What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-02 · 181 added, 364 removed, 246 unchanged (69% of the section changed)

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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 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 tests provide.

Castle Biosciences is a molecular diagnostics company offering innovative test solutions to aid clinicians in the diagnosis and treatment of dermatologic cancers, Barrett’s esophagus (“BE”), uveal melanoma (“UM”), and in the treatment of mental health conditions.

Our Test Portfolio

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 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.

Currently, our revenue is primarily generated by our DecisionDx-Melanoma risk stratification gene expression profile (“GEP”) test for cutaneous melanoma, which is supplemented by revenue generated from our DecisionDx-SCC risk stratification test for cutaneous squamous cell carcinoma (“SCC”), our TissueCypher risk stratification test for Barrett’s esophagus (“BE”) and our DecisionDx-UM risk stratification test for uveal melanoma (“UM”).

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

We also offer a proprietary pharmacogenomics (“PGx”) test to guide optimal drug treatment for patients diagnosed with depression, anxiety and other mental health conditions.

Currently, our revenue is primarily generated by our DecisionDx-Melanoma risk stratification test for cutaneous melanoma (“CM”), which is supplemented by revenue generated from our DecisionDx-SCC risk stratification test for cutaneous squamous cell carcinoma (“SCC”), our TissueCypher risk stratification test for BE and our DecisionDx-UM risk stratification test for uveal melanoma (“UM”).

All five of our MAAA tests have been granted Advanced Diagnostic Laboratory (“ADLT”) test status by the Centers for Medicare & Medicaid Services (“CMS”) which means each test has demonstrated that (i) when combined with an empirically derived algorithm, it yields a result that predicts the probability a specific individual patient will develop a certain condition or conditions, or will respond to a particular therapy or therapies;

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Our Dermatologic Tests

Our lead product is DecisionDx-Melanoma, a proprietary risk stratification GEP test that predicts the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma.

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.

DecisionDx-Melanoma is our proprietary risk stratification gene expression profile (“GEP”) test that is designed to predict the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma.

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

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

We launched DecisionDx-Melanoma in May 2013.

We estimate that approximately 50% of patients diagnosed with CM are 65 years of age or older.

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, representing an estimated U.S.

We estimate that 20% of SCC patients, or 200,000 annually in the United States, are classified as high risk, representing an estimated U.S.

TAM of approximately $820 million.

We launched DecisionDx-SCC in August 2020.

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

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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.

We began offering MyPath Melanoma following our acquisition of the Myriad MyPath Laboratory in May 2021 at which point 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 BE.

TissueCypher is our proprietary risk stratification spatialomics 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 BE.

We estimate a U.S.

TAM of approximately $1 billion.

We began offering the TissueCypher Barrett’s Esophagus Test following our acquisition of Cernostics, Inc.

(“Cernostics”) in December 2021.

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

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

DecisionDx-UM is a proprietary, risk stratification GEP test that predicts the risk of metastasis for patients with UM.

DecisionDx-UM is a proprietary, risk stratification GEP test that is designed to predict the risk of metastasis for patients with UM.

We believe DecisionDx-UM is the standard of care in the management of newly diagnosed UM in the majority of ocular oncology practices in the United States.

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TAM of approximately $5 billion associated with this test.

We began offering the IDgenetix test following our acquisition of AltheaDx in April 2022.

Commercial Expansion Efforts

In late April 2022, we acquired AltheaDx and a commercial team covering approximately 20 outside sales territories.

In September 2022, we added additional outside territories for our TissueCypher Barrett’s Esophagus Test and established a new commercial sales team dedicated to our Diagnostic GEP offering, with the current dermatologic commercial team shifting to focus primarily on DecisionDx-Melanoma and DecisionDx-SCC.

The new sales teams were fully integrated into our commercial operations by the end of the second quarter of 2023.

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.

In September 2022, we established a new commercial sales team dedicated to our Diagnostic GEP offering and added additional outside territories for our TissueCypher test, which were fully integrated into our commercial operations by the end of the second quarter of 2023.

During the year ended December 31, 2023, we continued to expand our dermatologic and gastrointestinal commercial sales forces through territory and headcount expansions with focus being on our DecisionDx Melanoma, DecisionDx-SCC, and TissueCypher tests.

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

Reimbursement

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Achieving broad coverage and reimbursement of our current products by third-party payors and continued Medicare coverage are key components of our financial success.

De novo coverage by government and third-party payors for our pipeline tests will be important over time.

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

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

We have received Medicare coverage for our DecisionDx-Melanoma, DecisionDx-SCC, MyPath Melanoma, DecisionDx-UM, TissueCypher and IDgenetix tests which meet certain criteria for Medicare and Medicare Advantage beneficiaries, representing approximately 60 million covered lives.

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

The Medicare rates discussed below are prior to giving effect to applicable sequestration in effect from time to time as described in further detail under “Government Regulation and Product Approval—Healthcare Reform” included in Item 1, Business, of our Annual Report on Form 10-K for the year ended December 31, 2023.

DecisionDx-Melanoma

Palmetto GBA MolDX (“Palmetto”), the Medicare Administrative Contractor (“MAC”) responsible for administering MolDX, the program that assesses molecular diagnostic technologies, issued a final expanded local coverage determination (“LCD”) for DecisionDx-Melanoma, effective November 22, 2020.

With this expanded LCD and the accompanying billing and coding articles, we estimate that a significant majority of the DecisionDx-Melanoma tests performed for Medicare patients will meet the coverage criteria.

Noridian Healthcare Solutions, LLC (“Noridian”), the MAC responsible for administering claims for laboratory services performed in our Arizona laboratory, has adopted the same coverage policy as Palmetto and also issued an expanded final LCD for DecisionDx-Melanoma, effective December 6, 2020.

More recently, Palmetto converted the DecisionDx-Melanoma test-specific LCD to a “foundational” LCD.

This LCD was issued as final May 19, 2022 with Noridian issuing the same on June 16, 2022.

The final LCDs did not result in any changes in coverage.

On May 17, 2019, CMS determined that DecisionDx-Melanoma meets the criteria for ADLT status.

DecisionDx-Melanoma tests are processed from our Phoenix laboratory and since the second quarter of 2022, have been covered under “foundational” local coverage determinations (“LCD”) finalized by Medicare Administrative Contractors (“MACs”) Palmetto GBA MolDX (“Palmetto”) and Noridian Health Solutions (“Noridian”).

DecisionDx-Melanoma has met ADLT status, as determined by the CMS, since 2019.

Since 2022, the rate for DecisionDx-Melanoma is 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 was set using median private payor rate data from January 1, 2021 to June 30, 2021.

The rate for 2022 was $7,193 per test and continues to be $7,193 per test for 2023.

Our rate for 2023 was $7,193 per test and is $7,193 for 2024.

DecisionDx-UM

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

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.

DecisionDx-UM tests are processed from our Phoenix laboratory and are covered under LCDs finalized by MAC administrators Palmetto and Noridian in July 2017.

DecisionDx-UM has met the criteria of “existing advanced diagnostic laboratory test” status, also referred to as “existing ADLT” status, as determined by the CMS, since May 2019.

Our rate is 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 was set using median private payor rate data from January 1, 2021 to June 30, 2021.

The rate for 2022 was $7,776 per test and the rate for 2023 remains at $7,776 per test.

Diagnostic GEP Offering

MyPath Melanoma

MyPath Melanoma is currently covered under a MolDX LCD policy through Noridian that first became effective in June 2019.

Our rate for 2023 was $7,776 per test and is $7,776 for 2024.

MyPath Melanoma and DiffDx-Melanoma

MyPath Melanoma was covered under a test-specific LCD policy through Noridian that became effective in June 2019.

Effective August 6, 2023, Palmetto and Noridian issued LCDs that converted the test-specific MyPath Melanoma LCD to a “foundational” LCD and provided coverage for both MyPath Melanoma and DiffDx-Melanoma.

MyPath Melanoma was approved as a “new ADLT” in September 2019.

The rate for 2022 was $1,950 per test.

Our 2023 rate is set at $1,755 per test, based on data submitted by the predecessor owner of the Myriad MyPath Laboratory relating to the first half of 2021.

Rates for our MyPath Melanoma test continues to be set annually based upon the median private payor rate for the first half of the second preceding calendar year.

DiffDx-Melanoma

In early 2021, we submitted our technical assessment dossier for DiffDx-Melanoma.

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

In June 2022, Palmetto and Noridian each posted a proposed LCD that would convert the MyPath Melanoma test-specific LCD to a “foundational” LCD and provide coverage for both MyPath Melanoma and DiffDx-Melanoma.

On June 22, 2023, Palmetto and Noridian issued final foundational LCDs that will provide coverage for both MyPath Melanoma and DiffDx-Melanoma effective August 6, 2023.

Rates for our MyPath Melanoma test is set annually based upon the median private payor rate for the first half of the second preceding calendar year.

Our 2023 rate was set at $1,755 per test, based on data submitted by the predecessor owner of the Myriad MyPath Laboratory relating to the first half of 2021.

Our 2024 rate is set at $1,950 per test.

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

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.

Our rate for 2024 is $1,950 per test.

Diagnostic GEP Offering

Our Diagnostic GEP offering included MyPath Melanoma and DiffDx-Melanoma.

We began offering MyPath Melanoma following our acquisition of the Myriad MyPath Laboratory on May 28, 2021.

Our internal data indicates that we have improved the technical performance of MyPath Melanoma and that it is comparable to the technical performance of DiffDx-Melanoma.

As such, 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.

DecisionDx‑SCC

In the first quarter of 2022, we requested that Novitas Solutions, Inc.

(“Novitas”), the MAC that manages the Medicare jurisdiction covering our Pittsburgh, Pennsylvania laboratory, conduct a medical review of our DecisionDx-SCC test.

That review was completed towards the end of that quarter.

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.

We issue our DecisionDx-SCC tests from our Pittsburgh and Phoenix labs, with a majority of tests being issued from our Pittsburgh lab.

On June 2, 2023, Novitas Solutions (“Novitas”), the MAC responsible for administering claims for test reports issued by our Pittsburgh laboratory, posted a finalized oncology biomarker LCD pursuant to which the DecisionDx-SCC test would no longer be covered by Medicare effective July 17, 2023.

However, on July 6, 2023, Novitas suspended the final version of the LCD and announced its intent to post a new proposed LCD for comment and presentation at an open meeting.

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

In the second quarter of 2020, we submitted our technical assessment dossier for DecisionDx-SCC to Palmetto and Noridian.

The dossier was accepted as complete in the third quarter of 2020.

On June 8, 2023, both Palmetto and Noridian posted their draft LCD recommending no coverage for DecisionDx-SCC.

Palmetto’s MolDX program oversees MAAA tests that are reported from our Phoenix laboratory and Noridian is the MAC responsible for administering claims for test reports issued by our Phoenix laboratory.

On June 8, 2023, both Palmetto and Noridian posted a preliminary draft LCD recommending no coverage for DecisionDx-SCC.

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

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

We receive payments for claims according to the published CLFS rate.

For 2022, the published CLFS payment rate was $2,513 for the test.

Decision-SCC was reimbursed at a rate of $3,873 per test under a PLA code from second quarter of 2022 through June 30, 2023 when 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.

We submitted the median private payor data to CMS during the data reporting period in December 2023.

Effective April 1, 2024, the updated CLFS rate will continue at $8,500 through December 31, 2025.

Future rates 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 laboratory and falls under the Medicare jurisdiction managed by Novitas.

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 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.

ADLT status exempts TissueCypher from what is called the “14-day rule,” which simplifies the billing process for Medicare patients.

Effective January 1, 2023, the published CLFS rate for TissueCypher was set at $4,950 per test, 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.

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 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:

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

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.

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

Accordingly, as a result of this change, the Medicare reimbursement rate for the IDgenetix multi-gene panel decreased from approximately $1,500 per test to $917 per test.

The New CPT Code does not describe all of the components of the IDgenetix test.

We subsequently obtained a test-specific PLA CPT code.

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.

Our IDgenetix multi-gene panel was reimbursed by Medicare at approximately $1,500 per test from April 2022 through February 2023, when 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 was set at $917 per test while the test went through CMS’s Gapfill pricing process.

We believed the new CPT Code, in conjunction with the IDgenetix Z-Code, did not describe all of the components of the IDgenetix test and thus, was not appropriate for IDgenetix.

We subsequently obtained a test-specific PLA CPT code which became effective October 1, 2023.

In November 2023, CMS posted its final CLFS determination which crosswalks our PLA CPT code to an existing PLA code at a rate of $1,336 per test effective January 1, 2024.

Delivered Test Reports

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

A test report is generated when we receive a sample in our laboratory, 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 nine months ended September 30, 2023 and 2022 and for the year ended December 31, 2022 are presented in the table below:

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

The number of test reports delivered by us during the three months ended March 31, 2024, during each quarter in 2023 and for the year ended December 31, 2023 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 (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

Dermatologic Total DecisionDx-UM TissueCypher (2)

IDgenetix Grand Total

Q1 2024 8,384 3,577 998 12,959 422 3,429 4,078 20,888

For the nine months ended September 30, 2023

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

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

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

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 2023 8,591 3,530 1,018 13,139 405 3,441 3,299 20,284

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We offered both MyPath Melanoma and DiffDx-Melanoma under our Diagnostic GEP offering until February 2023 when we suspended the offering of DiffDx-Melanoma, as discussed above.

(2) We began offering the IDgenetix test on April 26, 2022, following our acquisition of AltheaDx.

Includes both single-gene and multi-gene tests.

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

(2) 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.

We completed processing of our pre-existing backlog orders in October 2023 and continue to accept new orders as of March 31, 2024.

For the three months ended March 31, 2024, our test report volume increased by 40.0% compared to the same period in 2023.

Our dermatologic test report volume increased by 18.1% for the three months ended March 31, 2024, compared to the prior period in 2023, 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 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 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.

For example, we found that during the three months ended March 31, 2024, approximately 55% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

Information About Certain Metrics

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

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

Test Reports Delivered

Test reports delivered represents the number of completed test reports delivered by us during the reporting period indicated.

The period in which a test report is delivered does not necessarily correspond with the period the related revenue, if any, is recognized, due to the timing and amount of adjustments for variable consideration under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Test reports delivered represent the number of completed test reports delivered by us during the reporting period indicated.

The period in which a test report is delivered does not necessarily correspond with the period in which the related revenue, if any, is recognized, due to the timing and amount of adjustments for variable consideration under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).

We use this metric to evaluate the growth in adoption of our tests and to measure against our internal performance objectives.

We believe this metric is useful to investors in evaluating the volume of our business activity from period-to-period that may not be discernible from our reported revenues under ASC 606.

New Ordering Clinicians

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

Our dermatologic tests currently consist of DecisionDx-Melanoma, DecisionDx-SCC and MyPath Melanoma.

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

We also believe this metric provides useful information to investors in assessing our ability to expand the use of our dermatologic tests.

Since this metric is based upon the reporting period in which an order is placed, it does not necessarily correspond to the reporting period in which a test report was delivered or revenue was recognized.

Impact of Macroeconomic Conditions

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.

Macroeconomic conditions, including uncertainties associated with the Israel-Hamas war, the ongoing conflict between Ukraine and Russia, economic slowdowns, public health crises, 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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Our Financial Results

Our net (loss) income may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under ASC 606.

Our net loss may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under ASC 606.

We expect our expenses will increase substantially over time as we:

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For tests with limited reimbursement experience or no coverage, we recognize revenues on the basis of actual cash collections.

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

through acquisitions, obtain reimbursement from additional third-party payors and increase our reimbursement rate for tests performed.

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

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

For example, we commenced operations in a new expanded laboratory facility in Pittsburgh, Pennsylvania in the second quarter of 2023.

For example, we commenced operations in a new expanded laboratory facility in Pittsburgh, Pennsylvania in the second quarter of 2023 and expect to operate additional lab space in Pittsburgh by end of 2024.

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

See the table in “Results of Operations—Comparison of the Three Months ended March 31, 2024 and 2023” for details.

Research and Development

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

We expect to use a portion of 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 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.

In February 2023, we announced the publication of data from the DECIDE study presenting DecisionDx-Melanoma test results influenced 85% of clinicians’ decisions regarding the SLNB surgical procedure.

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 important studies that are underway to support our DecisionDx-Melanoma test.

For instance, in February 2023, we announced the publication of data from the DECIDE study presenting DecisionDx-Melanoma test results influenced 85% of clinicians’ decisions regarding the SLNB surgical procedure.

Additionally, use of the tests’ results within current guideline recommendations led to a significant reduction in SLNB procedures performed, demonstrating the clinical value of the test to guide risk-aligned patient care.

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 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.

Also, in 2021, we initiated our large prospective, multi-center clinical study to develop, validate and bring to market a pipeline genomic test, or tests, aimed at predicting response to systemic therapy in patients with moderate to severe psoriasis, atopic dermatitis and related inflammatory skin conditions.

As of March 31, 2024, there were more than 44 active clinical study sites and over 1,100 patients enrolled in this study.

Assuming we are successful in validating a genomic test, or tests, for one or more of these uses, then we expect to launch this pipeline test by the end of 2025.

Selling, General and Administrative

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Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets is primarily associated with developed technology obtained through acquisitions, such as our acquisitions of the Myriad MyPath Laboratory in May 2021, Cernostics in December 2021 and AltheaDx in April 2022.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration is associated with our acquisitions of Cernostics and AltheaDx and the related contingent consideration of up to $50.0 million and $75.0 million, respectively, payable based on the achievement of certain commercial milestones relating to the year ended December 31, 2022 in the case of Cernostics, and the years ending December 31, 2022, 2023 and 2024, in the case of AltheaDx (the “Earnout Payments”).

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

Amortization of acquired intangible assets is primarily associated with developed technology obtained through acquisitions, such as our acquisitions of Cernostics in December 2021 and AltheaDx in April 2022.

Interest Income

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Interest Expense

Interest expense is primarily attributable to finance leases.

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 nine months ended September 30, 2022.

Interest expense is primarily attributable to finance leases and long-term debt.

Income Tax Expense

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.

As of December 31, 2023, we had federal net operating loss (“NOL”) carryforwards of $197.1 million, of which $92.0 million will begin to expire in 2029 if not utilized to offset federal taxable income, and $105.1 million may be carried forward indefinitely.

Also, as of December 31, 2022, we had state NOL carryforwards of $114.0 million, which begin to expire in 2028 if not utilized to offset state taxable income.

As of December 31, 2023, we also had state NOL carryforwards of $114.3 million, which begin to expire in 2028 if not utilized to offset state taxable income.

Results of Operations

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

Comparison of the Three Months Ended March 31, 2024 and 2023

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

Three Months Ended

September 30, Change

March 31, Change

Net revenues $ 72,974 $ 42,037 $ 30,937 73.6 %

Operating expenses and other operating income

Operating expenses

Cost of sales (exclusive of amortization of acquired intangible assets) 13,894 10,182 3,712 36.5 %

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Amortization of acquired intangible assets 2,247 2,222 25 1.1 %

Change in fair value of contingent consideration — (151) 151 100.0 %

Total operating expenses, net 78,445 73,559 4,886 6.6 %

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Loss before income taxes (2,489) (29,190) 26,701 91.5 %

Income tax expense 32 — 32 NA

Income tax expense 45 14 31 221.4 %

Net loss $ (2,534) $ (29,204) $ 26,670 91.3 %

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,

2024 2023 Change

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Three Months Ended

September 30,

2024 2023 Change

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Three Months Ended

September 30,

2024 2023 Change

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Gross margin percentage 77.9 % 70.5 % 7.4 %

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.

Net revenues for the three months ended March 31, 2024 increased by $30.9 million, or 73.6%, to $73.0 million compared to the three months ended March 31, 2023, due to a $23.4 million increase in revenue from our dermatologic tests and a $7.5 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to a higher average selling price for DecisionDx-SCC tests, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, increases in test report volume of 10.6% for DecisionDx-Melanoma and 48.4% for DecisionDx-SCC, and a slightly higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $7.5 million was primarily attributable to our TissueCypher test, due to a higher average selling price and higher test report volume.

Our IDgenetix test also contributed to the increase in non-dermatologic revenues during the period due to a higher average selling price and higher test report volume.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.6% for the three months ended March 31, 2023 to 18.7% for the three months ended March 31, 2024.

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 $1.7 million of net positive revenue adjustments for the three months ended March 31, 2024, compared to $1.3 million of net negative revenue adjustments for the three months ended March 31, 2023.

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 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.

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended March 31, 2024 increased by $3.7 million, or 36.5%, compared to the three months ended March 31, 2023, primarily due to higher personnel costs and increased expenditures on supplies.

The increase in personnel costs primarily consists of higher salaries and wages, employee benefits and bonuses, reflecting headcount additions made to support business growth as well as merit and annual inflationary wage adjustment for existing employees.

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 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 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.

Our gross margin percentage was 77.9% for the three months ended March 31, 2024, compared to 70.5% for the same period in 2023.

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 personnel costs and higher supplies expenditures, 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 $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 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.

Research and development expenses decreased by $0.6 million, or 4.1%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily consisting of lower clinical studies expenses and advisory services partially offset by higher personnel costs.

Decreases in clinical studies expense were primarily attributable to CM studies and our other inflammatory skin disease pipeline studies.

Higher personnel costs are primarily a result of higher salaries and wages, and bonuses, all of which increased due to headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

We expect research and development expense to increase as we continue to invest in ongoing pipeline initiatives as well as seek opportunities to branch out upstream, downstream and parallel to our existing commercial tests, within or adjacent to our established dermatology commercial call points.

Selling, General and Administrative

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Three Months Ended

September 30,

2024 2023 Change

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Total selling, general and administrative expense $ 48,495 $ 46,762 $ 1,733

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 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 $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 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 $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 $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 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):

Nine Months Ended

September 30, Change

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

Operating expenses and other operating income

Cost of sales (exclusive of amortization of acquired intangible assets) 32,559 22,489 10,070 44.8 %

Research and development 40,624 33,594 7,030 20.9 %

Selling, general and administrative 136,062 104,577 31,485 30.1 %

Amortization of acquired intangible assets 6,742 6,051 691 11.4 %

Change in fair value of contingent consideration — (17,987) 17,987 100.0 %

Total operating expenses, net 215,987 148,724 67,263 45.2 %

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

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

Interest expense (9) (13) 4 30.8 %

Loss before income taxes (54,824) (48,343) (6,481) (13.4) %

Income tax expense (benefit)

62 (1,823) 1,885 103.4 %

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

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

Nine Months Ended

September 30,

2023 2022 Change

Cost of sales (exclusive of amortization of acquired intangible assets) $ 3,719 $ 2,725 $ 994

Research and development 7,755 5,607 2,148

Selling, general and administrative 27,943 18,066 9,877

Total stock-based compensation expense $ 39,417 $ 26,398 $ 13,019

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

Nine Months Ended

September 30,

2023 2022 Change

Dermatologic (1)

$ 130,097 $ 90,160 $ 39,937

Non-Dermatologic (2)

23,571 8,541 15,030

Total net revenues $ 153,668 $ 98,701 $ 54,967

(1) Consists of DecisionDx-Melanoma, DecisionDx-SCC and our Diagnostic GEP offering.

(2) Consists of TissueCypher, DecisionDx-UM and IDgenetix.

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

Nine Months Ended

September 30,

2023 2022 Change

Net revenues $ 153,668 $ 98,701 $ 54,967

Cost of sales (exclusive of amortization of acquired intangible assets) 32,559 22,489 10,070

Amortization of acquired intangible assets 6,742 6,051 691

Gross margin $ 114,367 $ 70,161 $ 44,206

Gross margin percentage 74.4 % 71.1 % 3.3 %

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 $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 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.

The increase in personnel costs, including increases in salaries and wages, stock-based compensation expense and benefits, was primarily due to increased headcount driven by our expanded laboratory capacity.

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.

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 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 $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 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):

Nine Months Ended

September 30,

2023 2022 Change

Sales and marketing $ 86,693 $ 62,190 $ 24,503

General and administrative 49,369 42,387 6,982

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

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.

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, 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 $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.

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

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 nine months ended September 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.

Sales and marketing expenses increased by $0.6 million, or 2.0%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase is primarily due to higher expense for training events and speaker conferences and expense for salary and wages, partially offset by lower expense for travel and lower stock-based compensation expense.

Increases in salary and wages reflect headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in sales and marketing was $4.7 million for the three months ended March 31, 2024, compared to $4.9 million for the three months ended March 31, 2023, a decrease of $0.2 million.

Decreases in stock-based compensation expense is primarily attributable to the timing of annual grants where an annual grant was made in December 2022 and the next annual grant was not made until March 2024.

General and administrative expenses increased by $1.1 million, or 6.7%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase is primarily attributable to higher expense for professional services, higher general administrative costs, and higher salaries and wage expense partially offset by lower stock-based compensation expense.

Increases in salary and wage expense reflect headcount expansions in our administrative support functions and merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in general and administrative expense was $4.0 million for the three months ended March 31, 2024, compared to $4.7 million for the three months ended March 31, 2023, a decrease of $0.7 million.

Amortization of Acquired Intangible Assets

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 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 $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 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.

Amortization of acquired intangible assets for the three months ended March 31, 2024 was $2.2 million and remains consistent as compared to the three months ended March 31, 2023.

Interest and Other Non-Operating Income

Interest income increased by $0.7 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, 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 $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 September 30, 2023, we had 587 employees compared to 517 as of September 30, 2022.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $12.7 million for the three months ended March 31, 2024, compared to $13.5 million for the three months ended March 31, 2023.

The decrease is primarily due to the timing of annual grants where an annual grant was made in December 2022 and the next annual grant was not made until March 2024.

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 March 31, 2024, we had 638 employees, compared to 562 as of March 31, 2023.

As of March 31, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $103.1 million, which is expected to be recognized over a weighted-average period of 2.5 years.

Liquidity and Capital Resources

Sources of Liquidity

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

Our principal sources of liquidity are our cash and cash equivalents, marketable investment securities, cash generated from the sale of our products and our line-of-credit under the 2024 Loan and Security Agreement (the “2024 LSA”).

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, 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.

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 through 2025.

As of March 31, 2024 and December 31, 2023, we had marketable investment securities of $156.3 million and $144.3 million, respectively.

As of March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $82.9 million and $98.8 million, respectively.

As of March 31, 2024, we had a $25 million credit-line available under the 2024 LSA.

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

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Material Cash Requirements

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

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

We agreed to pay contingent consideration of up $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.

The portion associated with the commercial milestones for the year ended December 31, 2022 was not paid since the applicable commercial milestones were not met.

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 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.

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.

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.

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

On February 9, 2024, we closed on the purchase of the land for cash consideration of $7.2 million.

In connection with our acquisition of AltheaDx, we agreed to pay contingent consideration of up $75.0 million, payable 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.

The portion of the AltheaDx Earnout Payments associated with the commercial milestones for the year ended December 31, 2023 was $37.5 million and was not paid since the applicable commercial milestones were not met.

The AltheaDx Earnout Payments included a 2022 catch-up provision for additional payment of up to $17.5 million that expired in 2023.

Therefore, as of March 31, 2024, we have a potential payment obligation of up to $20.0 million with respect to the remaining commercial milestones for 2024.

The number of shares of our common stock that may be issued in connection with the commercial milestone payment for 2024 is subject to limitations.

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

For the year ended December 31, 2023 we had a net loss of $57.5 million and an accumulated deficit of $218.4 million as of December 31, 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.

For the three months ended March 31, 2024, we had a net loss of $2.5 million and an accumulated deficit of $220.9 million as of March 31, 2024.

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

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

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

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

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

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

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• the development and validation of genomic classifiers;

• acceptance of new genomic tests by clinicians, patients and third-party payors.

• acceptance of new genomic tests by clinicians, patients and third-party payors including competitor actions.

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 and in our other filings with the SEC.

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

In the event additional funding is required, we expect that we would use a combination of equity and debt financings, which may not be available to us when needed, on terms that we deem to be favorable or at all.

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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.

Long-Term Debt

We had no debt as of December 31, 2023.

Our long-term debt as of March 31, 2024 is presented in the table below (in thousands):

March 31, 2024

Term debt $ 10,200

Unamortized discount (200)

Total long-term debt 10,000

Current portion of long-term debt —

Total $ 10,000

2024 Loan and Security Agreement

On March 26, 2024 (the ‘‘Closing Date’’), we entered into the ‘2024 LSA, by and between the Company, its wholly owned subsidiary, Castle Narnia Real Estate Holding 1, LLC and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (the “Lender’’).

The 2024 LSA provides for (i) on the Closing Date, $10.0 million aggregate principal amount of term loans (discussed in the ‘‘2024 Term Loan’’ section below), and (ii) from the Closing Date until March 31, 2025, an additional line of credit of $25.0 million with the same interest rate and maturity as the term debt available (discussed in the ‘‘2024 Credit Line’’ section below) at our option.

The obligations under the 2024 LSA are secured by substantially all of our assets, excluding intellectual property, the real property held by the Company, and are subject to certain other exceptions and limitations.

right to prepay the 2024 LSA in whole, subject to a prepayment fee of approximately 1.50% if paid prior to March 26, 2026.

Amounts repaid under the 2024 LSA may not be reborrowed.

In addition, the 2024 LSA contains customary conditions of borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of our capital stock.

Should an event of default occur, including the occurrence of a material adverse change, we could be liable for immediate repayment of all obligations under the 2024 LSA.

Should we seek to amend the terms of the 2024 LSA, the consent of the Lender would be required.

As of March 31, 2024, we were in compliance with this covenant.

The 2024 LSA bears interest at a floating rate equal to the greater of (a) the WSJ Prime Rate plus 0.25% or (b) 6.00% per annum.

The Term Loans are interest only from the Closing Date through November 30, 2025, which may be extended at our option through November 30, 2026 as long as no event of default under the 2024 LSA has occurred.

After the end of the interest only period, we are required to pay equal monthly installments of principal through the maturity date of November 1, 2028.

We are also obligated to make an additional final payment of 2.00% of the aggregate original principal amounts of Term Loans advanced by the Lender, due at the earlier of the maturity date or date the Term Loans are repaid in full.

2024 Term Loan

On March 26, 2024, we drew $10.0 million in Term Loans under the terms and provisions of the 2024 LSA.

We are obligated to make a final payment of $200,000 under the terms of the 2024 LSA final payment provisions.

A discount on debt equal to this obligation was recorded on the draw date and is being amortized as additional interest expense using the effective interest method over the term of the debt.

As of March 31, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 9.03%.

2024 Credit Line

We have a $25.0 million line of credit under the terms and provisions of the 2024 LSA available from the Closing Date until March 31, 2025.

Amounts repaid under the 2024 Credit Line may not be reborrowed.

As of March 31, 2024, no draws had been made on the line of credit.

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 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.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of March 31, 2024 totaled approximately $23.8 million, of which $1.8 million is payable through the remainder of 2023 and $22.0 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.

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

We expect our lease obligations may increase in the future as we expand our facilities, operations and headcount in support of the anticipated growth in our portfolio of commercial products and pipeline tests.

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

Nine Months Ended

September 30,

Three Months Ended

Net cash used in operating activities $ (6,835) $ (25,439)

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

Net cash (used in) provided by investing activities (19,701) 16,584

Net cash provided by financing activities 10,644 728

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Operating Activities

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.

Net cash used in operating activities was $6.8 million for the three months ended March 31, 2024, and was primarily attributable to decreases in accrued compensation of $14.2 million, increases in accounts receivable of $4.3 million, a net loss of $2.5 million, and increases in accretion of discounts on marketable investment securities of $1.7 million, partially offset by non-cash stock-based compensation expense of $12.7 million, depreciation and amortization of $3.3 million.

Net cash used in operating activities was $25.4 million for the three months ended March 31, 2023, and was primarily attributable to the net loss of $29.2 million, decreases in accrued compensation of $11.6 million, increases in accounts receivable of $4.4 million, increases in accretion of discounts on marketable investment securities of $1.2 million and increases in prepaid expenses and other current assets of $0.7 million, partially offset by non-cash stock-based compensation expense of $13.5 million, change in accounts payable of $3.9 million, depreciation and amortization of $2.9 million and a change in other accrued and current liabilities of $1.0 million.

The $18.6 million decrease in net cash used in operating activities for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 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 three months ended March 31, 2024 reflects the payment of annual cash bonuses to our employees as well as certain health care benefit payments totaling $20.8 million, that are not expected to recur during the remainder of 2024.

In comparison, we paid $17.7 million during the same period in 2023 towards annual cash bonuses and certain health care benefits.

Investing Activities

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.

Net cash used in investing activities was $19.7 million for the three months ended March 31, 2024 and consisted primarily of purchases of marketable investment securities of $60.8 million and purchases of property and equipment of $9.2 million, partially offset by the maturity of marketable investment securities of $50.2 million.

Net cash provided by investing activities was $16.6 million for the three months ended March 31, 2023 and consisted primarily of the maturity of marketable investment securities of $50.0 million, partially offset by purchases of marketable investment securities of $30.1 million and purchases of property and equipment of $3.3 million.

The $5.8 million increase in cash used for the purchase of property and equipment for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to our purchase of land for cash consideration of $7.2 million on February 9, 2024.

Financing Activities

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.

Net cash provided by financing activities was $10.6 million for the three months ended March 31, 2024, and consisted primarily of $10.0 million of proceeds from issuance of long-term debt and $1.1 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), partially offset by the $0.5 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

Net cash provided by financing activities was $0.7 million for the three months ended March 31, 2023, and primarily consisted of $1.0 million in proceeds from contributions to the ESPP and $0.1 million in proceeds from the exercise of stock options, partially offset by the $0.3 million payment of employee taxes attributable to the vesting of RSUs.

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 nine months ended September 30, 2023.

We do not believe that inflation has had a material impact on our financial results during the three months ended March 31, 2024.

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

Critical Accounting Estimates

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.

This information should be read in conjunction with our other information on critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Goodwill—Impairment Testing

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

On June 5, 2023, our stock price decreased significantly and did not recover before June 30, 2023.

In response to this trigger, we tested goodwill for impairment at June 30, 2023.

We elected to bypass the optional qualitative assessment and proceeded directly to the quantitative assessment.

In conducting our interim test, we concluded that our business consists of a single reporting unit.

To measure the fair value of our reporting unit, we used a market approach whereby we calculated our total market capitalization on the impairment test date, based on the closing price of our common stock as reported on the Nasdaq Global Market, and applied a reasonable control premium.

The control premium was based on an analysis of control premiums paid in recent acquisitions of companies in the same or similar industry as us.

Our impairment test indicated that the fair value of our reporting unit exceeded its carrying value by 13% and therefore no impairment was indicated.

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.

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

For awards with graded vesting and only service conditions, we recognize compensation costs on a straight-line basis over the requisite service period of the awards.

For options and RSUs, the requisite service period is generally the awards’ vesting period (typically four years).

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.

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

The requisite service period for PSUs is based on an analysis of vesting requirements and performance conditions for the particular award.

Certain employees are entitled to acceleration of vesting of a portion of their awards upon retirement, subject to age, service and notice requirements.

In these cases, the requisite service period takes into consideration the employee’s retirement eligibility, and is reassessed at each reporting date.

For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date.

Quantitative and Qualitative Disclosures About Market Risk.

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

During the three months ended March 31, 2024, 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, 2023.

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