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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-10 · 178 added, 99 removed, 232 unchanged (54% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years ended December 31, 2020 and 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies and Significant Judgments and Estimates, included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission, or the SEC, on March 11, 2021.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years ended December 31, 2020 and 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies and Significant Judgments and Estimates, included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission, or the SEC, on March 11, 2021.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to Castle Biosciences, Inc.

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

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

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

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

In May 2021, we completed the acquisition of all the equity of Myriad myPath, LLC, or the Myriad myPath Laboratory, from Myriad Genetics for a cash purchase price of $32.5 million.

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

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

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

current estimated U.S.

total addressable market.

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

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

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

For the six months ended June 30, 2021 our revenue was $45.6 million compared to $30.1 million for the six months ended June 30, 2020.

The numbers of DecisionDx-Melanoma, DecisionDx-SCC, DecisionDx DiffDx-Melanoma and myPath Melanoma (collectively, our comprehensive diagnostic offering for difficult-to-diagnose melanocytic lesions, or CDO), and DecisionDx-UM test reports delivered by us during the six months ended June 30, 2021 and 2020 are presented in the table below:

Proprietary Dermatologic GEP Tests

DecisionDx-SCC (1)

DecisionDx DiffDx-Melanoma (2)

Dermatologic Total DecisionDx-UM Grand Total

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Q2 2021 5,128 784 627 6,539 468 7,007

Q2 2020 3,008 — — 3,008 306 3,314

For the six months ended June 30, 2021

9,188 1,311 845 11,344 805 12,149

Q1 2020 4,574 — — 4,574 361 4,935

Q2 2020 3,008 — — 3,008 306 3,314

For the year ended December 31, 2020 16,232 485 73 16,790 1,395 18,185

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

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

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

(2) Includes DecisionDx DiffDx-Melanoma, which we commercially launched on November 2, 2020, and myPath Melanoma, which we began offering following the completion of the acquisition of Myriad myPath Laboratory on May 28, 2021.

For a discussion of how we recognize revenue derived from our GEP tests, refer to “Net Revenues” under “Components of Results of Operations” below.

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

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

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

For the six months ended June 30, 2021, we saw approximately 872 new ordering clinicians for our dermatologic tests compared to 697 during the same period of 2020.

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

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

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

For example, we found that for the six months ended June 30, 2021, approximately 70% of all DecisionDx-SCC ordering clinicians were clinicians that had also ordered our DecisionDx-Melanoma test during that same period.

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

We began 2020 with 32 outside sales territories.

In the third quarter of 2020, we expanded our commercial team to create a dedicated sales force of ten territories to support the launch of our DecisionDx Diff-Dx Melanoma test to dermatopathologists.

During the first half of 2021, we folded this dedicated team into our existing sales team as well as completed a further expansion, bringing our dermatologic sales force to the mid-60s.

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

commercialization activities for those products.

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

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

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

The number of test reports we generate is a key indicator that we use to assess our business.

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

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

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

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

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

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

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

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

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

In the second quarter of 2021, Noridian and certain other MACs posted a draft revised LCD for DecisionDx-Melanoma.

The draft LCD includes commentary about certain recent publications regarding the clinical utility of GEP tests and was posted to give providers an opportunity to comment.

Each of the draft LCDs include an assessment stating that the MAC does not believe that the new data are sufficient to change the coverage criteria.

We have submitted comments on the draft LCD.

The comment period on the last of these draft LCDs closed on August 8, 2021.

We are unable to predict any future developments related to this matter.

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

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

Recent Development

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

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

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

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

Impact of COVID-19 Pandemic

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

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

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

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

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

We believe the decreases in our test report volume in the first quarter of 2021 were linked to delays in the diagnoses as well as the cumulative impact on promotional responsiveness as a result of reduced sales calls per day and in-person sales call during the COVID-19 pandemic.

• We saw positive trends in orders and test report volume in the second quarter of 2021.

In the second quarter of 2021, test reports delivered for DecisionDx-Melanoma increased by 70.5% compared to the second quarter of 2020 and increased 26.3% compared to the first quarter of 2021.

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

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

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

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

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

During the three months ended June 30, 2021, we saw improvement in both the number of promotional calls per day as well as a continued shift from virtual to in-person sales calls with in-person sales calls accounting for nearly 90% of all calls during such period.

However, we have not yet achieved pre-COVID-19 levels of calls per day per sales representative.

• Our future results will be dependent upon the extent and duration of the COVID-19 crisis, including the emergence and spread of variants of the virus, such as the Delta variant, and government restrictions, which are beyond our control.

Although state and local government restrictions put in place to slow the spread of the virus have been eased in certain locations, restrictions may be reinstated from time to time in various regions depending on the circumstances, potentially impacting the flow of future patient visits as well as access to our sales targets.

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

For example, our analysis of third-party data indicates that cutaneous melanoma diagnoses during the three months ended June 30, 2021 remain approximately 12% below historical 2019 levels.

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

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

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

In the near term, our report volume may be negatively impacted by ongoing developments with the COVID-19 pandemic, as discussed above.

• Reimbursement.

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Our revenue depends on our ability to demonstrate the value of our products to these payors.

• Gross margin.

We believe that our gross margin is an important indicator of the operating performance of our business.

Higher gross margins reflect the average selling price of our tests, as well as the operating efficiency of our laboratory operations.

• New product development.

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

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

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

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

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

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

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

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

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

Cost of Sales

Cost of Sales (exclusive of amortization of acquired intangible asset)

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

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

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

Research and Development

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

We have also initiated two additional disease studies for pipeline tests for new indications.

Selling, General and Administrative

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

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

Other administrative and professional services expenses within SG&A are expected to increase with the

scale of our business, but selling and marketing-related expenses are expected to increase significantly, consistent with our growth strategy.

Amortization of Acquired Intangible Asset

Amortization of acquired intangible asset is related to the developed technology we acquired in May 2021, which is attributable to the myPath Melanoma test for difficult-to-diagnose melanocytic lesions.

Other Operating Income

Other operating income consists of an automatic payment received from the U.S.

Department of Health and Human Services for provider relief funds pursuant to the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, also known as the CARES Act.

Interest Income

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Income Tax Expense

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

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

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

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Results of Operations

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

Certain prior year amounts in the tables below have been reclassified to conform to the current year presentation.

Specifically, we no longer present gross margin and therefore the cost of sales line is now presented within the operating expenses section.

This reclassification had no impact on operating (loss) income, loss before income taxes or net loss.

Comparison of the three months ended June 30, 2021 and 2020

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

Three Months Ended

March 31, Change

June 30, Change

Net revenues $ 22,758 $ 12,715 $ 10,043 79.0 %

Cost of sales 3,028 2,391 637 26.6 %

Gross margin 19,785 15,027 4,758 31.7 %

Gross margin percentage 86.7 % 86.3 %

Operating expenses:

Operating expenses and other operating income:

Cost of sales (exclusive of amortization of acquired intangible asset) 3,697 2,146 1,551 72.3 %

Research and development 6,793 2,704 4,089 151.2 %

Selling, general and administrative 20,822 10,392 10,430 100.4 %

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

Amortization of acquired intangible asset 256 — 256 NA

Other operating income — (1,882) 1,882 100.0 %

Total operating expenses, net 31,568 13,360 18,208 136.3 %

Operating loss (8,810) (645) (8,165) NM

Interest income 24 38 (14) (36.8) %

Interest expense — (769) 769 100.0 %

Loss before income taxes (8,786) (1,376) (7,410) NM

Income tax expense 5 — 5 NA

Net loss $ (8,791) $ (1,376) $ (7,415) NM

NA = not applicable

NM = not meaningful

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

Three Months Ended June 30,

2021 2020 Change

Cost of sales (exclusive of amortization of acquired intangible asset) $ 415 $ 200 $ 215

Research and development 1,073 231 842

Selling, general and administrative 3,278 1,222 2,056

Total stock-based compensation expense $ 4,766 $ 1,653 $ 3,113

For the three months ended June 30, 2021 net revenues increased by $10.0 million, or 79.0%, to $22.8 million compared to the three months ended June 30, 2020 and was primarily attributable to higher DecisionDx-Melanoma and DecisionDx-UM test revenues.

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

We believe the higher test report volume during the three months ended June 30, 2021 reflects the relaxing of COVID-19 restrictions and the related positive impacts on the flow of patient visits as well as the effects of our sales force expansion.

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

For the three months ended June 30, 2021, we experienced a 68.9% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the three months ended June 30, 2020.

For the three months ended June 30, 2021 and 2020, we recorded net (negative) positive revenue adjustments of $(0.2) million and $2.3 million, respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

Cost of Sales (exclusive of amortization of acquired intangible asset)

Cost of sales (exclusive of amortization of acquired intangible asset) for the three months ended June 30, 2021 increased by $1.6 million, or 72.3%, compared to the three months ended June 30, 2020, primarily due to increased costs for supplies and services, attributable to the higher activity levels, as well as higher personnel costs due to additional headcount in our laboratory testing operations.

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

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

Research and Development

Research and development expenses increased by $4.1 million, or 151.2%, for the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

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

Selling, General and Administrative

SG&A expense increased by $10.4 million, or 100.4%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Approximately 68% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

We expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test and further expanded our sales team during the first and second quarters of 2021, bringing our dermatology-facing commercial team to the mid-60s.

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

The remainder of the increase was primarily associated with higher travel costs and additional expenses related to conferences and training events.

Stock-based compensation expense included in SG&A expense was $3.3 million for the three months ended June 30, 2021 compared to $1.2 million for the same period in 2020, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth in headcount.

Amortization of Acquired Intangible Asset

Amortization of acquired intangible asset for the three months ended June 30, 2021 of $0.3 million is related to the developed technology we acquired in May 2021, which is attributable to the myPath Melanoma test.

We estimate that going forward, this amortization will be approximately $2.8 million per year, or $0.7 million per quarter.

Other Operating Income

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

Interest Expense

Interest expense decreased by $0.8 million, or 100.0%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

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

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $4.8 million for the three months ended June 30, 2021 compared to $1.7 million for the three months ended June 30, 2020.

We expect material increases in stock-based compensation expense in future periods, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth in our headcount.

As of June 30, 2021 we had 292 employees compared to 201 as of December 31, 2020.

As of June 30, 2021, the total unrecognized stock-based compensation cost related to outstanding awards was $55.2 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.1 years.

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

Results of Operations

Comparison of the six months ended June 30, 2021 and 2020

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

Six Months Ended June 30, Change

Net revenues $ 45,571 $ 30,133 $ 15,438 51.2 %

Operating expenses and other operating income

Cost of sales (exclusive of amortization of acquired intangible asset) 6,725 4,537 2,188 48.2 %

Research and development 12,701 5,617 7,084 126.1 %

Selling, general and administrative 38,983 21,470 17,513 81.6 %

Amortization of acquired intangible asset 256 — 256 NA

Other operating income — (1,882) 1,882 100.0 %

Total operating expenses, net 58,665 29,742 28,923 97.2 %

Operating (loss) income (13,094) 391 (13,485) NM

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Interest expense — (1,533) 1,533 100.0 %

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

Income tax expense — — — — %

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

Loss before income taxes (13,066) (806) (12,260) NM

Income tax expense 5 — 5 NA

Net loss $ (13,071) $ (806) $ (12,265) NM

NA = not applicable

NM = not meaningful

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

Three Months Ended March 31,

Six Months Ended June 30,

2021 2020 Change

Cost of sales $ 510 $ 206 $ 304

Cost of sales (exclusive of acquired intangible asset amortization) $ 925 $ 406 $ 519

Research and development 2,131 465 1,666

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Total stock-based compensation expense $ 9,679 $ 3,230 $ 6,449

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

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

For the six months ended June 30, 2021 net revenues increased by $15.4 million, or 51.2%, to $45.6 million compared to the six months ended June 30, 2020 and was primarily attributable to higher DecisionDx-Melanoma and DecisionDx-UM test revenues.

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

We believe the higher test report volume during the six months ended June 30, 2021 reflects the relaxing of COVID-19 restrictions and the related positive impacts on the flow of patient visits as well as the effects of our sales force expansion.

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

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

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

Cost of Sales

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

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

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

For the six months ended June 30, 2021, we experienced a 21.1% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the six months ended June 30, 2020.

For the six months ended June 30, 2021 and 2020, we recorded net positive revenue adjustments of $5.1 million and $1.0 million, respectively, related to tests delivered in previous periods, associated with changes in estimated variable consideration.

The year-over-year increase is primarily attributable to favorable

adjustments related to the settlement and collection during the six months ended June 30, 2021 of certain groups of receivables from prior years.

Cost of Sales (exclusive of amortization of acquired intangible asset)

Cost of sales (exclusive of amortization of acquired intangible asset) for the six months ended June 30, 2021 increased by $2.2 million, or 48.2%, compared to the six months ended June 30, 2020, primarily due to higher personnel costs due to additional headcount in our laboratory testing operations and increased costs for supplies and services, attributable to the higher activity levels.

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

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Research and Development

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

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

Research and development expenses increased by $7.1 million, or 126.1%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.

Selling, General and Administrative

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

SG&A expense increased by $17.5 million, or 81.6%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Approximately 68% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

We expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test and further expanded our sales team during the six months ended June 30, 2021, bringing our dermatology-facing commercial team to the mid-60s.

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

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

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

The remainder of the increase was primarily associated with additional expenses related to conferences and training events as well as higher travel costs.

Stock-based compensation expense included in SG&A expense was $6.6 million for the six months ended June 30, 2021 compared to $2.4 million for the same period in 2020, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth in headcount.

Amortization of Acquired Intangible Asset

Amortization of acquired intangible asset for the six months ended June 30, 2021 of $0.3 million is related to the developed technology we acquired in May 2021, which is attributable to the myPath Melanoma test.

We estimate that going forward, this amortization will be approximately $2.8 million per year, or $0.7 million per quarter.

Other Operating Income

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

Interest Income

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

Interest income decreased by $0.3 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

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

Interest Expense

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

Interest expense decreased by $1.5 million, or 100.0%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

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

Stock-Based Compensation Expense

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

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

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

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

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $9.7 million for the six months ended June 30, 2021 compared to $3.2 million for the six months ended June 30, 2020.

As of June 30, 2021 we had 292 employees compared to 201 as of December 31, 2020.

As of June 30, 2021, the total unrecognized stock-based

compensation cost related to outstanding awards was $55.2 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.1 years.

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

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

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

As of June 30, 2021 and December 31, 2020, we had cash and cash equivalents of $368.3 million and $409.9 million, respectively.

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

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

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

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

Recoupment will commence April 2021 during which the first eleven months CMS will apply 25% of the Medicare payments otherwise owed to us against the balance of the Advance Payment.

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

Recoupment of the Advance Payment commenced in April 2021.

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

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

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

Through June 30, 2021, $2,173,000 has been applied against the balance of the Advance Payment.

Funding Requirements

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

For example, in May 2021, we completed the acquisition of the Myriad myPath Laboratory for $32.5 million, as discussed above.

We funded this acquisition using existing cash and cash equivalents.

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

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

For the six months ended June 30, 2021 we had a net loss of $13.1 million and an accumulated deficit of $75.6 million as of June 30, 2021.

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

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

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

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

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

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

Any disruptions to, or volatility in, the credit and financial markets or any deterioration in overall economic conditions may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

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

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

Three Months Ended

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

Six Months Ended

Net cash (used in) provided by operating activities $ (10,069) $ 13,250

Net cash used in investing activities (34,845) (2,256)

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Operating Activities

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

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

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

Net cash used in operating activities was $10.1 million for the six months ended June 30, 2021 and was primarily attributable to the net loss of $13.1 million, increases in accounts receivable of $5.3 million, and recoupment of the Advance Payment of $2.2 million, partially offset by non-cash stock compensation expense of $9.7 million and decreases in prepaid expenses and other current assets of $1.3 million.

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

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

Investing Activities

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

Net cash used in investing activities for the six months ended June 30, 2021 consisted primarily of the purchase of Myriad myPath Laboratory of $33.2 million (including transaction costs) and purchases of property and equipment of $1.7 million.

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

Financing Activities

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

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

Net cash provided by financing activities was $3.4 million for the six months ended June 30, 2021 and primarily consisted of $2.3 million in proceeds from the exercise of stock options and $1.4 million in proceeds from contributions to the employee stock purchase plan.

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

Critical Accounting Policies and Significant Judgments and Estimates

During the three months ended March 31, 2021, there were no significant changes to the information discussed under “Critical Accounting Policies and Significant Judgments and Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2020.

During the six months ended June 30, 2021, there were no significant changes to the information discussed under “Critical Accounting Policies and Significant Judgments and Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2020.

Recent Accounting Pronouncements

Refer to Note 2, ‘‘Summary of Significant Accounting Policies,’’ in the accompanying notes to our unaudited condensed financial statements included in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

Refer to Note 2, ‘‘Summary of Significant Accounting Policies,’’ in the accompanying notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

JOBS Act Accounting Election

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Thus, an emerging growth company can delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

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

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

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

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

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

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

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

Because the market value of our common stock held by non-affiliates exceeded $700.0 million as of June 30, 2021, we will no longer be an emerging growth company effective December 31, 2021.

This means that the consolidated financial statements that we include in our next Annual Report on Form 10-K must comply with the public company adoption dates for new or revised accounting standards.

Further, we will be required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley regarding our internal control over financial reporting as of December 31, 2021.

Qualitative and Quantitative Disclosures About Market Risk.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis