What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-09 · 136 added, 102 removed, 308 unchanged (44% of the section changed)

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Our non-invasive products utilize proprietary algorithms to provide an assessment of a patient’s specific risk of metastasis or recurrence of their cancer, allowing physicians to identify patients who are likely to benefit from an escalation of care as well as those who may avoid unnecessary medical and surgical interventions.

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

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 five proprietary multianalyte assay with algorithmic analysis gene expression profile, or GEP, products and generate substantially all of our revenue from DecisionDx-Melanoma and DecisionDx-UM.

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

This test has two current clinically actionable uses.

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We launched DecisionDx-Melanoma in May 2013.

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

We launched DecisionDx-UM in January 2010.

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

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

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

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

Our myPath Melanoma offering complements our DecisionDx DiffDx-Melanoma offering and enables us to provide a comprehensive diagnostic offering (or CDO) molecular testing solution for difficult-to-diagnose melanocytic lesions.

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

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

current estimated U.S.

total addressable market.

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

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

We launched DecisionDx-UM in January 2010.

In October 2021, we signed a definitive agreement to acquire Cernostics, Inc., or Cernostics.

Cernostics specializes in spatial biology and artificial intelligence-driven image analysis of tissue biopsies.

Its TissueCypher® Barrett’s Esophagus Assay is a precision medicine test designed to predict future development of high-grade dysplasia and/or esophageal cancer in patients with Barrett’s esophagus.

Under the terms of the definitive agreement, Cernostics will become our wholly owned subsidiary.

Upon finalization of the transaction, the management team and other staff based in Pittsburgh are expected to stay with us.

Cernostics’ laboratory and operations will remain in Pittsburgh.

We believe the combined strengths of Castle and Cernostics will position us for continued growth and success in the diagnostics space, complementing our first-to-market dermatologic franchise.

At closing, we will pay upfront consideration of approximately $30 million, which may consist entirely of cash or a combination of $20 million in cash and $10 million in shares of our common stock, at our sole discretion.

Under the definitive agreement, we have also agreed to pay up to an additional $50 million in cash or our common stock, at our sole discretion, based on the achievement of certain commercial milestones relating to the year ending December 31, 2022.

The closing is subject to delivery of certain financial statements to us by Cernostics, the continued of employment of certain Cernostics personnel and satisfaction of other customary conditions.

We have processed over 90,000 clinical samples since our inception.

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:

For the nine months ended September 30, 2021 our revenue was $69.0 million compared to $45.4 million for the nine months ended September 30, 2020.

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

A test report is generated when we receive a sample in our laboratory, the relevant information relating to that test is entered into our Laboratory Information Management System, the genomic profile of the sample is performed and a report providing the results of that profile is sent to the physician who ordered the test.

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 nine months ended September 30, 2021 and 2020 are presented in the table below:

Proprietary Dermatologic GEP Tests

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

For the six months ended June 30, 2021

Q3 2021 5,505 934 913 7,352 375 7,727

For the nine months ended September 30, 2021

14,693 2,245 1,758 18,696 1,180 19,876

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Q2 2020 3,008 — — 3,008 306 3,314

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

Q3 2020 4,404 57 — 4,461 318 4,779

For the nine months ended September 30, 2020 11,986 57 — 12,043 985 13,028

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

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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 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.

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.

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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.

commercialization activities for those products.

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.

In connection with our pending acquisition of Cernostics, we expect to hire a dedicated commercial team of initially 13 to 15 outside sales territories, along with commensurate internal sales associates and medical science liaisons, to support the TissueCypher Barrett’s Esophagus Assay.This dedicated team will focus on gastroenterology specialists that diagnose and manage patients with Barrett’s Esophagus.

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

For the nine months ended September 30, 2021, we saw approximately 1,408 new ordering clinicians for our dermatologic tests compared to 1,047 during the same period of 2020.

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

For example, we found that for the nine months ended September 30, 2021, approximately 76% of all DecisionDx-SCC ordering clinicians were clinicians that had also ordered our DecisionDx-Melanoma test during that same period.

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

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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 rate.

Note that our rate for 2020 was set by Noridian, our local MAC, but our rate for 2021 for DecisionDx-UM is $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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The dossier was accepted as complete in the first quarter of 2021.

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

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

As of today, the Palmetto MolDx program has not posted a second open comment period for 2021.

Accordingly, given the proximity to year end, we believe that the next open comment period for MolDx LCDs will be in the first quarter of 2022.

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.

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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.

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

In the second and third quarters of 2021, test reports delivered for DecisionDx-Melanoma increased by 70.5% and 25.0%, respectively, compared to the same quarters in 2020.

On a sequential basis, second quarter 2021 test report volume for DecisionDx-Melanoma increased by 26.3% compared to the first quarter of 2021 and third quarter 2021 test report volume for DecisionDx-Melanoma increased by 7.4% compared to the second 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 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.

Since the beginning of 2021, we have seen improvement in both the number of promotional calls per day as well as a continued shift from virtual to in-person sales calls.

During the three-months ended September 30, 2021, in-person sales calls accounting for approximately 90% of all calls during such period.

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

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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.

For example, our analysis of third-party data indicates that cutaneous melanoma diagnoses during the three months ended September 30, 2021 remain approximately 16% 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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We also sometimes present, on a limited basis, data on the number of orders received.

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

We believe order data can provide additional insight on current demand trends, particularly during the COVID-19 pandemic

and with respect to new product launches, when considered in conjunction with test report volume.

However, orders received in a particular period do not necessarily correspond with actual delivered test reports or reported revenues for the same period or subsequent periods.

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

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

A dermatologic test is DecisionDx-Melanoma, DecisionDx-SCC or our CDO.

We believe this metric is useful in evaluating the effectiveness of our sales and marketing efforts in establishing new relationships with clinicians and increasing the adoption of our dermatologic tests.

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

We expect to use a portion of the proceeds from the June 2020 and December 2020 follow-on public offerings to further support and accelerate our research and development activities, including two important studies that we have recently commenced to support our DecisionDx-Melanoma test.

We expect to use a portion of the proceeds from the June 2020 and December 2020 follow-on public offerings to further support and accelerate our research and development activities, including three important studies that are underway to support our DecisionDx-Melanoma test.

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

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

The third is the DECIDE study, which is designed to determine the association of GEP test results with SLNB surgical decisions in patients eligible for SLNB as well as to track outcomes for patients who did and did not undergo SLNB.

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.

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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.

Other Operating Loss

Other operating loss reflects the reversal of previously recognized other operating income associated with an automatic payment for relief funds received from the U.S.

Department of Health and Human Services, or HHS, pursuant to the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, or the CARES Act, as discussed further below.

Interest Income

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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

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

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

Three Months Ended

June 30, Change

September 30, Change

Net revenues $ 23,475 $ 15,217 $ 8,258 54.3 %

Operating expenses and other operating income:

Operating expenses and other operating loss:

Cost of sales (exclusive of amortization of acquired intangible asset) 4,500 2,475 2,025 81.8 %

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Amortization of acquired intangible asset 694 — 694 NA

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

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

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

Total operating expenses 35,289 19,118 16,171 84.6 %

Operating loss (11,814) (3,901) (7,913) NM

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

Three Months Ended June 30,

Three Months Ended

September 30,

2021 2020 Change

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Total stock-based compensation expense $ 5,210 $ 2,118 $ 3,092

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.

For the three months ended September 30, 2021 net revenues increased by $8.3 million, or 54.3%, to $23.5 million compared to the three months ended September 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.

We believe the higher test report volume during the three months ended September 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.

For the three months ended September 30, 2021, we experienced a 24.5% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the three months ended September 30, 2020.

For the three months ended September 30, 2021 and 2020, we recorded net (negative) positive revenue adjustments of $(0.1) million and $1.5 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.

Cost of sales (exclusive of amortization of acquired intangible asset) for the three months ended September 30, 2021 increased by $2.0 million, or 81.8%, compared to the three months ended September 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.

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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.

Research and development expenses increased by $4.4 million, or 145.3%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.

Approximately 55% 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.

Stock-based compensation expense included in research and development expense was $1.1 million for the three months ended September 30, 2021 compared to $0.4 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.

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.

SG&A expense increased by $10.9 million, or 93.1%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Approximately 67% of the increase is attributable to higher personnel costs, particularly due to increased headcount.

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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.

Stock-based compensation expense included in SG&A expense was $3.5 million for the three months ended September 30, 2021 compared to $1.5 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.

Amortization of acquired intangible asset for the three months ended September 30, 2021 of $0.7 million is related to the developed technology we acquired in May 2021, which is attributable to the myPath Melanoma test.

Other Operating Loss

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

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

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

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

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

However, in the fourth quarter of 2020, a legislative change was enacted affecting the program, under which we concluded it is reasonably assured we will qualify to retain the funds.

Accordingly, we recognized the income again in the fourth quarter of 2020.

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.

Interest expense decreased by $0.7 million, or 100.0%, for the three months ended September 30, 2021 compared to the three months ended September 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.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $5.2 million for the three months ended September 30, 2021 compared to $2.1 million for the three months ended September 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.

As of September 30, 2021 we had 311 employees compared to 201 as of December 31, 2020.

As of September 30, 2021, the total unrecognized stock-based compensation cost related to outstanding awards was $56.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 2.9 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

Comparison of the nine months ended September 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

Nine Months Ended

September 30, Change

Net revenues $ 69,046 $ 45,350 $ 23,696 52.3 %

Operating expenses and other operating income

Operating expenses:

Cost of sales (exclusive of amortization of acquired intangible asset) 11,225 7,012 4,213 60.1 %

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Amortization of acquired intangible asset 950 — 950 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

Total operating expenses 93,954 48,860 45,094 92.3 %

Operating loss (24,908) (3,510) (21,398) NM

Interest income 51 354 (303) (85.6) %

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

Six Months Ended June 30,

Nine Months Ended

September 30,

2021 2020 Change

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Total stock-based compensation expense $ 14,889 $ 5,348 $ 9,541

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 nine months ended September 30, 2021 net revenues increased by $23.7 million, or 52.3%, to $69.0 million compared to the nine months ended September 30, 2020 and was primarily attributable to higher DecisionDx-Melanoma and DecisionDx-

UM test revenues.

To a lesser extent, the year-over-year increase also reflects revenues from DecisionDx-SCC, which commercially launched in August 2020.

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

We believe the higher test report volume for DecisionDx-Melanoma and DecisionDx-UM during the nine months ended September 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 nine months ended September 30, 2021, we experienced a 22.4% increase in total DecisionDx-Melanoma and DecisionDx-UM test reports delivered, compared to the nine months ended September 30, 2020.

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.

For the nine months ended September 30, 2021 and 2020, we recorded net positive revenue adjustments of $4.1 million and $0.2 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 nine months ended September 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.

Cost of sales (exclusive of amortization of acquired intangible asset) for the nine months ended September 30, 2021 increased by $4.2 million, or 60.1%, compared to the nine months ended September 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.

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

Stock-based compensation expense included in cost of sales expense was $1.5 million for the nine months ended September 30, 2021 compared to $0.7 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.

Research and Development

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.

Research and development expenses increased by $11.5 million, or 132.9%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

Approximately 61% 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.

Stock-based compensation expense included in research and development expense was $3.3 million for the nine months ended September 30, 2021 compared to $0.8 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.

Selling, General and Administrative

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.

SG&A expense increased by $28.4 million, or 85.6%, for the nine months ended September 30, 2021 compared to the nine months ended September 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.

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 nine months ended September 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 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.

Stock-based compensation expense included in SG&A expense was $10.1 million for the nine months ended September 30, 2021 compared to $3.8 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.

Amortization of acquired intangible asset for the nine months ended September 30, 2021 of $1.0 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 six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Interest income decreased by $0.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 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 $1.5 million, or 100.0%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Interest expense decreased by $2.2 million, or 100.0%, for the nine months ended September 30, 2021 compared to the nine months ended September 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 $9.7 million for the six months ended June 30, 2021 compared to $3.2 million for the six months ended June 30, 2020.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $14.9 million for the nine months ended September 30, 2021 compared to $5.3 million for the nine months ended September 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.

As of September 30, 2021 we had 311 employees compared to 201 as of December 31, 2020.

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

As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $363.2 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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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.

Through September 30, 2021, $5.4 million has been applied against the balance of the Advance Payment.

Funding Requirements

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

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

We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on the commercialization of our existing

products, the development of our future product candidates, the potential commercialization of our product candidates, should their development be successful, and general administrative costs.

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.

In May 2021, we completed the acquisition of the Myriad myPath Laboratory for $32.5 million, which was funded with our existing cash and cash equivalents.

In October 2021, we signed a definitive agreement to acquire Cernostics.

At closing of the transaction, we will pay upfront consideration of approximately $30 million, which may consist entirely of cash or a combination of $20 million in cash and $10 million in shares of our common stock, at our sole discretion.

The transaction is expected to close prior to year-end 2021.

For additional information on each of these transactions, see page 18.

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

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.

For the nine months ended September 30, 2021 we had a net loss of $24.9 million and an accumulated deficit of $87.4 million as of September 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.

We expect to incur additional expenses and losses in the future as we invest in the commercialization of our existing products, the development of our future product candidates and the commercialization of our product candidates.

Further, we expect that any acquisitions of businesses, products, assets or technologies will also increase our expenses.

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

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

Six Months Ended

Nine Months Ended

September 30,

Net cash (used in) provided by operating activities $ (16,202) $ 10,295

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Operating Activities

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.

Net cash used in operating activities was $16.2 million for the nine months ended September 30, 2021 and was primarily attributable to the net loss of $24.9 million, increases in accounts receivable of $6.1 million and recoupment of the Advance Payment of $5.4 million, partially offset by non-cash stock compensation expense of $14.9 million, increases in accrued compensation of $3.0 million and depreciation and amortization of $2.0 million.

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

Investing Activities

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.

Net cash used in investing activities for the nine months ended September 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 $2.6 million.

Net cash used in investing activities for the nine months ended September 30, 2020 consisted entirely of purchases of property and equipment of $4.2 million.

Financing Activities

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.

Net cash provided by financing activities was $5.3 million for the nine months ended September 30, 2021 and primarily consisted of $3.9 million in proceeds from the exercise of stock options and $1.8 million in proceeds from contributions to the employee stock purchase plan.

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

Critical Accounting Policies and Significant Judgments and Estimates

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.

During the nine months ended September 30, 2021, except as noted below, 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.

Stock-Based Compensation

Previously, because of the limited period of time our stock had been traded in an active market, we calculated expected volatility by using the historical stock prices of a group of similar companies looking back over the estimated life of the option

or the purchase rights under our employee stock purchase plan and averaging the volatilities of these companies.

In the third quarter of 2021, we adjusted this calculation to include our own stock price on a relative basis to the peer group in the calculation of expected volatility, as our common stock has now been traded in an active market for more than two years.

Recent Accounting Pronouncements

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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.

Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information required by this Item.

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