial reporting.
Recent Accounting Pronouncements
See Item 1 of Part I, Note 1(t) and Note 1(u) of the condensed consolidated
financial statements herein.
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