What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-02 · 162 added, 156 removed, 448 unchanged (42% of the section changed)

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

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years ended December 31, 2022 and 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the section entitled “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q with our audited financial statements and notes thereto as of and for the years ended December 31, 2022 and 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the section entitled “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023.

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

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We currently offer five proprietary multi-analyte assays with algorithmic analysis (“MAAA”) tests for use in the dermatologic, ocular and gastroenterology fields.

We also offer a proprietary pharmacogenomics (“PGx”) test to guide optimal drug treatment for patients suffering from depression, anxiety and other mental health conditions following our acquisition of AltheaDx, Inc.

We also offer a proprietary pharmacogenomics (“PGx”) test to guide medication selection and management for patients with depression, anxiety and other mental health conditions following our acquisition of AltheaDx, Inc.

(“AltheaDx”) in April 2022, as discussed below.

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DecisionDx‑SCC is our proprietary GEP test for use in patients with SCC, with one or more risk factors (also referred to as “high-risk” SCC).

We estimate 200,000 SCC patients are annually diagnosed and classified at high risk in the United States, are classified as high risk, representing an estimated U.S.

We estimate 200,000 SCC patients are annually diagnosed and classified at high risk in the United States, representing an estimated U.S.

TAM of approximately $820 million.

We launched DecisionDx-SCC in August 2020.

Initially, we offered both our MyPath Melanoma test and our DiffDx-Melanoma test under an offering that we referred to as our Diagnostic GEP offering for use in patients with a melanocytic lesion and uncertainty related to the malignancy of the lesion representing an estimated U.S.

MyPath Melanoma is our proprietary GEP test for use in patients with a melanocytic lesion and uncertainty related to the malignancy of the lesion.

We estimate approximately 300,000 patients each year present with a diagnostically ambiguous lesion, representing an estimated U.S.

TAM of approximately $600 million.

Initially, we offered both our MyPath Melanoma test and our DiffDx-Melanoma test under an offering that we referred to as our Diagnostic GEP offering.

However, following an internal assessment of the clinical value of offering both tests, we made the decision to suspend the clinical offering of DiffDx-Melanoma in February 2023 and now the focus of this offering is MyPath Melanoma.

Our Gastroenterology Test

The TissueCypher Barrett’s Esophagus Test (sometimes referred to as “TissueCypher”) is the world’s first precision medicine test designed to predict future development of high-grade dysplasia and/or esophageal cancer in patients with non-dysplastic, indefinite dysplasia or low-grade dysplasia Barrett’s Esophagus.

We estimate a U.S.

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In the second quarter of 2023, we opened a new laboratory in Pittsburgh, Pennsylvania, where we process our TissueCypher Barrett's Esophagus Test.

We have seen such a strong adoption of the test from the gastrointestinal community that our orders have outpaced our forecasts as well as our process improvements and automation efforts.

In July 2023, in response to significant demand, we elected to temporarily pause accepting additional orders for the TissueCypher Barrett’s Esophagus Test in order to bring our process improvements and additional instrumentation and personnel on line.

We are currently working through these efforts and believe that we will be able to begin accepting new orders prior to the end of third quarter of 2023.

Due to high demand for the test from the gastrointestinal community, orders subsequently outpaced our forecasts despite our process improvements and automation efforts.

In July 2023, we elected to temporarily pause accepting additional TissueCypher orders to focus on scaling efforts and to work through a significant backlog of orders.

In September 2023, we resumed accepting new orders for testing in a phased approach consistent with continued scaling activity aimed at accommodating current demand and future growth.

As of mid-October 2023, we have completed the pre-existing backlog orders.

Our Uveal Melanoma Test

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Our Mental Health Test

IDgenetix is a PGx test for depression, anxiety and other mental health conditions.

IDgenetix is a PGx test that guides personalized mental health medication selection and management for patients with depression, anxiety and other mental health conditions.

We estimate a U.S.

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We will continue to assess market response in determining further commercial expansions.

Government Regulation and Product Approval

On September 12, 2023, we received our Clinical Laboratory Permit from the New York State Department of Health for our laboratory in Pittsburgh.

Reimbursement

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Palmetto issued a final LCD for DecisionDx-UM, which became effective in July 2017.

Noridian, the MAC responsible for administering claims for laboratory services performed in our Arizona laboratory, has adopted the same coverage policy as Palmetto.

Noridian has adopted the same coverage policy as Palmetto.

On May 17, 2019, CMS determined that DecisionDx-UM meets the criteria for “existing advanced diagnostic laboratory test” status, also referred to as “existing ADLT” status.

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

DiffDx-Melanoma is going through CMS’s gapfill pricing process in 2023, which we expect to conclude in late 2023 and to be effective January 1, 2024.

The gapfill process consists of several steps throughout the calendar year.

First, individual MACs develop gapfill rates and report them to CMS.

Using this information, CMS then posts preliminary rates and commences a public comment period.

After evaluating public comments, CMS posts updated rates and begins accepting requests to reconsider these rates, known as reconsideration requests.

After CMS processes any reconsideration requests, the gapfill rates are considered final.

In April 2023, CMS posted a preliminary determination of a gapfill rate for DiffDx-Melanoma of $1,950 per test, which is subject to a public comment period and any reconsideration requests.

We cannot predict at this time what the final gapfill rate will be.

In 2023, DiffDx-Melanoma went through the CMS gapfill process which concluded in September 2023 with CMS posting a final MAC-specific gapfill rate of $1,950 per test.

Our DiffDx-Melanoma code and this new rate will be included in the final Clinical Laboratory Fee Schedule (“CLFS”) for 2024 and becomes effective January 1, 2024.

DecisionDx‑SCC

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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 $3,873 per test.

On June 30, 2023, CMS determined DecisionDx-SCC meets the criteria for “new ADLT” status.

Effective July 1, 2023 and through March 31, 2024, CMS set the initial period rate equal to the list price of $8,500 per test.

Effective April 1, 2024 and through December 31, 2025, the published CLFS rate for DecisionDx-SCC will be based on the median private payor rates received between July 1, 2023 and November 30, 2023.

Thereafter, the rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

ADLT status determines the process by which the rate is set and is not an indication of Medicare coverage.

On June 2, 2023, Novitas finalized the oncology biomarker LCD pursuant to which the DecisionDx-SCC test would no longer be covered by Medicare effective July 17, 2023.

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The proposed LCD also recommends non-coverage for our DecisionDx-SCC test.

The comment period for the proposed LCD ends on September 9, 2023.

The comment period for the proposed LCD ended on September 9, 2023.

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

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The comment period for the draft LCDs ended on July 22, 2023.

On June 30, 2023, CMS determined DecisionDx-SCC meets the criteria for “new ADLT” status.

Effective July 1, 2023 and through March 31, 2024, CMS set the initial period rate equal to the list price of $8,500.

Effective April 1, 2024 and through December 31, 2025, the published Clinical Laboratory Fee Schedule (“CLFS”) rate for DecisionDx-SCC will be based on the median private payor rates received between July 1, 2023 and November 30, 2023.

Thereafter, the rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

ADLT status determines the process by which the rate is set and is not an indication of Medicare coverage.

TissueCypher is processed in our Pittsburgh, Pennsylvania laboratory and falls under the Medicare jurisdiction managed by Novitas which previously reviewed TissueCypher.

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On March 24, 2022, CMS determined that TissueCypher meets the criteria for “new ADLT” status.

From April 1, 2022 through December 31, 2022, CMS has set the initial period rate equal to the original list price of $2,350.

From April 1, 2022 through December 31, 2022, CMS has set the initial period rate equal to the original list price of $2,350 per test.

Effective January 1, 2023, the published CLFS rate for TissueCypher is $4,950, which will remain effective through December 31, 2024.

This rate is based on the median private payor rates received between April 1, 2022 and

August 31, 2022.

This rate is based on the median private payor rates received between April 1, 2022

and August 31, 2022.

Thereafter, the rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

IDgenetix is currently covered under an LCD policy through MolDX and an accompanying billing and coding article through Noridian.

IDgenetix is currently covered under a Noridian LCD policy and accompanying billing and coding article developed by MolDX.

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

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IDgenetix has historically been billed to Medicare using an unspecified Current Procedural Terminology (“CPT”) code along with the IDgenetix test-specific MolDX Z-code (the “IDgenetix Z-Code”).

In February 2023, MolDX notified us that as part of its annual CPT code updates.

IDgenetix should shift billing to a different generic gene sequencing CPT code (the “New CPT Code”) and continue using the IDgenetix Z-Code beginning in March 2023.

In February 2023, MolDX notified us that, as part of its annual CPT code updates, IDgenetix should shift billing to a different generic gene sequencing CPT code (the “New CPT Code”) and continue using the IDgenetix Z-Code beginning in March 2023.

The New CPT Code is currently contractor priced at $917 while it undergoes CMS’s gapfill pricing process in 2023.

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The new PLA code becomes effective October 1, 2023 and is currently undergoing the 2024 CLFS pricing process.

In September 2023, CMS posted a preliminary CLFS determination which crosswalks our PLA CPT code to an existing PLA code at a rate of $1,336 per test.

The final 2024 CLFS rates will be posted in the fourth quarter of 2023.

Delivered Test Reports

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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 laboratory portion of the test is performed, including proprietary algorithmic analysis of the combined biomarkers, and a report is then generated which is sent to the clinician who ordered the test.

The number of test reports delivered by us during the six months ended June 30, 2023 and 2022 and for the year ended December 31, 2022 are presented in the table below:

The number of test reports delivered by us during the nine months ended September 30, 2023 and 2022 and for the year ended December 31, 2022 are presented in the table below:

Proprietary Dermatologic GEP Tests

Melanoma DecisionDx-SCC Diagnostic GEP offering (1)

Dermatologic Total DecisionDx-UM TissueCypher Barrett’s Esophagus Test IDgenetix (2)

Dermatologic Total DecisionDx-UM TissueCypher Barrett’s Esophagus Test (3)

IDgenetix (2)

Q1 2023 7,583 2,411 980 10,974 409 1,383 2,150 14,916

Q2 2023 8,597 2,681 953 12,231 461 1,447 2,681 16,820

For the six months ended June 30, 2023

Q3 2023 8,559 2,820 1,011 12,390 399 2,829 2,791 18,409

For the nine months ended September 30, 2023

24,739 7,912 2,944 35,595 1,269 5,659 7,622 50,145

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

For the six months ended June 30, 2022

13,148 2,486 1,905 17,539 887 408 827 19,661

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

Q4 2022 7,301 1,845 822 9,968 432 1,030 1,214 12,644

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Includes both single-gene and multi-gene tests.

For the three and six months ended June 30, 2023, our test report volume increased by 52.4% and 61.4% respectively, compared to the same periods of 2022.

Our dermatologic test report volume increased by 29.8% and 32.3% for the three and six months ended June 30, 2023, respectively, compared to the prior periods in 2022,

largely driven by continued growth from our DecisionDx-Melanoma and DecisionDx-SCC tests.

Increases from our other tests (non-dermatologic), primarily TissueCypher and IDgenetix, also contributed to the overall volume increase.

(3) For the three months ended September 30, 2023, our TissueCypher test report volumes primarily derived from processed backlog orders.

We temporarily paused accepting additional orders in July 2023 and resumed accepting new orders in a phased approach in September 2023.

For the three and nine months ended September 30, 2023, our test report volume increased by 52.0% and 57.8% respectively, compared to the same periods of 2022.

Our dermatologic test report volume increased by 26.1% and 30.1% for the three and nine months ended September 30, 2023, respectively, compared to the prior periods in 2022, largely driven by continued growth from our DecisionDx-Melanoma and DecisionDx-SCC tests.

Increases from our other tests (non-dermatologic), primarily IDgenetix and TissueCypher, also contributed to the overall volume increase.

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

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

For the three months ended June 30, 2023, we saw approximately 567 new ordering clinicians for our dermatologic tests compared to 608 during the same period of 2022.

For the six months ended June 30, 2023 and 2022, we saw approximately 1,106 and 1,200, respectively, new ordering clinicians for our dermatologic tests.

Total ordering clinicians for our dermatologic tests were approximately 2,067 and 2,032 for the three months ended June 30, 2023 and 2022, respectively, and 6,592 and 5,661 for the six months ended June 30, 2023 and 2022, respectively.

For the three months ended September 30, 2023, we saw approximately 500 new ordering clinicians for our dermatologic tests compared to 601 during the same period of 2022.

For the nine months ended September 30, 2023 and 2022, we saw approximately 1,606 and 1,801, respectively, new ordering clinicians for our dermatologic tests.

Total ordering clinicians for our dermatologic tests were approximately 4,955 and 4,238 for the three months ended September 30, 2023 and 2022, respectively, and 7,865 and 6,763 for the nine months ended September 30, 2023 and 2022, respectively.

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

In developing our DecisionDx-SCC test, we believed that in addition to addressing significant unmet clinical needs, we would see opportunities for leverage, as many of the clinicians currently ordering DecisionDx-Melanoma would likely be the same clinicians who would find value in our DecisionDx-SCC test.

For example, we found that during the six months ended June 30, 2023, approximately 69% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

For example, we found that during the nine months ended September 30, 2023, approximately 75% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

Information About Certain Metrics

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Impact of Macroeconomic Conditions

Macroeconomic conditions, including uncertainties associated with COVID-19, the ongoing conflict between Ukraine and Russia, economic slowdowns, labor shortages, recessions or market corrections, supply chain disruptions, inflation and monetary policy shifts, liquidity concerns at, and failures of, banks and other financial institutions or other disruptions in the banking system or financing markets, rising interest rates and financial and credit market fluctuations, volatility in the capital markets or other evolving macroeconomic developments, continue to have direct and indirect impacts on our business and could in the future materially impact our results of operations and financial condition.

Macroeconomic conditions, including uncertainties associated with public health crises such as COVID-19, the Israel-Hamas war, the ongoing conflict between Ukraine and Russia, economic slowdowns, labor shortages, recessions or market corrections, supply chain disruptions, inflation and monetary policy shifts, liquidity concerns at, and failures of, banks and other financial institutions or other disruptions in the banking system or financing markets, rising interest rates and financial and credit market fluctuations, volatility in the capital markets or other evolving macroeconomic developments, continue to have direct and indirect impacts on our business and could in the future

materially impact our results of operations and financial condition.

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

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

Variable consideration is evaluated each reporting

period and adjustments are recorded as increases or decreases in revenues.

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

Variable consideration for Medicare claims that are not covered by Medicare, including those claims undergoing appeal, is deemed to be fully constrained due to factors outside our influence (e.g., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

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

See the table in “Results of Operations—Comparison of the Three Months ended June 30, 2023 and 2022” and “Results of Operations—Comparison of the Six Months ended June 30, 2023 and 2022“ for details.

See the table in “Results of Operations—Comparison of the Three Months ended September 30, 2023 and 2022” and “Results of Operations—Comparison of the Nine Months ended September 30, 2023 and 2022“ for details.

Research and Development

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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 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 sentinel lymph node biopsy (“SLNB”) surgical decisions in patients eligible for SLNB as well as to track outcomes for patients who did and did not undergo SLNB.

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Also, 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.

As of June 30, 2023, we have 57 committed sites and 759 patients enrolled in our IDENTITY study.

We expect to obtain early developmental data from this study in the second half of 2023 and to launch this test in 2025.

As of September 30, 2023, we have 57 committed sites and 866 patients enrolled in our IDENTITY study.

We announced early discovery data from this study in October 2023 and are targeting launch of this pipeline program by the end of 2025.

Selling, General and Administrative

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No Earnout Payments were paid relating to the year ended December 31, 2022 in connection with our acquisitions of Cernostics and AltheaDx since the applicable commercial milestones were not achieved.

As of June 30, 2023 and December 31, 2022, our contingent consideration liability for AltheaDx was zero.

As of September 30, 2023 and December 31, 2022, our contingent consideration liability for AltheaDx was zero.

Interest Income

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Income Tax Expense (Benefit)

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.

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Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

Comparison of the Three Months Ended September 30, 2023 and 2022

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 $ 61,493 $ 37,011 $ 24,482 66.1 %

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Loss before income taxes (6,873) (20,249) 13,376 66.1 %

Income tax expense (benefit)

16 (1,957) 1,973 100.8 %

Net loss $ (18,777) $ (1,648) $ (17,129) NM

NM = Not meaningful

Income tax expense 32 — 32 NA

Net loss $ (6,905) $ (20,249) $ 13,344 65.9 %

NA = Not applicable

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

Three Months Ended

September 30,

2023 2022 Change

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Three Months Ended

September 30,

2023 2022 Change

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Three Months Ended

September 30,

2023 2022 Change

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Gross margin percentage 77.9 % 69.8 % 8.1 %

Net revenues for the three months ended June 30, 2023 increased by $15.3 million, or 43.9%, to $50.1 million compared to the three months ended June 30, 2022, due to a $11.1 million increase in revenue from our dermatologic tests and a $4.2 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to increases in test report volume of 20.7% for DecisionDx-Melanoma and 99.5% for DecisionDx-SCC, and a slightly higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $4.2 million was primarily attributable to the effect of the increase in the Medicare reimbursement rate for our TissueCypher test and higher test report volume during the second quarter of 2023 compared to the second quarter of 2022.

The increases in total net revenues were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $0.1 million of net negative revenue adjustments for the three months ended June 30, 2023, compared to $0.6 million of net positive revenue adjustments for the three months ended June 30, 2022.

Net revenues for the three months ended September 30, 2023 increased by $24.5 million, or 66.1%, to $61.5 million compared to the three months ended September 30, 2022, due to a $17.2 million increase in revenue from our dermatologic tests and a $7.3 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to higher average selling price per unit for DecisionDx-SCC tests, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, increases in test report volume of 16.4% for DecisionDx-Melanoma and 72.4% for DecisionDx-SCC, and a slightly higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $7.3 million was primarily attributable to the effect of the increase in the Medicare reimbursement rate for our TissueCypher test and higher test report volume during the third quarter of 2023 compared to the third quarter of 2022.

Contributing to the increases in total net revenues was the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $0.9 million of net positive revenue adjustments for the three months ended September 30, 2023, compared to $0.3 million of net negative revenue adjustments for the three months ended September 30, 2022.

These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.

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, 2023 increased by $3.4 million, or 43.9%, compared to the three months ended June 30, 2022, primarily due to increased expenditures on supplies, higher personnel costs, third-party services and rent.

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended September 30, 2023 increased by $2.5 million, or 27.8%, compared to the three months ended September 30, 2022, primarily due to increased expenditures on supplies and higher personnel costs.

Supply and service expenses increased largely due to our higher test volumes.

The increase in personnel costs consists of higher salaries and wages, stock-based compensation expense and benefits related to headcount additions as well as existing employees.

The increase in personnel costs consists of higher salaries and wages, stock-based compensation expense and bonuses related to headcount additions as well as existing employees.

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

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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 73.5% for the three months ended June 30, 2023, compared to 71.9% for the same period in 2022.

Our gross margin percentage was 77.9% for the three months ended September 30, 2023, compared to 69.8% for the same period in 2022.

The increase was primarily due to higher revenues which were attributable to increases in both test report volumes and average selling prices, partially offset by higher supplies expenditures and higher personnel costs, both of which have increased due to our expanded laboratory capacity and higher test report volumes.

Research and Development

Research and development expenses increased by $1.4 million, or 11.6%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

A majority of the increase was 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.

Research and development expenses increased by $2.0 million, or 18.5%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

A majority of the increase was attributable to

higher personnel costs, primarily due to expansions in headcount in support of our growth, including higher stock-based compensation, higher salaries and wages and bonuses.

Additionally, 32.1% of the increase is due to higher costs for clinical studies, most of which relates to our IDENTITY study and our inflammatory skin disease pipeline test.

Increases in personnel and clinical studies expenses were partially offset by slightly lower advisory costs.

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

Increases in personnel and clinical studies expenses were partially offset by lower advisory costs.

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

Selling, General and Administrative

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Three Months Ended

September 30,

2023 2022 Change

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Total selling, general and administrative expense $ 44,619 $ 36,626 $ 7,993

Sales and marketing expenses increased by $6.7 million, or 30.9%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

Of the increase, 68.4% is attributable to higher personnel costs, including salaries, stock-based compensation and bonuses.

Sales and marketing expenses increased by $6.1 million, or 27.3%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Of the increase, 75.2% is attributable to higher personnel costs, including bonuses, stock-based compensation and salaries.

Personnel costs have increased through the expansions of our dermatology-facing and non-dermatology-facing commercial teams and outside sales forces, as described above.

In addition, 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 travel, conferences and other marketing costs, attributable to our expanded commercial operations and headcount.

Stock-based compensation expense included in sales and marketing was $4.7 million for the three months ended June 30, 2023, compared to $2.9 million for the three months ended June 30, 2022.

General and administrative expenses increased by $0.5 million, or 3.2%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The increase is primarily attributable to $1.0 million in higher personnel costs and $1.0 million in higher information technology-related costs.

Increases in personnel costs reflect higher stock-based compensation and salaries, partially offset by lower bonus expense and employee benefits.

The remainder of the increase in sales and marketing expenses was primarily associated with travel and conferences, attributable to our expanded commercial operations and headcount.

Stock-based compensation expense included in sales and marketing was $4.4 million for the three months ended September 30, 2023, compared to $3.1 million for the three months ended September 30, 2022.

General and administrative expenses increased by $1.9 million, or 13.2%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

The increase is primarily attributable to $1.8 million in higher personnel costs and higher information technology-related costs.

Increases in personnel costs reflect higher stock-based compensation and bonus expense.

Higher personnel costs reflect expanded headcount in our administrative support functions, as well as higher rates of salaries and wages.

Increases in personnel costs and information technology-related costs were partially offset by a reduction of professional fees of $1.5 million, primarily due to transaction costs incurred in connection with our acquisition of AltheaDx during the three months ended June 30, 2022.

Stock-based compensation expense included in general and administrative expense was $4.5 million for the three months ended June 30, 2023, compared to $3.2 million for the three months ended June 30, 2022.

Increases in personnel costs and information technology-related costs were partially offset by a reduction of professional fees of $0.8 million.

Stock-based compensation expense included in general and administrative expense was $4.7 million for the three months ended September 30, 2023, compared to $3.2 million for the three months ended September 30, 2022.

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, was primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics with no similar activity occurring in the second quarter of 2023 .

The change in fair value of contingent consideration for the three months ended September 30, 2022 of $0.2 million, a net gain, was primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics, with no similar activity occurring in the third quarter of 2023 .

Interest Income

Interest income increased by $2.0 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily as a result of higher interest rates and our purchases of marketable investment securities beginning in the third quarter of 2022.

Income Tax Expense (Benefit)

We recorded a minimal amount in income tax expense for the three months ended June 30, 2023.

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.

Interest income increased by $1.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily as a result of higher interest rates and our purchases of marketable investment securities beginning in September of 2022.

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $12.8 million for the three months ended June 30, 2023, compared to $8.8 million for

the three months ended June 30, 2022.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $13.0 million for the three months ended September 30, 2023, compared to $9.2 million for the three months ended September 30, 2022.

The increase is primarily due to our annual grant of equity awards in December 2022.

We expect material increases in stock-based compensation expense in future periods, attributable to both existing awards outstanding and anticipated additional grants to our current and future employees.

As of June 30, 2023, we had 582 employees compared to 482 as of June 30, 2022.

As of June 30, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $108.9 million, which is expected to be recognized over a weighted-average period of 2.6 years.

Comparison of the Six Months Ended June 30, 2023 and 2022

As of September 30, 2023, we had 587 employees, compared to 517 as of September 30, 2022.

As of September 30, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $96.4 million, which is expected to be recognized over a weighted-average period of 2.4 years.

Comparison of the Nine Months Ended September 30, 2023 and 2022

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 $ 153,668 $ 98,701 $ 54,967 55.7 %

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Operating loss (62,319) (50,023) (12,296) (24.6) %

Interest income 4,735 400 4,335 NM

Interest income 7,504 1,693 5,811 343.2 %

Interest expense (9) (13) 4 30.8 %

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Net loss $ (54,886) $ (46,520) $ (8,366) (18.0) %

NM = Not meaningful

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,

2023 2022 Change

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

Six Months Ended

Nine Months Ended

September 30,

2023 2022 Change

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

Six Months Ended

Nine Months Ended

September 30,

2023 2022 Change

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Gross margin percentage 74.4 % 71.1 % 3.3 %

Net revenues for the six months ended June 30, 2023 increased by $30.5 million, or 49.4%, to $92.2 million compared to the six months ended June 30, 2022, due to a $22.7 million increase in revenue from our dermatologic tests and a $7.8 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to increases in test report volume of 23.1% for DecisionDx-Melanoma and 104.8% for DecisionDx-SCC.

We began receiving Medicare coverage for DecisionDx-SCC tests in the second quarter of 2022, which also contributed to the increase in revenue.

The increase in revenue from our non-dermatologic tests of $7.8 million was primarily attributable to higher test report volume and the effect of the increase in the Medicare reimbursement rate for our TissueCypher test during the six months ended June 30, 2023 compared to the same period of 2022.

Net revenues for the nine months ended September 30, 2023 increased by $55.0 million, or 55.7%, to $153.7 million compared to the nine months ended September 30, 2022, due to a $39.9 million increase in revenue from our dermatologic tests and a $15.0 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to an increase in DecisionDx-Melanoma test report volume of 20.7%, a higher average selling price for DecisionDx-SCC, where we did not begin receiving Medicare reimbursement until the second quarter of 2022 and then began being reimbursed at a higher rate beginning in July 2023, and an increase in DecisionDx-SCC test report volume of 91.9%.

The increase in revenue from our non-dermatologic tests of $15.0 million was primarily attributable to TissueCypher, due to higher test report volume and a higher average selling price, reflecting a higher 2023 reimbursement rate than our 2022 rates.

Our IDgenetix test, which we acquired in connection with our acquisition of AltheaDx in April 2022, also contributed to the increase in non-dermatologic revenues during the period.

The increases in total net revenues were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $1.7 million of net negative revenue adjustments for the six months ended June 30, 2023, compared to $0.3 million of net negative revenue adjustments for the same period in 2022.

The increases in total net revenues were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $3.1 million of net negative revenue adjustments for the nine months ended September 30, 2023, compared to $1.9 million of net negative revenue adjustments for the same period in 2022.

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, 2023 increased by $7.6 million, or 55.8%, compared to the six months ended June 30, 2022, primarily due to increased expenditures on supplies, higher personnel costs, third-party services and rent.

Cost of sales (exclusive of amortization of acquired intangible assets) for the nine months ended September 30, 2023 increased by $10.1 million, or 44.8%, compared to the nine months ended September 30, 2022, primarily due to increased expenditures on supplies, higher personnel costs, third-party services and rent.

Supply and service expenses have increased due to higher laboratory activity, which is attributable to higher test report volume.

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The increased personnel costs also reflect higher salaries and wages for existing employees.

Due to the nature of our business, a significant

portion of our cost of sales expenses represents fixed costs associated with our testing operations.

Due to the nature of our business, a significant portion of our cost of sales expenses represents 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.

Our gross margin percentage was 72.1% for the six months ended June 30, 2023, compared to 71.8% for the six months ended June 30, 2022.

The increase was primarily due to higher revenues, partially offset by higher supplies expenditures, personnel costs, attributable to increases in laboratory headcount as well as higher rates of pay, and variations in revenue adjustments related to tests delivered in previous periods.

Our gross margin percentage was 74.4% for the nine months ended September 30, 2023, compared to 71.1% for the nine months ended September 30, 2022.

The increase was primarily due to higher revenues, partially offset by higher supplies expenditures and personnel costs, attributable to increases in laboratory headcount as well as higher rates of pay, and variations in revenue adjustments related to tests delivered in previous periods.

Research and Development

Research and development expenses increased by $5.0 million, or 22.1%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Higher personnel costs comprise 79.8% of the increase and were primarily due to expansions in headcount in support of our growth, higher salaries and wages, higher stock-based compensation expense and employee benefits.

Research and development expenses increased by $7.0 million, or 20.9%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Higher personnel costs comprise 85.1% of the increase and were primarily due to expansions in headcount in support of our growth, including higher salaries and wages, stock-based compensation expense, bonuses and employee benefits.

Additionally, 26.4% is attributable to higher costs for clinical studies, most of which was attributable to our IDENTITY study and our inflammatory skin disease pipeline test.

Increases in personnel and clinical studies expenses were partially offset by slightly lower advisory costs.

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

Increases in personnel and clinical studies expenses were partially offset by lower advisory costs.

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

Selling, General and Administrative

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

Six Months Ended

Nine Months Ended

September 30,

2023 2022 Change

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Total selling, general and administrative expense $ 136,062 $ 104,577 $ 31,485

Sales and marketing expenses increased by $18.4 million, or 46.2%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Of the increase, 62.9% is attributable to higher personnel costs, including salaries, stock-based compensation and bonuses.

Sales and marketing expenses increased by $24.5 million, or 39.4%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Of the increase, 66.0% is attributable to higher personnel costs, including salaries, stock-based compensation, bonuses and employee benefits.

Personnel costs have increased through the expansions of our dermatology-facing and non-dermatology-facing commercial teams and outside sales forces.

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The remainder of the increase in sales and marketing expenses was primarily associated with travel, training events, conference fees and other marketing costs, attributable to our expanded commercial operations and headcount.

Stock-based compensation expense included in sales and marketing expense was $9.6 million for the six months ended June 30, 2023, compared to $5.7 million for the six months ended June 30, 2022.

General and administrative expenses increased by $5.1 million, or 18.1%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Stock-based compensation expense included in sales and marketing expense was $14.0 million for the nine months ended September 30, 2023, compared to $8.7 million for the nine months ended September 30, 2022.

General and administrative expenses increased by $7.0 million, or 16.5%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The increase is primarily attributable to $6.2 million in higher personnel costs and $1.5 million in higher information technology-related costs.

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The higher personnel costs reflect expanded headcount in our administrative support functions as well as higher rates of salaries and wages.

Increases in personnel costs and information technology-related costs were partially offset by a decrease in professional fees, primarily due to transaction costs incurred in connection with our acquisition of AltheaDx during the six months ended June 30, 2022.

Stock-based compensation expense included in general and administrative expense was $9.2 million for the six months ended June 30, 2023, compared to $6.1 million for the six months ended June 30, 2022.

Stock-based compensation expense included in general and administrative expense was $13.9 million for the nine months ended September 30, 2023, compared to $9.3 million for the nine months ended September 30, 2022.

The remainder of the increase in general and administrative expenses was primarily associated with general increases across various categories.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets increased by $0.7 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Amortization of acquired intangible assets increased by $0.7 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The increase is primarily associated with amortization of developed technology attributable to the acquisition of AltheaDx in April 2022.

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, was primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics.

There was no such activity during the six months ended June 30, 2023.

The change in fair value of contingent consideration for the nine months ended September 30, 2022 of $18.0 million, a net gain, was primarily related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics.

There was no such activity during the nine months ended September 30, 2023.

Interest Income

Interest income increased by $4.3 million for the six months ended June 30, 2023 , compared to the six months ended June 30, 2022 , primarily as a result of higher interest rates and our purchases of marketable investment securities beginning in the third quarter of 2022.

Interest income increased by $5.8 million for the nine months ended September 30, 2023 , compared to the nine months ended September 30, 2022 , primarily as a result of higher interest rates and our purchases of marketable investment securities beginning in the third quarter of 2022.

Income Tax Expense (Benefit)

We recorded a minimal amount in income tax expense for the six months ended June 30, 2023 .

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.

We recorded a minimal amount in income tax expense for the nine months ended September 30, 2023 .

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.

Stock-Based Compensation Expense

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 six months ended June 30, 2023, compared to $17.2 million for the six months ended June 30, 2022.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $39.4 million for the nine months ended September 30, 2023, compared to $26.4 million for the nine months ended September 30, 2022.

The increase is primarily due to our annual grant of equity awards in December 2022.

As of June 30, 2023, we had 582 employees compared to 482 as of June 30, 2022.

As of September 30, 2023, we had 587 employees compared to 517 as of September 30, 2022.

Liquidity and Capital Resources

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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 June 30, 2023 and December 31, 2022, we had marketable investment securities of $129.6 million and $135.7 million, respectively.

As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents of $95.9 million and $122.9 million, respectively.

As of September 30, 2023 and December 31, 2022, we had marketable investment securities of $138.5 million and $135.7 million, respectively.

As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $91.2 million and $122.9 million, respectively.

Since becoming a public company, our liquidity has been primarily derived from the revenue generated from the sale of our products, proceeds from our initial public offering of common stock on July 29, 2019 (the “IPO”), follow-on public offerings of common stock in June 2020 and December 2020 and bank debt, which has since been repaid in full.

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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 laboratory and office facilities in support of our growth.

We anticipate that a substantial portion of our cash requirements in the

foreseeable future will relate to the further commercialization of our currently marketed products, the development of our future product candidates in our pipeline and the potential commercialization of these pipeline products, should their development be successful.

We anticipate that a substantial portion of our cash requirements in the foreseeable future will relate to the further commercialization of our currently marketed products, the development of our future product candidates in our pipeline and the potential commercialization of these pipeline products, should their development be successful.

In April 2022, we acquired AltheaDx, for $30.5 million in cash and $17.1 million in shares of our common stock.

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This portion represented $35.0 million of the $75.0 million total potential payment obligation, exclusive of a potential catch-up payment in 2023 of $17.5 million which will become payable if all 2023 commercial milestones are fully met.

Therefore, as of June 30, 2023, we have a potential payment obligation of up to $57.5 million with respect to the remaining commercial milestones for 2023 and 2024.

Therefore, as of September 30, 2023, we have a potential payment obligation of up to $57.5 million with respect to the remaining commercial milestones for 2023 and 2024.

In each case, the number of shares of our common stock that may be issued in connection with the commercial milestone payments is subject to limitations.

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

Our actual liability with respect to these commercial milestone payments from our acquisition will depend, in part, on our ability to successfully integrate IDgenetix (acquired from

AltheaDx) into our suite of commercial product offerings and the timing thereof.

See Note 6 of the unaudited condensed consolidated financial statements for additional information on the acquisition of AltheaDx.

On July 10, 2023, following approval by our board of directors, we entered into a definitive agreement to purchase a plot of land located in Friendswood, Texas for a purchase price of $7.6 million, subject to certain adjustments, for the purpose of developing a commercial office building which may be used as our future corporate headquarters.

We have the option to terminate the contract within 90 days, for any reason, and will use this time to complete initial suitability diligence.

Under the agreement, we had the option to terminate the contract within 90 days, for any reason.

On October 4, 2023, we amended the definitive agreement to extend the option period by an additional 30 days.

The option period is being used to complete initial suitability diligence.

Closing, if it should occur, is expected in late 2023.

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For the year ended December 31, 2022 we had a net loss of $67.1 million and an accumulated deficit of $160.9 million as of December 31, 2022.

For the six months ended June 30, 2023, we had a net loss of $48.0 million and an accumulated deficit of $208.9 million as of June 30, 2023.

For the nine months ended September 30, 2023, we had a net loss of $54.9 million and an accumulated deficit of $215.8 million as of September 30, 2023.

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

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Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate our exact working capital requirements.

Our future funding requirements will depend on and could increase significantly as a result of, many factors, including those listed above as well as those listed in Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q.

We do not currently have any committed external source of funds.

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

Any disruptions to, or volatility in, the credit and financial

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

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

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

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, 2023 totaled approximately $23.7 million, of which $1.1 million is payable through the remainder of 2023 and $22.6 million is payable through the end of 2033.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of September 30, 2023 totaled approximately $23.2 million, of which $0.6 million is payable through the remainder of 2023 and $22.6 million is payable through the end of 2033.

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

On April 18, 2023, we amended an existing lease agreement to lease additional laboratory space in Phoenix, Arizona.

On April 18, 2023, we amended an existing lease agreement

to lease additional laboratory space in Phoenix, Arizona.

Upon taking possession of the additional laboratory space, we expect our undiscounted future minimum payment obligations to increase by approximately $1.7 million.

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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 operating activities $ (24,213) $ (35,655)

Net cash provided by (used in) investing activities 1,197 (27,913)

Net cash used in investing activities (8,511) (162,063)

Net cash provided by financing activities 999 2,265

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Operating Activities

Net cash used in operating activities was $29.2 million for the six months ended June 30, 2023, and was primarily attributable to the net loss of $48.0 million, increases in accounts receivable of $8.0 million, decreases in accrued compensation of $7.1 million, increases in accretion of discounts on marketable investment securities of $2.3 million and increases in inventory of $2.1 million, partially offset by non-cash stock-based compensation expense of $26.4 million, depreciation and amortization of $5.9 million, a change in accounts payable of $3.1 million and a change in other accrued and current liabilities of $2.0 million.

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-based compensation expense of $17.2 million and depreciation and amortization of $4.8 million.

The $1.2 million decrease in net cash used in operating activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

In part, the cash used during the first half of 2023 reflects the payment of annual cash bonuses to our employees as well as certain health care benefit payments totaling $17.7 million, that are not expected to recur during the remainder of 2023.

Net cash used in operating activities was $24.2 million for the nine months ended September 30, 2023, and was primarily attributable to the net loss of $54.9 million, increases in accounts receivable of $13.8 million, increases in accretion of discounts on marketable investment securities of $3.9 million, decreases in accrued compensation of $2.0 million and increases in inventory of $1.8 million, partially offset by non-cash stock-based compensation expense of $39.4 million, depreciation and amortization of $9.1 million, a change in accounts payable of $2.7 million and a change in other accrued and current liabilities of $1.4 million.

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.

The $11.4 million decrease in net cash used in operating activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

In part, the cash used during the nine months ended September 30, 2023 reflects the payment of annual cash bonuses to our employees as well as certain health care benefit payments totaling $17.7 million, that are not expected to recur during the remainder of 2023.

In comparison, we paid $11.6 million during the same period in 2022 towards annual cash bonuses and certain health care benefits.

Investing Activities

Net cash provided by investing activities was $1.2 million for the six months ended June 30, 2023 and consisted primarily of the maturity of marketable investment securities of $95.0 million, partially offset by purchases of marketable investment securities of $86.4 million and purchases of property and equipment of $7.4 million.

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 purchase price of $26.7 million (net of cash and cash equivalents acquired) paid for our acquisition of AltheaDx and the purchase of property and equipment of $1.8 million.

The $5.6 million increase in cash used for the purchase of property and equipment for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the build out and completion of our new laboratory and office facilities located in Pittsburgh, Pennsylvania.

Net cash used in investing activities was $8.5 million for the nine months ended September 30, 2023 and consisted primarily of purchases of marketable investment securities of $136.7 million and purchases of property and equipment of $9.8 million, partially offset by the maturity of marketable investment securities of $138.0 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.

The $6.0 million increase in cash used for the purchase of property and equipment for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the build out and completion of our new laboratory and office facilities located in Pittsburgh, Pennsylvania.

Fixed asset purchases for this build out included those made for leasehold improvements, furniture and fixtures, new laboratory equipment and information technology infrastructure.

Financing Activities

Net cash provided by financing activities was $1.0 million for the six months ended June 30, 2023, and consisted primarily of $1.7 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), $0.2 million of proceeds from exercise of common stock options, partially offset by the $0.8 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

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 ESPP and $0.5 million in proceeds from the exercise of stock options.

Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2023, and consisted primarily of $2.0 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), $0.2 million of proceeds from exercise of common stock options, partially offset by the $1.1 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

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 ESPP and $0.7 million in proceeds from the exercise of stock options.

In 2021, the rate of inflation in the United States began to increase but has continued to subside since the second half of 2022.

We do not believe that inflation has had a material impact on our financial results during the three and six months ended June 30, 2023.

We do not believe that inflation has had a material impact on our financial results during the three and nine months ended September 30, 2023.

We are unable to predict if the rate of inflation will increase in future periods.

Critical Accounting Estimates

During the six months ended June 30, 2023, 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, 2022.

During the nine months ended September 30, 2023, 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, 2022.

The following is an updated discussion of our critical accounting estimates related to goodwill impairment testing and requisite service period for stock-based compensation.

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In July 2023, the MAC suspended the LCD and then posted a new draft LCD for comment that is substantially the same as the LCD that was to become effective.

Factors that could result in a future impairment of goodwill include declines in the price of our common stock, increased competition, changes in macroeconomic developments, unfavorable government or regulatory developments and changes in coverage or reimbursement conditions.

During the third quarter of 2023, we continued to monitor our market capitalization against the carrying value of our reporting unit and did not observe any significant changes since our impairment test at June 30, 2023.

We are currently performing our annual impairment test, as of October 1, 2023, and we have not identified any additional indicators of impairment to date.

Stock-Based Compensation—Requisite Service Period

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Performance-based restricted stock units (“PSUs”) vest upon the achievement of certain performance conditions and the provision of service with us through a specified period.

Accruals of compensation cost for PSUs are based on the probable outcome of the performance conditions and are

reassessed each reporting period.

Accruals of compensation cost for PSUs are based on the probable outcome of the performance conditions and are reassessed each reporting period.

We recognize compensation cost for PSUs separately for each vesting tranche on a ratable basis over the requisite service period.

6 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