What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-08 · 158 added, 159 removed, 430 unchanged (42% of the section changed)

10 unchanged sentences

The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements, except as may be required by law.

Castle Biosciences is improving health through innovative tests that guide patient care.

Castle Biosciences is applying innovative diagnostics to inform disease management and improve patient outcomes.

For the diseases that our portfolio of tests cover, we believe the traditional approach to developing a treatment plan for cancers and other diseases using clinical and pathology factors alone is inadequate and can be improved by incorporating the personalized information our diagnostic and prognostic (or risk stratification) tests provide.

Our Test Portfolio

We currently market six proprietary multi-analyte assays with algorithmic analysis designed to answer clinical questions in dermatologic cancers, uveal melanoma (“UM”) (a rare cancer of the eye) and Barrett’s esophagus (“BE”).

2 unchanged sentences

Our revenue is primarily generated by our DecisionDx®-Melanoma risk stratification test for cutaneous melanoma, a deadly skin cancer, and our DecisionDx®-UM risk stratification test for UM.

Business Overview

The foundation of our business is our dermatologic cancer franchise, and our lead product is DecisionDx-Melanoma, a proprietary risk stratification gene expression profile (“GEP”) test that predicts the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma.

3 unchanged sentences

The second use is to inform the appropriate treatment plan during the initial five years post-diagnosis, regardless of the decision to undergo or avoid invasive SLNB surgery.

In a typical year, we estimate approximately 130,000 patients are diagnosed with invasive cutaneous melanoma in the United States, representing an estimated U.S.

In a typical year, we estimate approximately 130,000 patients are diagnosed with invasive cutaneous melanoma in the United States (“U.S.”), representing an estimated U.S.

total addressable market (“TAM”) of approximately $540 million.

5 unchanged sentences

On November 2, 2020, we commercially launched our proprietary GEP test for difficult-to-diagnose melanocytic lesions, DiffDx®-Melanoma, for use in patients with a melanocytic lesion and uncertainty related to the malignancy of the lesion.

further expanded our commercially available dermatologic portfolio in May 2021 when we acquired Myriad myPath, LLC (the “Myriad MyPath Laboratory”) from Myriad Genetics, Inc.

We further expanded our commercially available dermatologic portfolio in May 2021 when we acquired Myriad myPath, LLC (the “Myriad MyPath Laboratory”) from Myriad Genetics, Inc.

for a cash purchase price of $32.5 million.

8 unchanged sentences

If successful, this inflammatory skin disease pipeline test has the potential to add approximately $1.9 billion to our current estimated U.S.

total addressable market (“TAM”).

In 2021, we initiated a 4,800 patient, prospective, multi-center clinical study to develop and validate this pipeline test and have 54 committed sites and approximately 303 patients enrolled.

In 2021, we initiated a 4,800 patient, prospective, multi-center clinical study (our “IDENTITY Study”), to develop and validate this pipeline test and have 55 committed sites and approximately 337 patients enrolled.

Based upon our current development and validation timelines, we expect to have initial validation and development data in 2023 and to commercialize this pipeline test by the end of 2025.

4 unchanged sentences

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

We estimate approximately 2,000 patients in the United States are diagnosed annually with a uveal melanoma, representing an estimated U.S.

We estimate approximately 2,000 patients in the United States are diagnosed annually with UM, representing an estimated U.S.

TAM of approximately $9 million.

11 unchanged sentences

A test report is generated when we receive a sample in our laboratory, and then the relevant test information is entered into our Laboratory Information Management System, the expression of the biomarkers is measured, then a proprietary algorithmic analysis of the combined biomarkers is performed to generate a report providing the results of that analysis, which is sent to the clinician who ordered the test.

The number of GEP test reports delivered by us during the six months ended June 30, 2022 and 2021 and for the year ended December 31, 2021 are presented in the table below:

The number of test reports delivered by us during the nine months ended September 30, 2022 and 2021 and for the year ended December 31, 2021 are presented in the table below:

Proprietary Dermatologic GEP Tests

4 unchanged sentences

Q2 2022 7,125 1,344 955 9,424 431 352 827 11,034

For the six months ended June 30, 2022

Q3 2022 7,354 1,636 834 9,824 392 690 1,208 12,114

For the nine months ended September 30, 2022

20,502 4,122 2,739 27,363 1,279 1,098 2,035 31,775

1 unchanged sentence

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

For the six months ended June 30, 2021

9,188 1,311 845 11,344 805 — — 12,149

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

Q4 2021 5,635 1,265 904 7,804 438 27 — 8,269

6 unchanged sentences

Includes both single-gene and multi-gene tests.

For the three and six months ended June 30, 2022, our dermatologic test report volume increased by 44.1% and 54.6%, respectively, compared to the prior period in 2021, largely driven by continued growth from our DecisionDx-Melanoma test.

For the three and nine months ended September 30, 2022, our dermatologic test report volume increased by 33.6% and 46.4%, respectively, compared to the prior period in 2021, largely driven by continued growth from our DecisionDx-Melanoma and DecisionDx-SCC tests.

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

1 unchanged sentence

During the second quarter of 2021, we expanded our dermatologic commercial team, bringing our dermatologic sales force to the mid-60s.

Starting in September 2022, we plan to have a new commercial sales team dedicated to our Diagnostic GEP offering, with the current dermatologic commercial team shifting to focus solely on DecisionDx-Melanoma and DecisionDx-SCC.

In September 2022, we established a new commercial sales team dedicated to our Diagnostic GEP offering, with the current dermatologic commercial team shifting to focus solely on DecisionDx-Melanoma and DecisionDx-SCC.

In connection with our acquisition of Cernostics in December 2021, we hired an initial commercial team of approximately 14 outside sales territories, along with commensurate internal sales associates and medical science liaisons, to support our launch of the TissueCypher Barrett’s Esophagus Assay.

This dedicated team focuses on gastroenterology specialists that diagnose and manage patients with BE.

Beginning in September 2022, we plan to add additional outside territories for our TissueCypher Barrett’s Esophagus Assay.

In September 2022, we added additional outside territories for our TissueCypher Barrett’s Esophagus Assay.

Similar to our dermatologic commercial team, we will continue to assess market response in determining further commercial expansions.

AltheaDx, which we acquired in late April 2022, had a commercial team covering approximately 20 outside sales territories.

AltheaDx, which we acquired in late April 2022, has a commercial team covering approximately 20 outside sales territories.

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

For the three months ended June 30, 2022, we saw 608 new ordering clinicians for our dermatologic tests compared to 462 during the same period of 2021.

For the six months ended June 30, 2022 and 2021, we saw 1,200 and 872, respectively, new ordering clinicians for our dermatologic tests.

Total ordering clinicians for our dermatologic tests were 5,661 and 3,879 for the six months ended June 30, 2022 and 2021, respectively, and 2,032 and 1,423 for the three months ended June 30, 2022 and 2021, respectively.

For the three months ended September 30, 2022, we saw 601 new ordering clinicians for our dermatologic tests compared to 536 during the same period of 2021.

For the nine months ended September 30, 2022 and 2021, we saw 1,801 and 1,408, respectively, new ordering clinicians for our dermatologic tests.

Total ordering clinicians for our dermatologic tests were 6,763 and 4,979 for the nine months ended September 30, 2022 and 2021, respectively, and 1,102 and 1,100 for the three months ended September 30, 2022 and 2021, respectively.

For additional information on the metrics we disclose, refer to “Information About Certain Metrics” below.

In developing our DecisionDx-SCC and DiffDx-Melanoma tests, we believed that in addition to addressing significant unmet clinical needs, we would see strategic opportunities for leverage, as many of the clinicians currently ordering DecisionDx-

Melanoma would likely be the same clinicians who would find value in these other dermatologic GEP tests.

For example, we found that for the six months ended June 30, 2022, approximately 68% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

For example, we found that for the nine months ended September 30, 2022, approximately 75% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

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

3 unchanged sentences

A ‘‘covered life’’ means a subscriber, or a dependent of a subscriber, who is insured under an insurance carrier’s policy.

The TissueCypher Barrett’s Esophagus Assay is paid by Medicare at the rate published on Medicare’s Clinical Laboratory Fee Schedule (“CLFS”) for the test.

Medicare coverage and payment for the TissueCypher Barrett’s Esophagus Assay was established through Novitas in early 2020, prior to our acquisition of Cernostics.

The payment rate for TissueCypher is published in the CMS Clinical Laboratory Fee Schedule (“CLFS”) for the test.

Effective March 24, 2022, we received Advanced Diagnostic Laboratory Test (“ADLT”) status for our TissueCypher test, as discussed further below.

22 unchanged sentences

The rate for 2022 is $1,950, based on the median private payor rate.

Beginning in 2023, the rates for DecisionDx-Melanoma, DecisionDx-UM, and MyPath Melanoma tests will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

For 2023, the rates for DecisionDx-Melanoma, DecisionDx-UM, and MyPath Melanoma tests will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

For example, the rate for 2023 will be set using median private payor rate data from January 1, 2021 to June 30, 2021.

7 unchanged sentences

IDgenetix is currently covered under an LCD policy through MolDX and an accompanying billing and coding article through Noridian, which oversees laboratories in California.

The Medicare coverage includes depression and was recently expanded for the following seven additional mental health conditions beyond major depressive disorder:

The Medicare coverage includes depression and the following seven additional mental health conditions beyond major depressive disorder:

schizophrenia, bipolar disorder, anxiety disorders, panic disorder, obsessive-compulsive personality disorder, post-traumatic stress disorder and attention deficit hyperactivity disorder.

4 unchanged sentences

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

In June 2022, Palmetto and Noridian each posted a draft LCD that would provide coverage criteria for DiffDx-Melanoma.

In June 2022, Palmetto and Noridian each posted a draft LCD that would provide coverage criteria for DiffDx-Melanoma, and each of the comment periods closed during the third quarter of 2022.

We believe the LCD for DiffDx-Melanoma will be finalized by the end of the second quarter of 2023.

1 unchanged sentence

Regarding DecisionDx-SCC, no draft LCD has been posted by Palmetto or Noridian to date.

In the second quarter of 2022, following the completion of a requested medical review and pricing of our DecisionDx-SCC test by Novitas, we have been receiving reimbursement from Novitas on DecisionDx-SCC at a rate of approximately $3,800 per test.

On June 9, 2022, Novitas posted a draft oncology biomarker LCD that proposes to rely upon evidentiary reviews sourced from three databases:

In the second quarter of 2022, we obtained a Proprietary Laboratory Analyses (“PLA”) code for DiffDx-Melanoma.

In late September 2022, CMS reviewed our DiffDx-Melanoma test price and released a draft CLFS for 2023.

Based on the draft CLFS, the reimbursement rate for DiffDx-Melanoma would be crosswalked to our MyPath Melanoma rate.

In the second quarter of 2022, following the completion of a requested medical review and pricing of our DecisionDx-SCC test by Novitas, we obtained a PLA code and began receiving reimbursement from Novitas for DecisionDx-SCC at a rate of approximately $3,800 per test.

In late September 2022, CMS reviewed our DecisionDx-SCC test price and released a draft CLFS for 2023.

Based on the draft CLFS, the reimbursement rate for DecisionDx-SCC would be crosswalked to our MyPath Melanoma rate.

We have interacted with CMS and submitted our recommendation.

We expect CMS to communicate a final determination on our 2023 rate in the fourth quarter of 2022.

On June 9, 2022, Novitas posted a draft oncology biomarker LCD that proposes to rely upon evidentiary reviews sourced from three databases for all oncology biomarker tests:

ClinGen, OncoKB and National Comprehensive Cancer Network (“NCCN”).

Two of the databases do not review gene expression profile tests and NCCN has not yet, to our knowledge, reviewed DecisionDx-SCC.

As such, if finalized as proposed, then DecisionDx-SCC would not be included as a covered test in the associated billing and coding article.

If finalized as proposed, then DecisionDx-SCC would not be included as a covered test in the associated billing and coding article.

The comment period for the draft LCD ended on September 6, 2022.

We cannot predict whether this draft LCD will be finalized as proposed or what the timing of any final LCD might be.

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

We believe that our existing cash and cash equivalents and anticipated cash generated from sales of our products will be sufficient to fund our operations for the next 12 months and into the foreseeable future.

We believe that our existing cash and cash equivalents, marketable investment securities and anticipated cash generated from sales of our products will be sufficient to fund our operations for the next 12 months and into the foreseeable future.

However, we have based these estimates on assumptions which may prove to be wrong and could result in us depleting our capital resources sooner than expected.

8 unchanged sentences

• add additional operational, financial and management information systems and personnel.

Impact of Hurricane Ian

Hurricane Ian made landfall at the Southwestern Florida coast in late September 2022, causing significant damage within the state.

Historically, a significant number of orders for our skin cancer tests have come from clinicians and healthcare providers based in Florida, and we are still assessing the expected impact of Hurricane Ian on our delivered test report volumes and financial results for the fourth quarter of 2022, which will depend on future developments that cannot be predicted at this time.

Accordingly, we are unable to predict the extent to which our future test report volumes, and our results of operations, financial condition and cash flows, will ultimately be impacted by Hurricane Ian.

Impact of Other Macroeconomic Conditions

Global economic and business activities continue to face widespread macroeconomic uncertainties, including labor shortages, inflation and monetary supply shifts, recession risks and potential disruptions from the Russia-Ukraine conflict.

We continue to actively monitor the impact of these macroeconomic factors on our results of operations, financial condition and cash flows.

The extent of the impact of these factors on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected timeframe, will depend on future developments, which are uncertain and cannot be predicted;

however, any continued or renewed disruption resulting from these factors could negatively impact our business.

Impact of COVID-19 Pandemic

We are continuing to closely monitor the impact of the ongoing COVID-19 pandemic on our business and taking proactive efforts designed to protect the health and safety of our workforce, continue our business operations and advance our corporate objectives.

We are providing the following update with respect to the impact of COVID-19 on our business:

• We have maintained and expect to continue to maintain uninterrupted business operations, with adequate access to reagents and consumables needed for testing patient samples and normal turnaround times for our delivery of test reports.

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

• Following the onset of the COVID-19 pandemic, we experienced declines in orders and test report volume in certain periods.

For example, in the second quarter of 2020, test reports delivered for our lead product, DecisionDx-Melanoma, decreased 18.5% compared to the second quarter of 2019.

We believe these decreases in our test report volume were linked to delays and/or cancellations in patient visits, resulting in fewer diagnostic biopsies and thus a reduction in the number of diagnoses of cutaneous melanoma in response, as well as the cumulative impact on

promotional responsiveness as a result of reduced sales calls per day and in-person sales calls during the ongoing COVID-19 pandemic.

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

Since the beginning of 2021, we have seen improvements in 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 June 30, 2022 and 2021, in-person sales calls accounted for over 99% and 90% of all calls during such periods, respectively.

• 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, 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 most 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 diagnoses of the diseases covered by our diagnostic and prognostic tests may be impacted by continued apprehension regarding possible exposure to the virus as well as a general shift from in-person clinical visits to telehealth approaches, which may result in missed or delayed diagnoses of skin cancer and other diseases.

As conditions are evolving, we are unable to predict how our future test report volume will be impacted, or the extent to which our results of operations, financial condition or cash flows will be impacted, by the ongoing COVID-19 pandemic or other future public health crises.

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

For more information on the potential impact of the ongoing COVID-19 pandemic on our business, see the risk factors included under “Risks Related to Our Business” and the other risk factors included in Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q.

We are continuing to monitor our compliance with state and local government mandates to protect the health and safety of our workforce.

We believe the volumes of in-person sales calls have returned to our pre-COVID-19 levels and we expect to continue to maintain uninterrupted business operations.

Factors affecting our performance

4 unchanged sentences

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

Our report volume could be negatively impacted by developments related to the ongoing COVID-19 pandemic or other future public health crises, as discussed above.

Our report volume could be negatively impacted by developments related to the COVID-19 pandemic or other evolving macroeconomic developments, as discussed above.

• Reimbursement.

43 unchanged sentences

Gross margin and gross margin percentage are key indicators we use to assess our business.

See the tables in “Results of Operations—Comparison of the three months ended June 30, 2022 and 2021” and “Results of Operations—Comparison of the six months ended June 30, 2022 and 2021” for details.

See the tables in “Results of Operations—Comparison of the three months ended September 30, 2022 and 2021” and “Results of Operations—Comparison of the nine months ended September 30, 2022 and 2021” for details.

Research and Development

3 unchanged sentences

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 our cash and cash equivalents to further support and accelerate our research and development activities, including two important studies that are underway to support our DecisionDx-Melanoma test.

We expect to use a portion of our cash and cash equivalents and marketable investment securities to further support and accelerate our research and development activities, including two important studies that are underway to support our DecisionDx-Melanoma test.

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

The second 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, in 2021, we initiated our 4,800 patient, prospective, multi-center clinical study to develop, validate and bring to market a pipeline test aimed at predicting response to systemic therapy in patients with moderate to severe psoriasis, atopic dermatitis and related inflammatory skin conditions.

Also, as noted above, in 2021, we initiated our IDENTITY Study, a 4,800 patient, prospective, multi-center clinical study to develop, validate and bring to market a pipeline test aimed at predicting response to systemic therapy in patients with moderate to severe psoriasis, atopic dermatitis and related inflammatory skin conditions.

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

13 unchanged sentences

Interest Income

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

Interest income consists primarily of earnings on cash and cash equivalents, primarily money market funds, and marketable investment securities, primarily short-term U.S.

government obligations.

Interest Expense

1 unchanged sentence

Income Tax (Benefit) Expense

In connection with our acquisition of AltheaDx in April 2022, and taking into consideration the additional deferred tax liabilities resulting from such acquisition, we determined that a portion of our valuation allowance should be reduced, which is reflected in our income tax benefit for the three and six months ended June 30, 2022.

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

2 unchanged sentences

Results of Operations

Comparison of the three months ended June 30, 2022 and 2021

Comparison of the three months ended September 30, 2022 and 2021

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 $ 37,011 $ 23,475 $ 13,536 57.7 %

7 unchanged sentences

Operating loss (21,536) (11,814) (9,722) (82.3) %

Interest income 370 24 346 1,441.7 %

Interest income 1,293 23 1,270 NM

Interest expense (6) — (6) NA

6 unchanged sentences

Three Months Ended

September 30,

2022 2021 Change

8 unchanged sentences

Three Months Ended

September 30,

2022 2021 Change

6 unchanged sentences

Three Months Ended

September 30,

2022 2021 Change

3 unchanged sentences

Total stock-based compensation expense $ 9,196 $ 5,210 $ 3,986

Net revenues for the three months ended June 30, 2022 increased by $12.1 million, or 53.1%, to $34.8 million compared to the three months ended June 30, 2021, primarily due to a $11.5 million increase in revenue from our dermatologic tests, primarily DecisionDx-Melanoma and DecisionDx-SCC.

The increase in dermatologic revenue was primarily attributable to a 44.1% increase in test volumes, with higher test reports delivered across each of our dermatologic offerings, due to a combination of the effects of our dermatologic sales force expansion during the second quarter of 2021 and increased patient flow potentially attributable to the easing of COVID-19 restrictions.

The higher revenues also reflect Medicare payments on DecisionDx-SCC, as discussed above, and the effect of higher positive (negative) revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $0.6 million for the three months ended June 30, 2022 compared to $(0.2) million for the three months ended June 30, 2021.

The increase in revenue from our other tests (non-dermatologic) of $0.6 million was primarily attributable to our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022.

Net revenues for the three months ended September 30, 2022 increased by $13.5 million, or 57.7%, to $37.0 million compared to the three months ended September 30, 2021, primarily due to a $12.3 million increase in revenue from our dermatologic tests, primarily DecisionDx-Melanoma and DecisionDx-SCC.

The increase in dermatologic revenue was primarily attributable to a 33.6% increase in total test report volumes for our dermatologic offerings, due to a combination of the effects of our dermatologic sales force expansion during the second quarter of 2021 and increased patient flow potentially attributable to the easing of COVID-19 restrictions.

The higher revenues also reflect Medicare payments on DecisionDx-SCC, as discussed above, partially offset by the effect of higher negative revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $0.3 million for the three months ended September 30, 2022 compared to $0.1 million for the three months ended September 30, 2021.

The increase in revenue from our other tests (non-dermatologic) of $1.2 million was primarily attributable to TissueCypher and IDgenetix.

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

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended June 30, 2022 increased by $4.0 million, or 107.9%, compared to the three months ended June 30, 2021, primarily due to higher personnel costs and increased costs of supplies and third-party services.

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended September 30, 2022 increased by $4.4 million, or 96.9%, compared to the three months ended September 30, 2021, primarily due to higher personnel costs and increased costs of supplies and third-party services.

Personnel costs have increased with additions in headcount in our laboratory testing operations, including headcount attributable to our acquisitions of Cernostics and AltheaDx.

4 unchanged sentences

We expect our cost of sales expenses (exclusive of amortization of acquired intangible assets) to continue to increase in future periods as we hire additional laboratory personnel and related resources to support our expected growth in volume for our dermatologic, gastrointestinal, mental health and pipeline tests.

Our gross margin percentage was 71.9% for the three months ended June 30, 2022, compared to 82.6% for the same period in 2021.

The decrease was primarily due to this year’s additional investments in laboratory headcount, higher salaries and wages,

and higher amortization expense associated with our acquired intangible assets.

In the near term, we expect that our gross margin percentage will decline, compared to prior periods, as we invest in additional laboratory personnel and related resources to support the anticipated growth in our test report volumes in advance of obtaining reimbursement coverage.

Our gross margin percentage was 69.8% for the three months ended September 30, 2022, compared to 77.9% for the same period in 2021.

The decrease was primarily due to this year’s additional investments in laboratory headcount, higher rates of pay and higher amortization expense associated with our acquired intangible assets.

In the near term, we expect that our gross margin percentage will be lower, compared to prior periods, as we invest in additional laboratory personnel and related resources to support the anticipated growth in our test report volumes in advance of obtaining reimbursement coverage.

Additionally, our gross margin percentage will continue to be negatively impacted by amortization of intangible assets associated with recent acquisitions.

Research and Development

Research and development expenses increased by $5.1 million, or 75.6%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Approximately 50.1% of the increase is attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, higher salaries and wages, and higher stock-based compensation expense, and approximately 23.6% is attributable to higher costs for clinical studies, including costs related to the PERSONALize, CONNECTION and DECIDE studies.

In the second quarter of 2022, we decided to close our PERSONALize study.

The remainder of the increase is primarily associated with higher costs incurred for outside legal fees.

Research and development expenses increased by $3.4 million, or 45.4%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Approximately 62.3% of the increase is attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, higher rates of pay, and higher stock-based compensation expense.

The remainder of the increase is primarily attributable to higher inventory usage to support research and development activities, higher travel and meeting costs, and higher costs for clinical studies, including costs related to the IDENTITY, CONNECTION and DECIDE studies.

We expect to continue to increase our research and development expenses as we fund ongoing evidence development for our existing products as well as additional pipeline programs.

2 unchanged sentences

Three Months Ended

September 30,

2022 2021 Change

2 unchanged sentences

Total selling, general and administrative expense $ 36,626 $ 22,595 $ 14,031

Sales and marketing expenses increased by $9.7 million, or 81.8%, for the three months ended June 30, 2022, compared to three months ended June 30, 2021.

Approximately $5.2 million, or 53.6%, of the increase is attributable to higher personnel costs including salaries, bonuses and stock-based compensation.

Personnel costs have increased through the expansion of our dermatology-facing commercial team headcount to the mid-60s in the second quarter of 2021 and through our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022.

Following our acquisition of Cernostics in December 2021, we hired an initial commercial team of approximately 14 outside sales territories, along with commensurate internal sales associates and other personnel, to support our launch of the TissueCypher Barrett’s Esophagus Assay and to serve as a dedicated team focused on gastroenterology specialists that diagnose and manage patients with BE.

Through our acquisition of AltheaDx, we added a commercial team of approximately 20 outside sales territories to support our launch of the IDgenetix test.

Sales and marketing expenses increased by $9.1 million, or 69.1%, for the three months ended September 30, 2022, compared to three months ended September 30, 2021.

Approximately $5.9 million, or 65.0%, of the increase is attributable to higher personnel costs including salaries, stock-based compensation and bonuses.

Personnel costs have increased through our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022, and through the expansion of our outside sales territories and sales force in September 2022, as discussed under “Overview—Business Overview” above.

In addition to increases through sales force expansion, higher personnel costs also reflect salary increases for members of our existing sales force.

The remainder of the increase in sales and marketing expenses was primarily associated with training events, meetings, travel and other general increases.

The higher expenses for training events and travel reflect an increase in our sales and commercial operations related to our expanded headcount and expanded test offerings, as well a return to more in-person activities resulting from the continued easing of COVID-19 restrictions.

Stock-based compensation expense included in sales and marketing expense was $2.9 million for the three months ended June 30, 2022, compared to $1.5 million for the three months ended June 30, 2021.We expect sales and marketing expenses to increase in future periods as we intend to expand our outside sales territories and sales force further during 2022, as discussed under “Overview” above.

General and administrative expenses increased by $7.0 million, or 77.7%, for the three months ended June 30, 2022, compared to three months ended June 30, 2021.

The remainder of the increase in sales and marketing expenses was primarily associated with travel, training events, meetings and other general increases.

The higher expenses for travel and training events reflect an increase in our sales and commercial operations related to our expanded headcount and expanded test offerings, as well a return to more in-person activities resulting from the continued easing of COVID-19 restrictions.

Stock-based compensation expense included in sales and marketing expense was $3.1 million for the three months ended September 30, 2022, compared to $1.6 million for the three months ended September 30, 2021.

General and administrative expenses increased by $4.9 million, or 52.2%, for the three months ended September 30, 2022, compared to three months ended September 30, 2021.

The increase is primarily attributable to $3.2 million in higher personnel costs including salaries, bonuses and stock-based compensation.

The higher personnel costs reflect expanded headcount in our administrative support functions, including that related to the acquisitions of Cernostics and AltheaDx, as well as higher rates of pay.

Stock-based compensation expense included in general and administrative expense was $3.2 million for the three months ended June 30, 2022, compared to $1.8 million for the three months ended June 30, 2021.

Furthermore, we incurred $1.7 million of transaction costs associated with our acquisition of AltheaDx.

The higher personnel costs reflect expanded headcount in our administrative support functions, including that related to the acquisitions of Cernostics and AltheaDx, as well as higher rates of salaries and wages.

Stock-based compensation expense included in general and administrative expense was $3.2 million for the three months ended September 30, 2022, compared to $1.9 million for the three months ended September 30, 2021.

The remainder of the increase in general and administrative expenses was primarily associated with professional fees and other general increases.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets increased by $1.8 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The increase is primarily associated with amortization of developed technology attributable

to the acquisitions of the Myriad MyPath Laboratory, Cernostics, and AltheaDx in May 2021, December 2021 and April 2022, respectively.

Amortization of acquired intangible assets increased by $1.6 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The increase is primarily associated with amortization of developed technology attributable to the acquisitions of Cernostics and AltheaDx in December 2021 and April 2022, respectively.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration for the three months ended June 30, 2022 of $20.4 million, a net gain, is primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics and reflects changes in management’s projections regarding attainment of certain commercial milestones.

There was no such activity during the three months ended June 30, 2021.

The change in fair value of contingent consideration for the three months ended September 30, 2022 of $0.2 million, a net gain, is primarily related to the remeasurement of the Earnout Payments associated with our acquisition of AltheaDx and reflects changes in management’s projections regarding attainment of certain commercial milestones.

There was no such activity during the three months ended September 30, 2021.

Interest Income

Interest income increased by $0.3 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily as a result of higher interest rates.

Income Tax (Benefit) Expense

Our income tax benefit was $2.0 million for the three months ended June 30, 2022 and was primarily attributable to a reduction of $1.8 million in our valuation allowance on net deferred tax assets resulting from our acquisition of AltheaDx in April 2022.

Specifically, we took into consideration the additional deferred tax liabilities resulting from the acquisition and determined that a portion of our existing valuation allowance should be reduced.

Other than this item, we recorded minimal amounts in income tax benefit because in both the three months ended June 30, 2022 and 2021, the income tax benefit of the pre-tax loss was largely offset by corresponding changes in the valuation allowance on net deferred tax assets, as we have determined that it is more likely than not that these benefits will not be realized.

Interest income increased by $1.3 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily as a result of higher interest rates and our purchases of marketable investment securities.

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $8.8 million for the three months ended June 30, 2022, compared to $4.8 million for the three months ended June 30, 2021.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $9.2 million for the three months ended September 30, 2022, compared to $5.2 million for the three months ended September 30, 2021.

We expect material increases in stock-based compensation expense in future periods, reflecting mainly higher awards outstanding due to growth in our headcount.

As of June 30, 2022, we had 482 employees compared to 292 as of June 30, 2021.

As of June 30, 2022, the total unrecognized stock-based compensation cost related to outstanding awards was $99.5 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.0 years.

As of September 30, 2022, we had 517 employees compared to 311 as of September 30, 2021.

As of September 30, 2022, the total unrecognized stock-based compensation cost related to outstanding awards was $94.4 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 2.8 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.

Comparison of the six months ended June 30, 2022 and 2021

Comparison of the nine months ended September 30, 2022 and 2021

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 $ 98,701 $ 69,046 $ 29,655 42.9 %

7 unchanged sentences

Operating loss (50,023) (24,908) (25,115) (100.8) %

Interest income 400 28 372 1,328.6 %

Interest income 1,693 51 1,642 NM

Interest expense (13) — (13) NA

5 unchanged sentences

The following table provides a disaggregation of net revenues by type (in thousands):

Six Months Ended

Nine Months Ended

September 30,

2022 2021 Change

7 unchanged sentences

The following table presents the calculation of gross margin (in thousands, except percentages):

Six Months Ended

Nine Months Ended

September 30,

2022 2021 Change

5 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

2022 2021 Change

3 unchanged sentences

Total stock-based compensation expense $ 26,398 $ 14,889 $ 11,509

Net revenues for the six months ended June 30, 2022 increased by $16.1 million, or 35.4%, to $34.8 million compared to the six months ended June 30, 2021, primarily due to a $14.9 million increase in revenue from our dermatologic tests, primarily DecisionDx-Melanoma and DecisionDx-SCC, and to a lesser extent, a $1.2 million increase in revenue from our other tests (non-dermatologic).

Net revenues for the nine months ended September 30, 2022 increased by $29.7 million, or 42.9%, to $98.7 million compared to the nine months ended September 30, 2021, primarily due to a $27.3 million increase in revenue from our dermatologic tests, primarily DecisionDx-Melanoma and DecisionDx-SCC, and to a lesser extent, a $2.4 million increase in revenue from our other tests (non-dermatologic).

The increase in dermatologic revenue was primarily attributable to a 46.4% increase in test volumes, with higher test reports delivered across each of our dermatologic offerings, due to a combination of the effects of our dermatologic sales force expansion during the second quarter of 2021 and increased patient flow potentially attributable to the easing of COVID-19 restrictions.

The higher revenues also reflect Medicare payments on DecisionDx-SCC, as discussed above.

The higher volumes were partially offset by the effect of lower positive (negative) revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $(0.3) million for the six months ended June 30, 2022 compared to $5.1 million for the six months ended June 30, 2021.

The year-over-year decrease is primarily attributable to the effect of favorable adjustments related to the settlement and collection during the six months ended June 30, 2021 of certain groups of receivables from prior years that did not recur during the six months ended June 30, 2022.

The increase in revenue from our other tests (non-dermatologic) of $1.2 million was primarily attributable to higher test report volume of DecisionDx-UM and the acquisitions of Cernostics in December 2021 and AltheaDx in April 2022.

The higher volumes were partially offset by the effect of variations in positive (negative) revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $(1.9) million for the nine months ended September 30, 2022 compared to $4.1 million for the nine months ended September 30, 2021.

The year-over-year decrease is primarily attributable to the effect of favorable adjustments related to the settlement and collection during the nine months ended September 30, 2021 of certain groups of receivables from prior years that did not recur during the nine months ended September 30, 2022.

The increase in revenue from our other tests (non-dermatologic) of $2.4 million was primarily attributable to TissueCypher and IDgenetix.

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

Cost of sales (exclusive of amortization of acquired intangible assets) for the six months ended June 30, 2022 increased by $6.9 million, or 102.7%, compared to the six months ended June 30, 2021, primarily due to higher personnel costs and increased costs of supplies and third-party services.

Cost of sales (exclusive of amortization of acquired intangible assets) for the nine months ended September 30, 2022 increased by $11.3 million, or 100.3%, compared to the nine months ended September 30, 2021, primarily due to higher personnel costs and increased costs of supplies and third-party services.

Personnel costs have increased with additions in headcount in our laboratory testing operations, including headcount attributable to our acquisitions of Cernostics and AltheaDx.

4 unchanged sentences

Our gross margin percentage was 71.8% for the six months ended June 30, 2022, compared to 84.7% for the same period in 2021.

The decrease was primarily due to lower revenue adjustments related to tests delivered in previous periods, higher personnel costs attributable to investments in laboratory headcount as well as higher salaries and wages, and higher amortization expense associated with our acquired intangible assets.

In the near term, we expect that our gross margin percentage will decline, compared to prior periods, as we invest in additional laboratory personnel and related resources to support the anticipated growth in our report volumes for tests in advance of obtaining reimbursement coverage.

Our gross margin percentage was 71.1% for the nine months ended September 30, 2022, compared to 82.4% for the nine months ended September 30, 2021.

The decrease was primarily due to higher personnel costs attributable to investments in laboratory headcount as well as higher rates of pay, variations in revenue adjustments related to tests delivered in previous periods and higher amortization expense associated with our acquired intangible assets.

In the near term, we expect that our gross margin percentage will be lower, compared to prior periods, as we invest in additional laboratory personnel and related resources to support the anticipated growth in our report volumes for tests in advance of obtaining reimbursement coverage.

Additionally, our gross margin percentage will continue to be negatively impacted by amortization of intangible assets associated with recent acquisitions.

Research and Development

Research and development expenses increased by $10.0 million, or 78.6%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Approximately 50.7% of the increase is attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, higher pay rates and higher stock-based compensation expense, and

approximately 22.0% is attributable to higher costs for clinical studies, including costs related to the PERSONALize, CONNECTION and DECIDE studies.

In the second quarter of 2022, we decided to close our PERSONALize study.

Research and development expenses increased by $13.4 million, or 66.3%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Approximately 53.7% of the increase is attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, higher pay rates and higher stock-based compensation expense, and approximately 17.9% is attributable to higher costs for clinical studies, including costs related to the IDENTITY, CONNECTION and DECIDE studies.

The remainder of the increase is primarily associated with meeting costs and travel expenses.

2 unchanged sentences

The following table provides a breakdown of SG&A expenses (in thousands):

Six Months Ended

Nine Months Ended

September 30,

2022 2021 Change

2 unchanged sentences

Total selling, general and administrative expense $ 104,577 $ 61,578 $ 42,999

Sales and marketing expenses increased by $18.3 million, or 84.9%, for the six months ended June 30, 2022, compared to six months ended June 30, 2021.

Approximately $10.6 million, or 57.9%, of the increase is attributable to higher personnel costs including salaries, bonuses and stock-based compensation.

Personnel costs have increased through the expansion of our dermatology-facing commercial team headcount to the mid-60s during the second quarter of 2021 and through our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022.

Following our acquisition of Cernostics, we hired an initial commercial team of approximately 14 outside sales territories, along with commensurate internal sales associates and other personnel, to support our launch of the TissueCypher Barrett’s Esophagus Assay and to serve as a dedicated team focused on gastroenterology specialists that diagnose and manage patients with BE.

Through our acquisition of AltheaDx, we added a commercial team of approximately 20 outside sales territories to support our launch of the IDgenetix test.

Sales and marketing expenses increased by $27.4 million, or 78.9%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Approximately $16.5 million, or 60.3%, of the increase is attributable to higher personnel costs including salaries, stock-based compensation and bonuses.

Personnel costs have increased through the expansion of our dermatology-facing commercial team headcount to the mid-60s during the second quarter of 2021, through our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022, and through the expansion of our outside sales territories and sales force in September 2022, as discussed under “Overview—Business Overview” above.

In addition to increases through sales force expansion, higher personnel costs also reflect salary increases for members of our existing sales force.

1 unchanged sentence

Stock-based compensation expense included in sales and marketing expense was $5.7 million for the six months ended June 30, 2022, compared to $3.0 million for the six months ended June 30, 2021.

We expect sales and marketing expenses to increase in future periods as we intend to expand our outside sales territories and sales force further during 2022, as discussed under “Overview” above.

General and administrative expenses increased by $10.7 million, or 61.2%, for the six months ended June 30, 2022, compared to six months ended June 30, 2021.

Stock-based compensation expense included in sales and marketing expense was $8.7 million for the nine months ended September 30, 2022, compared to $4.7 million for the nine months ended September 30, 2021.

General and administrative expenses increased by $15.6 million, or 58.1%, for the nine months ended September 30, 2022, compared to nine months ended September 30, 2021.

The increase is primarily attributable to $9.4 million in higher personnel costs including salaries, bonuses and stock-based compensation.

Stock-based compensation expense included in general and administrative expense was $6.1 million for the six months ended June 30, 2022, compared to $3.6 million for the six months ended June 30, 2021.

Furthermore, we incurred $1.7 million of transaction costs associated with our acquisition of AltheaDx.

Stock-based compensation expense included in general and administrative expense was $9.3 million for the nine months ended September 30, 2022, compared to $5.4 million for the nine months ended September 30, 2021.

Furthermore, we incurred $1.7 million of transaction costs associated with our acquisition of AltheaDx during the nine months ended September 30, 2022.

The remainder of the increase in general and administrative expenses was primarily associated with professional fees and other general increases.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets increased by $3.5 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Amortization of acquired intangible assets increased by $5.1 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase is primarily associated with amortization of developed technology attributable to the acquisitions of the Myriad MyPath Laboratory, Cernostics, and AltheaDx in May 2021, December 2021 and April 2022, respectively.

Change in Fair Value of Contingent Consideration

The change in fair value of contingent consideration for the six months ended June 30, 2022 of $17.8 million, a net gain, is primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics and reflects changes in management’s projections regarding attainment of certain commercial milestones.

There was no such activity during the six months ended June 30, 2021.

The change in fair value of contingent consideration for the nine months ended September 30, 2022 of $18.0 million, a net gain, is primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics and reflects changes in management’s projections regarding attainment of certain commercial milestones.

There was no such activity during the nine months ended September 30, 2021.

Interest Income

Interest income increased by $0.3 million for the six months ended June 30, 2022 , compared to the six months ended June 30, 2021 , primarily as a result of higher interest rates.

Interest income increased by $1.6 million for the nine months ended September 30, 2022 , compared to the nine months ended September 30, 2021 , primarily as a result of higher interest rates and our purchases of marketable investment securities.

Income Tax (Benefit) Expense

Our income tax benefit was $1.8 million for the six months ended June 30, 2022, and was primarily attributable to a reduction of $1.8 million in our valuation allowance on net deferred tax assets resulting from our acquisition of AltheaDx in April 2022.

Our income tax benefit was $1.8 million for the nine months ended September 30, 2022, and was primarily attributable to a reduction of $1.8 million in our valuation allowance on net deferred tax assets resulting from our acquisition of AltheaDx in April 2022.

Specifically, we took into consideration the additional deferred tax liabilities resulting from the acquisition and determined that a portion of our existing valuation allowance should be reduced.

Other than this item, we recorded minimal amounts in income tax benefit because in both the six months ended June 30, 2022 and 2021, the income tax benefit of the pre-tax loss was largely offset by corresponding changes in the valuation allowance on net deferred tax assets, as we have determined that it is more likely than not that these benefits will not be realized.

Other than this item, we recorded minimal amounts in income tax benefit because in both the nine months ended September 30, 2022 and 2021, the income tax benefit of the pre-tax loss was largely offset by corresponding changes in the valuation allowance on net deferred tax assets, as we have determined that it is more likely than not that these benefits will not be realized.

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $17.2 million for the six months ended June 30, 2022, compared to $9.7 million for the six months ended June 30, 2021.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $26.4 million for the nine months ended September 30, 2022, compared to $14.9 million for the nine months ended September 30, 2021.

We expect material increases in stock-based compensation expense in future periods, reflecting mainly higher awards outstanding due to growth in our headcount.

As of June 30, 2022, we had 482 employees compared to 292 as of June 30, 2021.

As of September 30, 2022, we had 517 employees compared to 311 as of September 30, 2021.

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.

1 unchanged sentence

Sources of Liquidity

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

As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $273.2 million and $329.6 million, respectively.

Our principal sources of liquidity are our cash and cash equivalents, marketable investment securities and cash generated from the sale of our products.

All of our marketable investment securities are considered investment grade, are readily available for use in current operations and have contractual maturities of one year or less.

As of September 30, 2022, we had marketable investment securities of $131.8 million, and we had no such balance as of December 31, 2021.

As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $134.2 million and $329.6 million, respectively.

In addition to the revenue generated from the sale of our commercial products, we have financed our operations through our IPO in July 2019, two follow-on public offerings of common stock in June 2020 and December 2020, and a $25.0 million secured term loan credit facility, which we repaid in full in December 2020.

3 unchanged sentences

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

Our market capitalization as of August 1, 2022 is below the level required to maintain status as well-known seasoned issuer in the future.

As mentioned above, we expect to use a portion of our cash and cash equivalents, including any proceeds from subsequent offerings under our Shelf Registration Statement, to further support and accelerate our research and development activities, including the clinical studies noted above in “Components of the Results of Operations—Research and Development.”

As of October 26, 2022, our non-affiliate market capitalization was below $700 million, and if our non-affiliate market capitalization does not meet or exceed $700 million during any date within 60 days prior to the filing of our Annual Report on Form 10-K for the fiscal year ending December 31, 2022, we may lose our well-known seasoned issuer status.

If that were to occur, we would no longer be able to take advantage of the benefits of being a well-known seasoned issuer, including the ability to file automatically effective shelf registration statements allowing us to issue an indeterminate number or amount of securities from time to time in one or more offerings, which could restrict our ability to timely access the capital markets.

As mentioned above, we expect to use a portion of our cash and cash equivalents and marketable investment securities, including any proceeds from subsequent offerings under our Shelf Registration Statement, to further support and accelerate our research and development activities, including the clinical studies noted above in “Components of the Results of Operations—Research and Development.”

Material Cash Requirements

4 unchanged sentences

With respect to AltheaDx, we agreed to pay up to an additional $75.0 million, 50% in cash and 50% in common stock, based on the achievement of certain commercial milestones relating to the years ending December 31, 2022, 2023 and 2024.

In each case, the number of shares of our common stock that may be issued in connection with the Earnout Payments is subject to limitations, as discussed in Notes 5 and 10 to the unaudited

condensed consolidated financial statements.

In each case, the number of shares of our common stock that may be issued in connection with the Earnout Payments is subject to limitations, as discussed in Notes 6 and 11 to the unaudited condensed consolidated financial statements.

Our actual liability with respect to these commercial milestone payments from our acquisitions will depend, in part, on our ability to successfully integrate the TissueCypher Barrett’s Esophagus Assay (acquired from Cernostics) and IDgenetix (acquired from AltheaDx) into our suite of commercial product offerings and the timing thereof.

1 unchanged sentence

For the year ended December 31, 2021 we had a net loss of $31.3 million and an accumulated deficit of $93.8 million as of December 31, 2021.

For the six months ended June 30, 2022, we had a net loss of $26.3 million and an accumulated deficit of $120.0 million as of June 30, 2022.

For the nine months ended September 30, 2022, we had a net loss of $46.5 million and an accumulated deficit of $140.3 million as of September 30, 2022.

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.

1 unchanged sentence

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 the sale of our commercial products will be sufficient to fund our operations for the next twelve months.

We believe we will meet longer-term expected cash requirements and obligations through a combination of existing cash and cash equivalents, anticipated cash generated from sales of our products and issuances of equity securities or debt offerings, including through our Shelf Registration Statement.

We believe that our existing cash and cash equivalents, marketable investment securities and anticipated cash generated from the sale of our commercial products will be sufficient to fund our operations for the next twelve months.

We believe we will meet longer-term expected cash requirements and obligations through a combination of existing cash and cash equivalents, marketable investment securities, anticipated cash generated from sales of our products and issuances of equity securities or debt offerings, including through our Shelf Registration Statement.

However, we have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

13 unchanged sentences

We have entered into various operating and finance leases, which are primarily associated with our laboratory facilities and office space.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of June 30, 2022 totaled approximately $10.1 million, of which $0.7 million is payable through the remainder of 2022 and $9.4 million through the end of 2033.

The leases expire on various dates through 2033 and provide certain options to renew for additional periods.

On March 11, 2022, we amended an existing lease agreement to lease additional laboratory space in Phoenix, Arizona.

On April 1, 2022, we entered into a new lease agreement with an initial term of 10.5 years for laboratory and office space located in Pittsburgh, Pennsylvania.

As of June 30, 2022, neither of the two leases had commenced.

Upon commencement, we expect these two leases to increase our undiscounted future minimum payment obligations by a total of approximately $13.8 million.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of September 30, 2022 totaled approximately $23.6 million, of which $0.3 million is payable through the remainder of 2022 and $23.3 million through the end of 2033.

The leases expire on various dates through 2033 and provide certain options to renew for additional periods.

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 operating activities $ (35,655) $ (16,202)

5 unchanged sentences

Operating Activities

Net cash used in operating activities was $30.4 million for the six months ended June 30, 2022, and was primarily attributable to the net loss of $26.3 million, the change in fair value of contingent consideration of $17.8 million, increases in accounts receivable of $5.6 million and deferred income taxes of $1.8 million, partially offset by non-cash stock compensation expense of $17.2 million and depreciation and amortization of $4.8 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 $2.2 million of an advance payment from CMS under its Accelerated and Advance Payment Program, partially offset by non-cash stock compensation expense of $9.7 million and decreases in prepayments and other current assets of $1.3 million.

The $20.4 million additional net cash used in operating activities for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is primarily due to cash requirements associated with the increases in operating expenses, the majority of which were attributable to salaries, bonuses and benefits due to our growth in headcount, as discussed in further detail under “Results of Operations—Comparison of the six months ended June 30, 2022 and 2021” above.

Net cash used in operating activities was $35.7 million for the nine months ended September 30, 2022, and was primarily attributable to the net loss of $46.5 million, the change in fair value of contingent consideration of $18.0 million, increases in accounts receivable of $5.7 million and deferred income taxes of $1.8 million, partially offset by non-cash stock-based compensation expense of $26.4 million, depreciation and amortization of $7.7 million and the increase in accrued compensation of $3.7 million.

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 $5.4 million of an advance payment from CMS under its Accelerated and Advance Payment Program, partially offset by non-cash stock-based compensation expense of $14.9 million, increases in accrued compensation of $3.0 million and depreciation and amortization of $2.0 million.

The $19.5 million additional net cash used in operating activities for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is primarily due to cash requirements associated with the increases in operating expenses, the majority of which were attributable to salaries, bonuses and benefits due to our growth in headcount, as discussed in further detail under “Results of Operations—Comparison of the nine months ended September 30, 2022 and 2021” above.

The effect of the higher expenses on net cash used in operating activities was partially offset by cash inflows from the higher revenues.

Investing Activities

Net cash used in investing activities was $27.9 million for the six months ended June 30, 2022 and consisted primarily of the cash portion of the AltheaDx purchase consideration of $26.7 million (net of cash and cash equivalents acquired) and purchases of property and equipment of $1.8 million.

Net cash used in investing activities was $34.8 million for the six months ended June 30, 2021 and 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 was $162.1 million for the nine months ended September 30, 2022 and consisted primarily of purchases of marketable investment securities of $131.8 million, the cash portion of the AltheaDx purchase consideration of $27.0 million (net of cash and cash equivalents acquired) and purchases of property and equipment of $3.8 million.

Net cash used in investing activities was $35.8 million for the nine months ended September 30, 2021 and resulted primarily from the purchase of Myriad MyPath Laboratory for $33.2 million (including transaction costs) and purchases of property and equipment of $2.6 million.

Financing Activities

Net cash provided by financing activities was $1.9 million for the six months ended June 30, 2022, and primarily consisted of $1.5 million in proceeds from contributions to the employee stock purchase plan and $0.5 million in proceeds from the exercise of stock options.

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 $2.3 million for the nine months ended September 30, 2022, and primarily consisted of $1.8 million in proceeds from contributions to the employee stock purchase plan and $0.7 million in proceeds from the exercise of stock options.

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.

In 2021, the rate of inflation in the United States began to increase and has since risen to levels not experienced in over 40 years.

1 unchanged sentence

The extent of any future impacts from inflation on our business and our results of operations will be dependent upon how long the elevated inflation levels persist and the extent to which the rate of inflation further increases, if at all, neither of which we are able to predict.

If elevated levels of inflation were to persist or if the rate of inflation were to accelerate, the purchasing power of our cash and cash equivalents may be diminished, our expenses could increase faster than anticipated and we may utilize our capital resources sooner than expected.

Further, given the complexities of the reimbursement landscape in which we operate, our payors may be unwilling or unable to increase reimbursement rates to

compensate for inflationary impacts.

If elevated levels of inflation were to persist or if the rate of inflation were to accelerate, the purchasing power of our cash and cash equivalents and marketable investment securities may be diminished, our expenses could increase faster than anticipated and we may utilize our capital resources sooner than expected.

Further, given the complexities of the reimbursement landscape in which we operate, our payors may be unwilling or unable to increase reimbursement rates to compensate for inflationary impacts.

As such, the effects of inflation may adversely impact our results of operations, financial condition and cash flows.

Critical Accounting Estimates

During the six months ended June 30, 2022, except as noted below, there were no significant changes to the information discussed under “Critical Accounting 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, 2021.

During the nine months ended September 30, 2022, except as noted below, there were no significant changes to the information discussed under “Critical Accounting 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, 2021.

The following is an updated discussion of our critical accounting estimates related to contingent consideration.

3 unchanged sentences

In a business combination, in accordance with to ASC Topic 805, Business Combinations, contingent consideration is recorded at fair value as of the acquisition date and classified as liabilities or equity based on applicable accounting principles generally accepted in the United States of America (“U.S.

For contingent consideration classified as liabilities, we remeasure the contingent consideration at fair value each period with changes in fair value recorded in the statements of operations and comprehensive loss each period.

For contingent consideration in transactions that are not business combinations, we apply applicable U.S.

With respect to the additional consideration that may be payable in connection with the acquisition of Cernostics, an asset acquisition we completed on December 3, 2021, we account for the contingent consideration as liability in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), under the guidance for obligations that must or may be settled by issuance of a variable number of shares.

In accordance with ASC 480, we record the contingent consideration initially and subsequently at fair value with changes in fair value recorded in the condensed consolidated statements of operations and comprehensive loss each period.

Liabilities for contingent consideration are classified as a “Level 3” fair value measurements (as defined in Note 11 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021) due to the use of significant unobservable inputs and a Monte Carlo simulation to determine its fair value.

Liabilities for contingent consideration are classified as a “Level 3” fair value measurements (as defined in Note 11 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q) due to the use of significant unobservable inputs and a Monte Carlo simulation to determine its fair value.

The Monte Carlo simulation uses projections of the commercial milestones for the applicable period as well as the corresponding targets and approximate timing of payment based on the terms of the arrangement.

5 unchanged sentences

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