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Item 2. Management’s Discussion and Analysis

2024-11-04 compared with 2024-08-05 · 159 added, 146 removed, 398 unchanged (43% of the section changed)

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

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q with our audited financial statements and notes thereto as of and for the years ended December 31, 2023 and 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the section entitled “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2024.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q with our audited financial statements and notes thereto as of and for the years ended December 31, 2023 and 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including the section entitled “Critical Accounting Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2024.

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

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Actual results or events could differ materially from the plans, intentions or expectations disclosed in the forward-looking statements that we make.

These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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.

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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 CM.

In a typical year, we estimate

approximately 130,000 patients are diagnosed with invasive CM in the United States, representing an estimated U.S.

In a typical year, we estimate approximately 130,000 patients are diagnosed with invasive CM in the United States, representing an estimated

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

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We estimate a U.S.

TAM of approximately $5 billion associated with this test.

TAM of approximately $5 billion.

Commercial Expansion Efforts

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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.

During the six months ended June 30, 2024, we further expanded our sales and marketing team for our TissueCypher test.

During the nine months ended September 30, 2024, we further expanded our sales and marketing team for our TissueCypher test.

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

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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.

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

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

On July 26, 2024, Novitas posted a note that it had been granted an extension by CMS.

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

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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 delivered to the clinician who ordered the test.

The number of test reports delivered by us during the six months ended June 30, 2024 and 2023 and for the year ended December 31, 2023 are presented in the table below:

The number of test reports delivered by us during the nine months ended September 30, 2024 and 2023 and for the year ended December 31, 2023 are presented in the table below:

Proprietary Dermatologic GEP Tests

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Q2 2024 9,585 4,277 1,099 14,961 456 4,782 4,903 25,102

For the six months ended June 30, 2024

Q3 2024 9,367 4,195 933 14,495 397 6,073 5,045 26,010

For the nine months ended September 30, 2024

27,336 12,049 3,030 42,415 1,275 14,284 14,026 72,000

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

For the six months ended June 30, 2023

16,180 5,092 1,933 23,205 870 2,830 4,831 31,736

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

For the nine months ended September 30, 2023

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

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

We completed processing of our pre-existing backlog orders in October 2023 and continue to accept new orders as of June 30, 2024.

For the three and six months ended June 30, 2024, our test report volume increased by 49.2% and 44.9%, respectively, compared to the same period in 2023.

Our dermatologic test report volume increased by 22% and 20.3% for the three and six months ended June 30, 2024, respectively, 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.

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

For example, we found that during the six months ended June 30, 2024, approximately 68% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

(2) We temporarily paused accepting additional orders in July 2023, resumed accepting new orders in a phased approach in September 2023, and completed processing of our pre-existing backlog orders in October 2023.

We have continued accepting new orders since September 2023.

For the three and nine months ended September 30, 2024, our test report volume increased by 41.3% and 43.6%, respectively, compared to the same period in 2023.

Our dermatologic test report volume increased by 17% and 19.2% for the three and nine months ended September 30, 2024, respectively, compared to the prior period in 2023.

For the nine months ended September 30, 2024, we have experienced higher test report volumes for all of our tests compared to the prior period in 2023.

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

In August 2024, we amended our Pittsburgh commercial real estate lease to add 23,821 square feet to our existing facilities, most of which will be used as dedicated lab space for processing our TissueCypher test.

As of September 30, 2024, substantially all leasehold improvements for this added space were complete and the added lab space was ready for use.

We expect the additional space will allow us to continue developing our business through our TissueCypher product line.

For our DecisionDx-SCC product line, we continue to see opportunities for leverage, where many of the clinicians ordering our DecisionDx-Melanoma are the same clinicians who order our DecisionDx-SCC test.

During each of the nine months ended September 30, 2024 and 2023, approximately 75% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

Information About Certain Metrics

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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.

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.

Impact of Macroeconomic Conditions

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.

Macroeconomic conditions, including uncertainties associated with the Israel-Hamas war, the ongoing conflict between Ukraine and Russia, the U.S.

presidential election, 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, changes to interest rates and financial and credit market fluctuations, volatility in the capital markets and 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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Revenue growth, operational results and advances to our business strategy depends on our ability to integrate any acquisitions into our existing business and effectively scale their operations.

The integration of acquired assets may impact our revenue growth, increase the cost of operations or may require management resources that otherwise would be available for ongoing development of our existing business.

The integration of acquired assets may impact our revenue growth, increase the cost of

operations or may require management resources that otherwise would be available for ongoing development of our existing business.

• New product development.

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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 newly 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.

For example, we commenced operations in a newly expanded laboratory facility in Pittsburgh, Pennsylvania in the second quarter of 2023 and subsequently amended the lease in August of 2024, adding 23,821 square feet to our existing facilities.

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

See the table in “Results of Operations—Comparison of the Three Months Ended June 30, 2024 and 2023” and “Results of Operations—Comparison of the Six Months Ended June 30, 2024 and 2023” for details.

See the table in “—Results of Operations—Comparison of the Three Months Ended September 30, 2024 and 2023” and “—Results of Operations—Comparison of the Nine Months Ended September 30, 2024 and 2023” for details.

Research and Development

Research and development expenses include costs incurred to develop our tests, collect clinical samples and conduct clinical studies to develop and support our products.

These costs consist of personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), prototype materials, laboratory supplies, consulting costs, regulatory costs, electronic medical records set up costs, costs associated with setting up and conducting clinical studies and allocated overhead, including rent, information technology, equipment depreciation and utilities.

conducting clinical studies and allocated overhead, including rent, information technology, equipment depreciation and utilities.

We expense all research and development costs in the periods in which they are incurred.

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

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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 June 30, 2024, there were more than 41 active clinical study sites and over 1,100 patients enrolled in this study.

Since December 31, 2023, we continue to maintain active clinical study test sites and a consistent number of 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.

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

Income Tax (Benefit) 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.

Income Tax Expense

Revisions in our estimate of annual pre-tax income, relating to uncertainty in continued Medicare coverage for our DecisionDx-SCC test and updated information, are sources of variability in our effective tax rates from period to period.

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.

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Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

Comparison of the Three Months Ended September 30, 2024 and 2023

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

Three Months Ended

June 30, Change

September 30, Change

Net revenues $ 85,782 $ 61,493 $ 24,289 39.5 %

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Income (loss) before income taxes 8,282 (6,873) 15,155 220.5 %

Income tax (benefit) expense (1,034) 16 (1,050) NM

Income tax expense 6,013 32 5,981 NM

Net income (loss) $ 2,269 $ (6,905) $ 9,174 132.9 %

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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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Three Months Ended

September 30,

2024 2023 Change

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Gross margin percentage 79.2 % 77.9 % 1.3 %

Net revenues for the three months ended June 30, 2024 increased by $36.9 million, or 73.5%, to $87.0 million compared to the three months ended June 30, 2023, due to a $25.8 million increase in revenue from our dermatologic tests and a $11.1 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests of $25.8 million 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, as well as increases in test report volume of 59.5% for DecisionDx-SCC and 11.5% for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $11.1 million was primarily attributable to our TissueCypher test, due to higher test report volume and a higher average selling price.

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

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.2% for the three months ended June 30, 2023 to 20.9% for the three months ended June 30, 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 $0.4 million of net positive revenue adjustments for the three months ended June 30, 2024, compared to $0.1 million of net negative revenue adjustments for the three months ended June 30, 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.

Net revenues for the three months ended September 30, 2024 increased by $24.3 million, or 39.5%, to $85.8 million compared to the three months ended September 30, 2023, due to a $13.9 million increase in revenue from our dermatologic tests and a $10.4 million increase in revenue from our non-dermatologic tests.

The $13.9 million increase in net revenues for our Dermatologic tests was primarily attributable to our DecisionDx-SCC test, which was due to higher test report volumes and a higher realized average selling price (“ASP”), as well our DecisionDx-Melanoma test which had higher test report volumes though a slightly lower ASP.

For the three months ended September 30, 2024 compared to the three months ended September 30, 2023, test report volumes for our DecisionDx-SCC and DecisionDx-Melanoma tests increased by 48.8% and 9.4%, respectively.

Increases in realized ASP for our DecisionDx-SCC test were primarily attributable to an increase in our Medicare reimbursement rate for this test, beginning in July 2023.

The $10.4 million increase in net revenues from our non-dermatologic tests was largely attributable to a 114.7% increase in test report volumes for our TissueCypher test, and, to a lesser extent, to our IDgenetix test which also had higher test report volumes.

Increases in our TissueCypher test report volumes reflect growth through our sales force efforts as well as the impacts of a temporary pause in accepting new orders from July 2023 through September 2023, during which time our lab operations team successfully implemented certain process improvements, automations, and operational enhancements for this test to support future growth.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 16.8% for the three months ended September 30, 2023 to 24.2% for the three months ended September 30, 2024.

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

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended June 30, 2024 increased by $3.5 million, or 31.3%, compared to the three months ended June 30, 2023, primarily due to higher personnel costs and increased expenditures on supplies.

The increase in personnel costs primarily consists of higher salaries and wages, bonuses, stock-based compensation, and employee benefits, 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.

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended September 30, 2024 increased by $4.3 million, or 37.9%, compared to the three months ended September 30, 2023, primarily due to higher personnel costs and higher expense for supplies and lab services.

Increases in personnel costs reflect a higher headcount, due to additions made to support business growth in response to growing test report volumes, as well as merit and annual inflationary wage adjustment for existing employees.

Higher expense for supplies and lab services also reflects higher test report volumes.

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.

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 80.7% for the three months ended June 30, 2024, compared to 73.5% 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.

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 expected operational growth and higher test volumes.

Our gross margin percentage was 79.2% for the three months ended September 30, 2024, compared to 77.9% 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, higher expense for supplies, and higher expense incurred through our expanded laboratory capacity and higher test report volumes.

Research and Development

Research and development expenses decreased by $0.8 million, or 6.2%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily due to higher personnel costs and clinical studies.

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

The higher personnel costs and clinical studies expenses were partially offset by lower general administration expenses across the department and advisory board.

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.

Research and development expenses decreased by $0.6 million, or 4.6%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, and primarily reflect slightly lower expense for clinical studies and personnel costs.

We expect to continue incurring research and development expenses through our continued investments in our ongoing pipeline initiatives and as we seek opportunities to build evidentiary support and new tests where commercial opportunities exist.

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 $ 50,499 $ 44,619 $ 5,880

Sales and marketing expenses increased by $4.4 million, or 15.7%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily due to higher personnel costs and marketing expenses associated with travel, training events and speaker conferences.

Increases in personnel costs 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 $4.8 million for the three months ended June 30, 2024, compared to $4.7 million for the three months ended June 30, 2023.

General and administrative expenses increased by $2.0 million, or 12.1%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily attributable to higher personnel costs (including expenses for salaries, bonuses, and benefits), reflecting headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees, and to a lesser extent, higher expenses for professional services, subscriptions and licensing.

Stock-based compensation expense included in general and administrative expense was $4.4 million for the three months ended June 30, 2024, compared to $4.5 million for the three months ended June 30, 2023.

Sales and marketing expenses increased by $1.3 million, or 4.7%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily reflecting higher travel and transportation costs incurred through our business development activities as well as slightly higher marketing costs and relatively consistent personnel costs.

Stock-based compensation expense included in sales and marketing was $4.0 million for the three months ended September 30, 2024, compared to $4.4 million for the three months ended September 30, 2023.

General and administrative expenses increased by $4.5 million, or 28.2%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, and was primarily due to higher personnel costs, higher professional fees and higher information technology related costs.

Higher personnel cost reflects headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in general and administrative expense was $5.2 million for the three months ended September 30, 2024, compared to $4.7 million for the three months ended September 30, 2023.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended June 30, 2024 was $2.2 million and remains consistent as compared to the three months ended June 30, 2023.

Amortization of acquired intangible assets for the three months ended September 30, 2024 was $2.3 million and remains consistent as compared to the three months ended September 30, 2023.

Interest Income

Interest income increased by $0.7 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest income increased by $0.6 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest Expense

Interest expense increased by $0.3 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax (Benefit) Expense

Income tax benefit was $1.0 million for the three months ended June 30, 2024 and was due to changes in our valuation allowance, state income taxes and the non-deductibility of other permanent items .

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

Interest expense increased by $0.2 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax Expense

Income tax expense was $6.0 million for the three months ended September 30, 2024 and was due to revisions in estimated pre-tax income, reflecting uncertainty in continued Medicare coverage for our DecisionDx-SCC test and updated information, as well as stock-based compensation, permanent differences, changes in valuation allowance, research and development tax credit and state income taxes.

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

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $13.2 million for the three months ended June 30, 2024, compared to $12.8 million for the three months ended June 30, 2023.

The increase is primarily due to our annual grant of equity awards in March 2024.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, was $13.0 million for the three months ended September 30, 2024 and 2023, respectively.

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

As of June 30, 2024, we had 703 employees, compared to 582 as of June 30, 2023.

As of June 30, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $94.6 million, which is expected to be recognized over a weighted-average period of 2.4 years.

Comparison of the Six Months Ended June 30, 2024 and 2023

As of September 30, 2024, we had 710 employees, compared to 587 as of September 30, 2023.

As of September 30, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $77.6 million, which is expected to be recognized over a weighted-average period of 2.2 years.

Comparison of the Nine Months Ended September 30, 2024 and 2023

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

Six Months Ended

June 30, Change

Nine Months Ended

September 30, Change

Net revenues $ 245,758 $ 153,668 $ 92,090 59.9 %

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Total operating expenses, net 241,138 215,987 25,151 11.6 %

Operating loss (459) (52,679) 52,220 99.1 %

Operating income (loss) 4,620 (62,319) 66,939 107.4 %

Interest income 9,544 7,504 2,040 27.2 %

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Income (loss) before income taxes 13,679 (54,824) 68,503 125.0 %

Income tax (benefit) expense (989) 30 (1,019) NM

Income tax expense 5,024 62 4,962 NM

Net income (loss) $ 8,655 $ (54,886) $ 63,541 115.8 %

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

Six Months Ended

Nine Months Ended

September 30,

2024 2023 Change

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

Six Months Ended

Nine Months Ended

September 30,

2024 2023 Change

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

Six Months Ended

Nine Months Ended

September 30,

2024 2023 Change

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Gross margin percentage 79.3 % 74.4 % 4.9 %

Net revenues for the six months ended June 30, 2024 increased by $67.8 million, or 73.6%, to $160.0 million compared to the six months ended June 30, 2023, due to a $49.2 million increase in revenue from our dermatologic tests and a $18.6 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests of $49.2 million 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, an increase in DecisionDx-SCC test report volume of 54.2%, and an increase in test report volume of 11.1% and a higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $18.6 million was primarily attributable to TissueCypher, due to higher test report volume and a higher average selling price.

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

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.4% for the six months ended June 30, 2023 to 19.9% for the six months ended June 30, 2024.

The increases in total net revenues were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $1.0 million of net positive revenue adjustments for the six months ended June 30, 2024, compared to $1.7 million of net negative revenue adjustments for the same period in 2022.

Net revenues for the nine months ended September 30, 2024 increased by $92.1 million, or 59.9%, to $245.8 million compared to the nine months ended September 30, 2023, due to a $63.1 million increase in revenue from our dermatologic tests and a $29.0 million increase in revenue from our non-dermatologic tests.

The $63.1 million increase from our dermatologic tests was primarily due to a higher ASP for DecisionDx-SCC test, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, a 52.3% increase in DecisionDx-SCC test report volumes, and a 10.5% increase in DecisionDx-Melanoma test report volumes.

The $29.0 million increase in revenue from our non-dermatologic tests was largely attributable to a 152% increase in tests report volumes for our TissueCypher test, and, to a much lesser extent, a higher realized ASP.

Our IDgenetix and DecisionDx-UM tests also contributed to the increase in non-dermatologic revenues, with both tests having higher test report volumes as well as higher ASPs.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 15.3% for the nine months ended September 30, 2023 to 21.4% for the nine months ended September 30, 2024.

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

Cost of sales (exclusive of amortization of acquired intangible assets) for the six months ended June 30, 2024 increased by $7.2 million, or 33.8%, compared to the six months ended June 30, 2023, primarily due to increased higher personnel costs, expenditures on supplies and third-party services.

The increase in personnel costs, including increases in salaries and wages, bonuses, employee benefits and stock-based compensation expenses, 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.

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

Cost of sales (exclusive of amortization of acquired intangible assets) for the nine months ended September 30, 2024 increased by $11.5 million, or 35.2%, compared to the nine months ended September 30, 2023, primarily due to higher personnel costs and expense for supplies and lab services.

Higher expense for supplies and lab services also reflects higher test report volumes.

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 79.4% for the six months ended June 30, 2024, compared to 72.1% for the six months ended June 30, 2023.

The increase was primarily due to higher revenues, partially offset by higher personnel costs and supplies expenditures, 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.

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 operational growth and higher test volumes.

Our gross margin percentage was 79.3% for the nine months ended September 30, 2024, compared to 74.4% for the nine months ended September 30, 2023.

The increase was primarily due to higher revenues, partially offset by higher personnel costs, higher expense for supplies and lab services and higher expense incurred through our expanded laboratory capacity and higher test report volumes.

Research and Development

Research and development expenses increased by $0.2 million, or 0.9%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 consisting of increases in personnel costs partially offset by lower advisory costs and lower clinical studies expense.

Increases in personnel costs, including higher salaries and wages, bonuses, stock-based compensation and employee benefits, were primarily due to headcount expansions in support of business growth.

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 $0.4 million, or 0.9%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily reflecting lower clinical studies costs, lower organizational development costs, and lower expense for laboratory supplies, partially offset by higher personnel costs.

Selling, General and Administrative

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

Six Months Ended

Nine Months Ended

September 30,

2024 2023 Change

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Total selling, general and administrative expense $ 150,082 $ 136,062 $ 14,020

Sales and marketing expenses increased by $5.0 million, or 8.6%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Of this increase, $2.3 million is attributable to higher salary and wage expense, which has increased through the expansion of our dermatology-facing and non-dermatology-facing commercial teams, as well as through merit and annual inflationary wage adjustment for existing employees.

The remainder of the increase in sales and marketing expenses was primarily due to increases in organization development and training costs, which was also attributable to expansions in our commercial operations including headcount.

Stock-based compensation expense included in sales and marketing expense was $9.5 million for the six months ended June 30, 2024, compared to $9.6 million for the six months ended June 30, 2023.

The decrease 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 $3.1 million, or 9.4%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Of this increase, $1.4 million is attributable to higher personnel costs (including expenses for salaries, bonuses, and benefits), higher professional fees and higher information technology-related costs.

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

Stock-based compensation expense included in general and administrative expense was $8.4 million for the six months ended June 30, 2024, compared to $9.2 million for the six months ended June 30, 2023.

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 $6.4 million, or 7.3%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

The increase is primarily due to higher personnel costs, higher expense incurred through organizational and business development activities and higher marketing expense.

Increases in personnel costs reflect a higher headcount as well as merit and annual inflationary wage adjustment for existing employees.

Higher test report volumes is a result of our continued investments in human capital for our sales organization.

Stock-based compensation expense included in sales and marketing expense was $13.5 million for the nine months ended September 30, 2024, compared to $14.0 million for the nine months ended September 30, 2023.

General and administrative expenses increased by $7.7 million, or 15.5%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

The increase is primarily due to higher personnel costs, professional fees and information technology-related costs.

Increases in personnel costs reflect headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in general and administrative expense was $13.6 million for the nine months ended September 30, 2024, compared to $13.9 million for the nine months ended September 30, 2023.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the six months ended June 30, 2024 was $4.5 million and remains consistent as compared to the six months ended June 30, 2023.

Amortization of acquired intangible assets for the nine months ended September 30, 2024 was $6.8 million and remains consistent as compared to the nine months ended September 30, 2023.

Interest Income

Interest income increased by $1.4 million for the six months ended June 30, 2024 , compared to the six months ended June 30, 2023 , primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest income increased by $2.0 million for the nine months ended September 30, 2024 , compared to the nine months ended September 30, 2023 , primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest Expense

Interest expense increased by $0.3 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 , primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax (Benefit) Expense

Income tax benefit was $1.0 million for the six months ended June 30, 2024 and was due to changes in our valuation allowance, state income taxes and the non-deductibility of other permanent items .

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

Interest expense increased by $0.5 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 , primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax Expense

Income tax expense was $5.0 million for the nine months ended September 30, 2024 and was due to revisions in estimated pre-tax income, reflecting uncertainty in continued Medicare coverage for our DecisionDx-SCC test and updated information, as well as stock-based compensation, permanent differences, changes in valuation allowance, research and development tax credit and state income taxes.

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

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $25.9 million for the six months ended June 30, 2024, compared to $26.4 million for the six months ended June 30, 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.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $38.9 million for the nine months ended September 30, 2024, compared to $39.4 million for the nine months ended September 30, 2023.

As of June 30, 2024, we had 703 employees compared to 582 as of June 30, 2023.

As of September 30, 2024, we had 710 employees compared to 587 as of September 30, 2023.

Liquidity and Capital Resources

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

As of June 30, 2024 and December 31, 2023, we had marketable investment securities of $174.1 million and $144.3 million, respectively.

As of June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $85.6 million and $98.8 million, respectively.

As of June 30, 2024, we had a $25 million credit-line available under the 2024 LSA.

As of September 30, 2024 and December 31, 2023, we had marketable investment securities of $184.8 million and $144.3 million, respectively.

As of September 30, 2024 and December 31, 2023, we had cash and cash equivalents of $95.0 million and $98.8 million, respectively.

As of September 30, 2024, we had a $25 million credit-line available under the 2024 LSA.

Our liquidity has been primarily derived from the revenue generated from the sale of our products and proceeds from our initial public offering of common stock in July 29, 2019 (the “IPO”) and our follow-on public offerings of common stock in June and December of 2020.

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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, and the construction of our future corporate headquarters.

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 to be used as our future corporate headquarters.

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

During the three months ended June 30, 2023, we began incurring costs, and making payments, to prepare the land for further development.

In July 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 to be used as our future corporate headquarters.

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

The development project will include a four-story headquarters building, which will encompass approximately 80,000 square feet of Class A office space.

Construction began in May 2024 and is expected to continue through early 2026, at which time the building

is expected to be ready for occupancy and use.

Over the duration of this project, we expect to make significant capital expenditures in form of payments to the developer under a percentage of completion basis.

As of September 30, 2024, the development project is expected to cost a total of approximately $40 million.

During the nine months ended September 30, 2024, we have made minimal capital expenditures in the planning and early development phases of this project.

We intend to use the proceeds from the 2024 Term Loan, the 2024 Credit Line and our existing cash and cash equivalents to pay for this project.

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.

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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 June 30, 2024, we have a potential payment obligation of up to $20.0 million with respect to the remaining commercial milestones for 2024.

Therefore, as of September 30, 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.

As of September 30, 2024, we believe it to be unlikely that the remaining commercial milestones will be met and that future payments will be due.

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, used $5.6 million in operating cash flows, and had an accumulated deficit of $218.4 million.

For the six months ended June 30, 2024, we had net income of $6.4 million and positive operating cash flows of $17.2 million.

For the nine months ended September 30, 2024, we had net income of $8.7 million and positive operating cash flows of $40.5 million.

Our ability to maintain profitability will heavily depend on us maintaining Medicare coverage for our currently marketed products, on the successful commercialization of the products we plan to launch in the future, and our ability to manage operating expenses.

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

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

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 I, Item 1A, “Risk Factors” in the 2023 10-K and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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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We had no debt as of December 31, 2023.

Our long-term debt as of June 30, 2024 is presented in the table below (in thousands):

June 30, 2024

Our long-term debt as of September 30, 2024 is presented in the table below (in thousands):

September 30, 2024

Term debt $ 10,200

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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 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 ‘‘—2024 Credit Line’’ 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.

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

As of June 30, 2024, we were in compliance with this covenant.

As of September 30, 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.

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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.

We are obligated to make a final payment of $0.2 million 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 June 30, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 9.03%.

As of September 30, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 8.60%.

2024 Credit Line

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

As of June 30, 2024, no draws had been made on the line of credit.

As of September 30, 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 June 30, 2024 totaled approximately $23.7 million, of which $1.3 million is payable through the remainder of 2024 and $22.4 million is payable through early 2034.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of September 30, 2024 totaled approximately $24.0 million, of which $0.8 million is payable through the remainder of 2024 and $23.2 million is payable through early 2034.

The leases expire on various dates through 2034 and provide certain options to renew for additional periods.

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

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by (used in) operating activities $ 40,501 $ (24,213)

Net cash (used in) provided by investing activities (41,118) 1,197

Net cash used in investing activities (55,907) (8,511)

Net cash provided by financing activities 11,524 999

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Operating Activities

Net cash provided by operating activities was $17.2 million for the six months ended June 30, 2024, and was primarily attributable to non-cash stock-based compensation expense of $25.9 million, depreciation and amortization of $6.7 million, and net income of $6.4 million, partially offset by decreases in accrued compensation of $7.7 million, increases in accounts receivable of $7.6 million, increases in accretion of discounts on marketable investment securities of $3.4 million, decreases in accounts payable of $1.7 million and deferred income taxes of $1.5 million.

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

The $46.4 million increase in cash inflows from operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

During the six months ended June 30, 2024 net revenues increased by 73.6% compared to the six months ended June 30, 2023 which outpaced the 10.8% increase in net operating expenses for the same period.

In part, the cash provided during the six months ended June 30, 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.

Net cash provided by operating activities was $40.5 million for the nine months ended September 30, 2024, and was primarily attributable to non-cash stock-based compensation expense of $38.9 million, depreciation and amortization of $10.2 million, net income of $8.7 million, deferred income taxes of $3.7 million and decreases in inventory of $1.4 million, partially offset by increases in accounts receivable of $11.9 million, increases in accretion of discounts on marketable investment securities of $5.1 million, decreases in accounts payable of $3.8 million, increases in prepaid expenses and other current assets of $1.7 million and decreases in accrued compensation of $1.3 million.

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.

The $64.7 million increase in cash inflows from operating activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

During the nine months ended September 30, 2024 net revenues increased by 59.9% compared to the nine months ended September 30, 2023 which outpaced the 11.6% increase in net operating expenses for the same period.

In part, the cash provided during the nine months ended September 30, 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 $41.1 million for the six months ended June 30, 2024 and consisted primarily of purchases of marketable investment securities of $113.2 million and purchases of property and equipment of $14.4 million, partially offset by the maturity of marketable investment securities of $86.5 million.

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

The $7.0 million increase in cash used for the purchase of property and equipment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to our purchase of land for cash consideration of $7.2 million on February 9, 2024.

Net cash used in investing activities was $55.9 million for the nine months ended September 30, 2024 and consisted primarily of purchases of marketable investment securities of $158.4 million and purchases of property and equipment of $20.8 million, partially offset by the maturity of marketable investment securities of $123.3 million.

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.

The $47.4 million increase in cash used in investing activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily due to purchasing $21.7 million more in marketable investment securities and collecting $14.7 million fewer proceeds from maturing marketable investment securities.

We also increased our purchases of property and equipment by $10.9 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, 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 $10.7 million for the six months ended June 30, 2024, and consisted primarily of $10.0 million of proceeds from issuance of long-term debt and $1.7 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), 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 $1.0 million for the six months ended June 30, 2023, and primarily consisted of $1.7 million of proceeds from contributions to the ESPP and $0.2 million of proceeds from the exercise of stock options, partially offset by the $0.8 million payment of employee taxes attributable to the vesting of RSUs.

Net cash provided by financing activities was $11.5 million for the nine months ended September 30, 2024, and consisted primarily of $10.0 million of proceeds from issuance of long-term debt and $2.3 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”) and $1.6 million of proceeds from the exercise of stock options, partially offset by the $2.4 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

Net cash provided by financing activities was $1.0 million for the nine months ended September 30, 2023, and primarily consisted of $2.0 million of proceeds from contributions to the ESPP and $0.2 million of proceeds from the exercise of stock options, partially offset by the $1.1 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 six months ended June 30, 2024.

We do not believe that inflation has had a material impact on our financial results during the three and nine months ended September 30, 2024.

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

Critical Accounting Estimates

During the six months ended June 30, 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.

During the nine months ended September 30, 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 2023 10-K.

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