CASTLE BIOSCIENCES INC Management report and analysis of the financial situation and operating results. (Form 10-Q)

You should read the following discussion and analysis of financial condition and
results of operations together with our unaudited condensed consolidated
financial statements and the related notes and other financial information
included in this Quarterly Report on Form 10-Q and our audited financial
statements and notes thereto as of and for the years ended December 31, 2021 and
2020 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, 2021, as filed with the Securities and Exchange Commission (the
"SEC") on February 28, 2022. 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.

Forward-Looking Statements

The information in this discussion contains forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor"
created by those sections. These forward-looking statements include, but are not
limited to, statements concerning the impacts of COVID-19 on our business, our
strategy, future operations, future financial position, future revenues,
projected costs, prospects and plans and objectives of management. The words
"anticipate," "believe," "estimate," "expect," "may," "plan," "potential,"
"will," "would" or the negative or plural of these terms or other similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We may not
actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements and you should not place undue reliance on our
forward-looking statements. 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. 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.

Insight

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

We currently market six proprietary multi-analyte assays with algorithmic
analysis designed to answer clinical questions in dermatologic cancers, uveal
melanoma ("UM") (a rare cancer of the eye) and Barrett's esophagus ("BE"). We
also offer a proprietary pharmacogenomic ("PGx") test to guide optimal drug
treatment for patients suffering from depression, anxiety and other mental
health conditions following our acquisition of AltheaDx, Inc. ("AltheaDx") in
April 2022, as discussed below. Our revenue is primarily generated by our
DecisionDx®-Melanoma risk stratification test for cutaneous melanoma, a deadly
skin cancer, and our DecisionDx®-UM risk stratification test for UM.

The foundation of our business is our dermatologic cancer franchise, and our
lead product is DecisionDx-Melanoma, a proprietary risk stratification gene
expression profile ("GEP") test that predicts the risk of metastasis or
recurrence for patients diagnosed with invasive cutaneous melanoma. In the
management of melanoma, as with nearly all diseases, treatment plans are
directed by patient risk stratification. This test has two distinct,
complementary clinically actionable uses. The first revolves around predicting
the likelihood of having a sentinel lymph node ("SLN") negative biopsy result so
that physicians and patients can discuss the risk and benefit of undergoing the
SLN biopsy ("SLNB") surgical procedure. The second use is to inform the
appropriate treatment plan during the initial five years post-diagnosis,
regardless of the decision to undergo or avoid invasive SLNB surgery. In a
typical year, we estimate approximately 130,000 patients are diagnosed with
invasive cutaneous melanoma in the United States, representing an estimated U.S.
total addressable market ("TAM") of approximately $540 million. We launched
DecisionDx-Melanoma in May 2013. Based on the substantial clinical evidence that
we have developed, we have received Medicare coverage for DecisionDx-Melanoma,
which represents approximately 50% of the addressable patient population for
this test.

On August 31, 2020, we commercially launched our cutaneous squamous cell
carcinoma ("SCC") proprietary GEP test, DecisionDx®­SCC, for use in patients
with one or more risk factors (also referred to as "high-risk" SCC). We estimate
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.

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

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further expanded our commercially available dermatologic portfolio in May 2021
when we acquired Myriad myPath, LLC (the "Myriad MyPath Laboratory") from Myriad
Genetics, Inc. for a cash purchase price of $32.5 million. MyPath® Melanoma is a
clinically validated GEP test that addresses the same unmet clinical need as our
DiffDx-Melanoma test. Today, we offer both our MyPath Melanoma test and our
DiffDx-Melanoma test under an offering that we refer to as our Diagnostic GEP
offering. We believe we have demonstrated that offering both tests can lead to
an improvement in actionable test results for patients with
difficult-to-diagnose melanocytic lesions. Of the two million suspicious
pigmented lesions biopsied annually in the United States, we estimate
approximately 300,000 of those present a difficult-to-diagnose melanocytic
lesion, representing an estimated U.S. TAM of approximately $600 million
associated with these two tests.

In 2021, we announced the launch of our innovative pipeline initiative to
develop a genomic test aimed at predicting response to systemic therapy in
patients with moderate to severe psoriasis, atopic dermatitis and related
inflammatory skin conditions. In the United States alone, there are
approximately 18 million patients diagnosed with psoriasis and atopic
dermatitis. Approximately 450,000 of these patients annually are eligible for
systemic therapies. If successful, this inflammatory skin disease pipeline test
has the potential to add approximately $1.9 billion to our current estimated
U.S. total addressable market ("TAM"). In 2021, we initiated a 4,800 patient,
prospective, multi-center clinical study to develop and validate this pipeline
test and have 54 committed sites and approximately 303 patients enrolled. Based
upon our current development and validation timelines, we expect to have initial
validation and development data in 2023 and to commercialize this pipeline test
by the end of 2025.

In addition to our dermatologic franchise, we also market a test for patients
diagnosed with UM. DecisionDx-UM is a proprietary, risk stratification GEP test
that predicts 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. We launched
DecisionDx-UM in January 2010. Based on the substantial clinical evidence that
we have developed, we have received Medicare coverage for DecisionDx-UM, which
represents approximately 50% of the addressable patient population for this
test. We estimate approximately 2,000 patients in the United States are
diagnosed annually with a uveal melanoma, representing an estimated U.S. TAM of
approximately $10 million.

In December 2021, we extended our commercial portfolio of proprietary tests into
the gastroenterology market through our acquisition of Cernostics, Inc.
("Cernostics") and the TissueCypher® platform. The TissueCypher platform focuses
on unlocking, in the case of the initial test for use in patients with BE, the
importance of the location of the expression of proteins or lack thereof within
the morphology of the disease (also known as spatialomics). This "spatialomic"
information is then interpreted using artificial intelligence approaches to
predict the likelihood of progression to high-grade dysplasia and/or esophageal
cancer in patients with non-dysplastic, indefinite or low-grade dysplasia BE. We
estimate approximately 384,000 patients annually undergo an endoscopic biopsy
with a subsequent diagnosis of non-dysplastic, indefinite or low-grade
dysplastic BE, representing an estimated U.S. TAM of approximately $1 billion.

On April 26, 2022, we completed our acquisition of AltheaDx, a commercial-stage
molecular diagnostics company specializing in the field of PGx testing services
that are focused on mental health, and the provider of IDgenetix®, a PGx test
for mental health conditions. This acquisition enables us to offer a testing
solution that we believe has the potential to accelerate our impact on patient
care in an area of high unmet clinical need, significantly expand our in-market
estimated U.S. TAM by approximately $5 billion and offer incremental value to
patients and clinicians over the standard of care trial-and-error approach. A
randomized controlled trial showed that patients diagnosed with depression, who
were assessed with the IDgenetix test, showed a 2.5 times improvement in
remission rates compared to those who did not have their genes tested.

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 expression of the biomarkers is
measured, then a proprietary algorithmic analysis of the combined biomarkers is
performed to generate a report providing the results of that analysis, which is
sent to the clinician who ordered the test.

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

                                                                     

Proprietary dermatological GEP tests

                             DecisionDx-                                                                                                                                              TissueCypher Barrett's
                              Melanoma                   DecisionDx-SCC               Diagnostic GEP offering (1)             Dermatologic Total              DecisionDx-UM                Esophagus(2)               IDgenetix(3)            Grand Total
Q1 2022                          6,023                         1,142                                950                               8,115                          456                            56                        -                  8,627
Q2 2022                          7,125                         1,344                                955                               9,424                          431                           352                      827                 11,034

For the six months ended
June 30, 2022                   13,148                         2,486                              1,905                              17,539                          887                           408                      827                 19,661

Q1 2021                          4,060                           527                                218                               4,805                          337                             -                        -                  5,142
Q2 2021                          5,128                           784                                627                               6,539                          468                             -                        -                  7,007
For the six months ended
June 30, 2021                    9,188                         1,311                                845                              11,344                          805                             -                        -                 12,149
Q3 2021                          5,505                           934                                913                               7,352                          375                             -                        -                  7,727
Q4 2021                          5,635                         1,265                                904                               7,804                          438                            27                        -                  8,269
For year ended December
31, 2021                        20,328                         3,510                              2,662                              26,500                        1,618                            27                        -                 28,145




(1)Includes DiffDx-Melanoma and MyPath Melanoma. We began offering MyPath
Melanoma following our acquisition of the Myriad MyPath Laboratory on May 28,
2021. We offer both MyPath Melanoma and DiffDx-Melanoma under our Diagnostic GEP
offering.

(2)We began offering the TissueCypher Barrett Esophagus Test on December 3, 2021following the completion of our acquisition of Cernostic. (3) We started offering the IDgenetix test on April 26, 2022following our acquisition of AltheaDx. Includes single gene and multigene tests.

For the three and six months ended June 30, 2022, our dermatologic test report
volume increased by 44.1% and 54.6%, respectively, compared to the prior period
in 2021, largely driven by continued growth from our DecisionDx-Melanoma test.
For a discussion of how we recognize revenue derived from our tests, refer to
"Net Revenues" under "Components of Results of Operations" below.

The principal focus of our current commercial efforts is to educate clinicians
and pathologists on the value of our molecular diagnostic testing products
through our direct sales force in the United States. During the second quarter
of 2021, we expanded our dermatologic commercial team, bringing our dermatologic
sales force to the mid-60s. Starting in September 2022, we plan to have a new
commercial sales team dedicated to our Diagnostic GEP offering, with the current
dermatologic commercial team shifting to focus solely on DecisionDx-Melanoma and
DecisionDx-SCC. In connection with our acquisition of Cernostics in December
2021, we hired an initial commercial team of approximately 14 outside sales
territories, along with commensurate internal sales associates and medical
science liaisons, to support our launch of the TissueCypher Barrett's Esophagus
Assay. This dedicated team focuses on gastroenterology specialists that diagnose
and manage patients with BE. Beginning in September 2022, we plan to add
additional outside territories for our TissueCypher Barrett's Esophagus Assay.
Similar to our dermatologic commercial team, we will continue to assess market
response in determining further commercial expansions. AltheaDx, which we
acquired in late April 2022, had a commercial team covering approximately 20
outside sales territories.

We continue to see new clinicians order our dermatologic tests for the first
time. For the three months ended June 30, 2022, we saw 608 new ordering
clinicians for our dermatologic tests compared to 462 during the same period of
2021. For the six months ended June 30, 2022 and 2021, we saw 1,200 and 872,
respectively, new ordering clinicians for our dermatologic tests. Total ordering
clinicians for our dermatologic tests were 5,661 and 3,879 for the six months
ended June 30, 2022 and 2021, respectively, and 2,032 and 1,423 for the three
months ended June 30, 2022 and 2021, respectively.

For more information about the metrics we disclose, see “Information About Certain Metrics” below.

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

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Melanoma would likely be the same clinicians who would find value in these other
dermatologic GEP tests. For example, we found that for the six months ended June
30, 2022, approximately 68% of all clinicians ordering DecisionDx-SCC had also
ordered our DecisionDx-Melanoma test during that same period.

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 local coverage determinations ("LCDs"), which provide coverage
for our DecisionDx-Melanoma, MyPath Melanoma, DecisionDx-UM and IDgenetix tests
that meet certain criteria for Medicare and Medicare Advantage beneficiaries,
representing approximately 60 million covered lives. In 2022, DecisionDx-UM
received coverage from United Healthcare that represents approximately 43
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
TissueCypher Barrett's Esophagus Assay is paid by Medicare at the rate published
on Medicare's Clinical Laboratory Fee Schedule ("CLFS") for the test. Effective
March 24, 2022, we received Advanced Diagnostic Laboratory Test ("ADLT") status
for our TissueCypher test, as discussed further below. ADLT status exempts
TissueCypher from what is called the "14-day rule," which simplifies the billing
process for Medicare patients.

Palmetto GBA MolDX ("Palmetto"), the Medicare Administrative Contractor ("MAC")
responsible for administering MolDX, the program that assesses molecular
diagnostic technologies, issued a final expanded 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 Arizona, has
adopted the same coverage policy as Palmetto and also issued an expanded final
LCD for DecisionDx-Melanoma, effective December 6, 2020.

In the second quarter of 2021, Palmetto and the other MACs that participate in
the MolDX program each released a revised draft LCD for DecisionDx-Melanoma. The
draft LCD included commentary about two publications regarding the clinical
utility of GEP tests and included an assessment stating that the new data is not
sufficient to change the coverage criteria. There was an open public comment
period, and we submitted comments in support of Medicare coverage. The comment
period ended on August 8, 2021. Palmetto issued a final LCD on May 19, 2022 with
Noridian issuing the same on June 16, 2022. The final LCDs did not result in any
change in coverage.

Separately, Palmetto issued a final LCD for DecisionDx-UM, which became
effective in July 2017, and Noridian issued a similar LCD that became effective
in September 2017. Noridian's LCD provides for coverage to determine metastatic
risk in connection with the management of a patient's newly diagnosed UM and to
guide surveillance and referral to medical oncology for those patients.

On May 17, 2019, the Centers for Medicare & Medicaid Services ("CMS") determined
that DecisionDx-UM meets the criteria for "existing ADLT" status. Since 2021,
our rate is set annually based upon the median private payor rate for the first
half of the second preceding calendar year. Our rate for 2022 continues to be at
$7,776, based on the calculation of the median private payor rate.

Also, on May 17, 2019, CMS determined that DecisionDx-Melanoma meets the
criteria for "new ADLT" status. Initially, the Medicare reimbursement rate was
equal to the initial list price of $7,193. Since 2022, the rate is set annually
based upon the median private payor rate for the first half of the second
preceding calendar year. Our rate for 2022 continues to be $7,193, based on the
median private payor rate.

MyPath Melanoma is currently covered under a MolDX LCD policy through Noridian,
which oversees laboratories in both Utah and Arizona. Noridian issued an LCD
that became effective in June 2019. On September 6, 2019, MyPath Melanoma was
approved as a new ADLT. The rate for 2022 is $1,950, based on the median private
payor rate.

Beginning in 2023, the rates for DecisionDx-Melanoma, DecisionDx-UM, and MyPath
Melanoma tests will be set annually based upon the median private payor rate for
the first half of the second preceding calendar year. For example, the rate for
2023 will be set using median private payor rate data from January 1, 2021 to
June 30, 2021.

Our TissueCypher test is processed in our Pittsburgh, Pennsylvania laboratory
and falls under the Medicare jurisdiction that is managed by Novitas Solutions
("Novitas"). Novitas previously reviewed TissueCypher and we are receiving
payments for claims according to the CLFS. For 2022, CMS published in its CLFS a
payment rate of $2,513 for the test. 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, subject to the possible recoupment provision
described below. Effective January 1, 2023, the rate will be based on the median
private payor rates received between April 1, 2022 and August 31, 2022. However,
for TissueCypher tests reported for April 1, 2022 through December 31, 2022, CMS
has the right to recoup the difference between the actual list price and 130% of
the weighted-median if the original list price is greater than 130% of the
weighted-median of private payor rates.

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IDgenetix is currently covered under an LCD policy through MolDX and an
accompanying billing and coding article through Noridian, which oversees
laboratories in California. The Medicare coverage includes depression and was
recently expanded for the following seven additional mental health conditions
beyond major depressive disorder: schizophrenia, bipolar disorder, anxiety
disorders, panic disorder, obsessive-compulsive personality disorder,
post-traumatic stress disorder and attention deficit hyperactivity disorder. The
IDgenetix multi-gene panel is currently reimbursed by Medicare at approximately
$1,500.

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. 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 draft LCD
that would provide coverage criteria for DiffDx-Melanoma. We believe the LCD for
DiffDx-Melanoma will be finalized by the end of the second quarter of 2023.
However, there is no assurance that any draft or final LCD will match our
expectations, be posted in a timeframe consistent with our historical experience
or will be posted at all. Regarding DecisionDx-SCC, no draft LCD has been posted
by Palmetto or Noridian to date.

In the second quarter of 2022, following the completion of a requested medical
review and pricing of our DecisionDx-SCC test by Novitas, we have been receiving
reimbursement from Novitas on DecisionDx-SCC at a rate of approximately $3,800
per test. On June 9, 2022, Novitas posted a draft oncology biomarker LCD that
proposes to rely upon evidentiary reviews sourced from three databases: ClinGen,
OncoKB and National Comprehensive Cancer Network ("NCCN"). Two of the databases
do not review gene expression profile tests and NCCN has not yet, to our
knowledge, reviewed DecisionDx-SCC. As such, if finalized as proposed, then
DecisionDx-SCC would not be included as a covered test in the associated billing
and coding article. We cannot predict whether this draft LCD will be finalized
as proposed or what the timing of any final LCD might be.

Since becoming a public company, we have financed our operations with the
revenue generated from the sale of our products, proceeds from our initial
public offering of our common stock (our "IPO") that closed in July 2019,
follow-on public offerings of common stock in June 2020 and December 2020 and
bank debt, which has since been repaid in full. We believe that our existing
cash and cash equivalents and anticipated cash generated from sales of our
products will be sufficient to fund our operations for the next 12 months and
into the foreseeable future. However, we have based these estimates on
assumptions which may prove to be wrong and could result in us depleting our
capital resources sooner than expected.

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, the effects of acquisitions and the timing of
revenue recognition under Accounting Standards Codification ("ASC") Topic 606,
Revenue from Contracts with Customers ("ASC 606"). We expect our expenses will
increase substantially over time as we:

•conducting clinical studies to generate evidence in support of our current and future product candidates;

•execute our marketing strategy for our current and future commercial products;

•pursue the ongoing and planned development of new products in our pipeline;

•seek to discover and develop additional product candidates;

•hire additional scientific and research and development personnel;

•full acquisitions of businesses, assets, products or technologies; and

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

Impact of the COVID-19 pandemic

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

•We have maintained and expect to continue to maintain uninterrupted business
operations, with adequate access to reagents and consumables needed for testing
patient samples and normal turnaround times for our delivery of test reports. We
have continued to maintain our previously implemented adjustments to our
operations designed to keep employees safe and comply with federal, state and
local guidelines, including those regarding social distancing.

•Following the onset of the COVID-19 pandemic, we experienced declines in orders
and test report volume in certain periods. For example, in the second quarter of
2020, test reports delivered for our lead product, DecisionDx-Melanoma,
decreased 18.5% compared to the second quarter of 2019. We believe these
decreases in our test report volume were linked to delays and/or cancellations
in patient visits, resulting in fewer diagnostic biopsies and thus a reduction
in the number of diagnoses of cutaneous melanoma in response, as well as the
cumulative impact on

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promotional responsiveness due to reduced sales calls per day and in-person sales calls during the ongoing COVID-19 pandemic.

•Our commercial team uses a combination of in-person, virtual and non-personal
promotional and educational efforts. Since the beginning of 2021, we have seen
improvements in the number of promotional calls per day, as well as a continued
shift from virtual to in-person sales calls. During the three months ended June
30, 2022 and 2021, in-person sales calls accounted for over 99% and 90% of all
calls during such periods, respectively.

•Our future results will be dependent upon the extent and duration of the
COVID-19 crisis, including the emergence and spread of variants of the virus,
and government restrictions, which are beyond our control. Although state and
local government restrictions put in place to slow the spread of the virus have
been eased in most locations, restrictions may be reinstated from time to time
in various regions depending on the circumstances, potentially impacting the
flow of future patient visits as well as access to our sales targets. Even with
the easing of state and local restrictions and the availability of vaccinations,
patient visits and diagnoses of the diseases covered by our diagnostic and
prognostic tests may be impacted by continued apprehension regarding possible
exposure to the virus as well as a general shift from in-person clinical visits
to telehealth approaches, which may result in missed or delayed diagnoses of
skin cancer and other diseases.

As conditions are evolving, we are unable to predict how our future test report
volume will be impacted, or the extent to which our results of operations,
financial condition or cash flows will be impacted, by the ongoing COVID-19
pandemic or other future public health crises. Accordingly, the test report data
presented above is not necessarily indicative of our results of operations that
can be expected for future periods. For more information on the potential impact
of the ongoing COVID-19 pandemic on our business, see the risk factors included
under "Risks Related to Our Business" and the other risk factors included in
Part II, Item 1A., "Risk Factors" in this Quarterly Report on Form 10-Q.

Factors affecting our performance

We believe that several important factors have had and which we believe will continue to have an impact on our operating performance and results of operations, including:

•Report volume. We believe that the number of reports we deliver to physicians
is an important indicator of the growth of adoption among the healthcare
provider community. Our revenue and costs are affected by the volume of testing
and mix of customers. Our performance depends on our ability to retain and
broaden adoption with existing prescribing physicians, as well as attract new
physicians. Our report volume could be negatively impacted by developments
related to the ongoing COVID-19 pandemic or other future public health crises,
as discussed above.

•Reimbursement. We believe that expanding reimbursement is an important
indicator of the value of our products. Payors require extensive evidence of
clinical utility, clinical validity, patient outcomes and health economic
benefits in order to provide reimbursement. Our revenue depends on our ability
to demonstrate the value of our diagnostic and prognostic tests to these payors.

•Gross margin. We believe that our gross margin is an important indicator of the
operating performance of our business. Higher gross margins reflect the average
selling price of our tests, as well as the operating efficiency of our
laboratory operations.

•New product development. A significant aspect of our business is our investment
in research and development activities, including activities related to the
development of new products. In addition to the development of new product
candidates, we believe these studies are critical to gaining physician adoption
of new products and driving favorable coverage decisions by payors for such
products.

Information on certain measures

The following provides additional information about certain measures we have disclosed in this MD&A and Analysis of Financial Condition and Results of Operations.

Test reports delivered for DecisionDx-Melanoma, DecisionDx-SCC, MyPath
Melanoma/DiffDx-Melanoma, DecisionDx-UM, TissueCypher and IDgenetix 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 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. We also sometimes present, on a limited basis, data on the number of
orders received. We believe order data can provide additional insight on current
demand trends, particularly during the ongoing COVID-19 pandemic and with
respect to new product launches, when considered in conjunction with test report
volume.

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

New ordering clinicians for our dermatologic tests represents the number of
clinicians who ordered a dermatologic test from us for the first time during the
reporting period specified. Our dermatologic tests consist of
DecisionDx-Melanoma, DecisionDx-SCC, MyPath Melanoma and DiffDx-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 either a test report was delivered or revenue
was recognized.

Components of operating results

Net income

We generate revenues from the sale of our products. Currently, our revenues are
primarily derived from the sale of DecisionDx-Melanoma and DecisionDx-UM. We
bill third-party payors and patients for the tests we perform.

Under ASC 606, we recognize revenue at the amount we expect to be entitled,
subject to a constraint for variable consideration, in the period in which our
tests are delivered to the treating physicians. We have determined that our
contracts contain variable consideration under ASC 606 because the amounts paid
by third-party payors may be paid at less than our standard rates or not paid at
all, with such differences considered implicit price concessions. Variable
consideration is recognized only to the extent it is probable that a significant
reversal of revenue will not occur in future periods when the uncertainties are
resolved. Variable consideration is evaluated each reporting period and
adjustments are recorded as increases or decreases in revenues. Variable
consideration for Medicare claims that are not covered by an LCD or otherwise,
including those claims undergoing appeal, is deemed to be fully constrained due
to factors outside our influence (e.g., judgment or actions of third parties)
and the uncertainty of the amount to be received is not expected to be resolved
for a long period of time. For these fully constrained claims, we generally
recognize revenue in the period the uncertainty is favorably resolved, if at
all. Due to potential future changes in Medicare coverage policies and appeal
cycles, insurance coverage policies, contractual rates and other trends in the
reimbursement of our tests, our revenues may fluctuate significantly from period
to period. Our ability to recognize revenue for a test is dependent on the
development of reimbursement experience and obtaining coverage decisions. 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.

Cost of sales (excluding amortization of intangible assets acquired)

The components of our cost of sales are material and service costs associated
with testing samples, personnel costs (including salaries, bonuses, benefits and
stock-based compensation expense), electronic medical record set up costs, order
and delivery systems, shipping charges to transport samples, third-party test
fees, and allocated overhead including rent, information technology costs,
equipment and facilities depreciation and utilities. Costs associated with
testing samples are recorded when the test is processed regardless of whether
and when revenues are recognized with respect to that test. As a result, our
cost of sales as a percentage of revenues may vary significantly from period to
period because we do not recognize all revenues in the period in which the
associated costs are incurred. We expect cost of sales in absolute dollars to
increase as the number of tests we perform increases. Additionally, we expect
cost of sales to increase with the expansion of laboratory capacity and staffing
in advance of the anticipated growth of our recently launched tests and tests
acquired through acquisitions.

Gross margin and gross margin percentage are key indicators we use to assess our
business. See the tables in "Results of Operations-Comparison of the three
months ended June 30, 2022 and 2021" and "Results of Operations-Comparison of
the six months ended June 30, 2022 and 2021" for details.

Research and development

Research and development expenses include costs incurred to develop our
diagnostic and prognostic 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. We expense all
research and development costs in the periods in which they are incurred. 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.

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We expect to use a portion of our cash and cash equivalents to further support
and accelerate our research and development activities, including two important
studies that are underway to support our DecisionDx-Melanoma test. The first is
the CONNECTION study, which is collecting long-term outcomes for up to 10,000
patients who have been tested with DecisionDx-Melanoma. The second is the DECIDE
study, which is designed to determine the association of GEP test results with
SLNB surgical decisions in patients eligible for SLNB as well as to track
outcomes for patients who did and did not undergo SLNB. Also, as noted above, in
2021, we initiated our 4,800 patient, prospective, multi-center clinical study
to develop, validate and bring to market a pipeline test aimed at predicting
response to systemic therapy in patients with moderate to severe psoriasis,
atopic dermatitis and related inflammatory skin conditions. We have also
initiated two additional disease studies for pipeline tests for new indications.

We previously funded the PERSONALize study, which was evaluating the use of
DecisionDx-Melanoma in patients eligible for adjuvant therapy. Other of our
sponsored studies are designed to provide risk stratification analyses within
various subgroups. These studies have shown statistically and clinically
significant risk stratification separation. Based upon this currently available
and anticipated future data, we have decided to close the PERSONALize study.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses include executive, selling
and marketing, legal, finance and accounting, human resources, billing and
client services. These expenses consist of personnel costs (including salaries,
bonuses, benefits and stock-based compensation expense), direct marketing
expenses, audit and legal expenses, consulting costs, training and medical
education activities, payor outreach programs and allocated overhead, including
rent, information technology, equipment depreciation, and utilities. We expect
continued increases in SG&A expenses related to compliance with the rules and
regulations of the SEC and The Nasdaq Stock Market LLC ("Nasdaq"). Other
administrative and professional services expenses within SG&A are expected to
increase with the scale of our business, but selling and marketing-related
expenses are expected to increase significantly, consistent with our growth
strategy.

Amortization of acquired intangible assets

Amortization of acquired intangible assets is primarily associated with developed technology obtained through acquisitions, such as our acquisitions of Myriad MyPath Laboratory in May 2021, Cernostic 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 additional consideration
of up to $50.0 million and $75.0 million, respectively, that may become payable
based on the achievement of certain commercial milestones relating to the year
ending December 31, 2022 in the case of Cernostics, and the years ending
December 31, 2022, 2023 and 2024, in the case of AltheaDx (collectively, the
"Earnout Payments").

Interest Income

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

Interest charges

Interest expense is mainly attributable to finance leases.

Income tax expense (benefits)

In connection with our acquisition of AltheaDx in April 2022, and taking into
consideration the additional deferred tax liabilities resulting from such
acquisition, we determined that a portion of our valuation allowance should be
reduced, which is reflected in our income tax benefit for the three and six
months ended June 30, 2022. Our consolidated financial statements do not reflect
any federal or state income tax benefits attributable to the pre-tax losses we
have incurred, due to the uncertainty of realizing a benefit from those items.
As of December 31, 2021, we had federal net operating loss carryforwards of
$99.4 million, of which $43.5 million will begin to expire in 2030 if not
utilized to offset federal taxable income, and $55.9 million may be carried
forward indefinitely. Also, as of December 31, 2021, we had state net operating
loss carryforwards of $67.5 million, which begin to expire in 2028 if not
utilized to offset state taxable income.

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Operating results

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

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

                                                         Three Months Ended
                                                              June 30,
                                                      2022                2021                         Change
                                                            (unaudited)
Net revenues                                      $   34,838          $  22,758          $  12,080                  53.1  %
Operating expenses and other operating income
Cost of sales (exclusive of amortization of
acquired intangible assets)                            7,686              3,697              3,989                 107.9  %
Research and development                              11,926              6,793              5,133                  75.6  %
Selling, general and administrative                   37,498             20,822             16,676                  80.1  %
Amortization of acquired intangible assets             2,097                256              1,841                 719.1  %
Change in fair value of contingent consideration     (20,398)                 -            (20,398)                      NA

Total operating expenses, net                         38,809             31,568              7,241                  22.9  %
Operating loss                                        (3,971)            (8,810)             4,839                  54.9  %
Interest income                                          370                 24                346               1,441.7  %
Interest expense                                          (4)                 -                 (4)                      NA

Loss before income taxes                              (3,605)            (8,786)             5,181                  59.0  %
Income tax (benefit) expense                          (1,957)                 5             (1,962)                      NM
Net loss                                          $   (1,648)         $  (8,791)         $   7,143                  81.3  %




NA = Not applicable

NM = Not meaningful

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

                         Three Months Ended
                              June 30,
                         2022           2021         Change
                            (unaudited)
Dermatologic(1)      $   31,897      $ 20,378      $ 11,519
Other(2)                  2,941         2,380           561
Total net revenues   $   34,838      $ 22,758      $ 12,080



(1) Includes DecisionDx-Melanoma, DecisionDx-SCC and our GEP diagnostic offer. (2) Mainly consists of DecisionDx-UM. Also includes TissueCypher and IDgenetix.

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

                                                               Three Months Ended
                                                                    June 30,
                                                            2022                2021               Change
                                                                  (unaudited)
Net revenues                                           $    34,838          $   22,758          $   12,080
Less: Cost of sales (exclusive of amortization of
acquired intangible assets)                                  7,686               3,697               3,989
Less: Amortization of acquired intangible assets             2,097                 256               1,841
Gross margin                                           $    25,055          $   18,805          $    6,250
Gross margin percentage                                       71.9  %             82.6  %            (10.7) %

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

                                                             Three Months Ended
                                                                  June 30,
                                                          2022                  2021               Change
                                                                (unaudited)
Cost of sales (exclusive of amortization of
acquired intangible assets)                        $        897             $      415          $      482
Research and development                                  1,831                  1,073                 758
Selling, general and administrative                       6,055                  3,278               2,777
Total stock-based compensation expense             $      8,783             $    4,766          $    4,017



Net Revenues

Net revenues for the three months ended June 30, 2022 increased by $12.1
million, or 53.1%, to $34.8 million compared to the three months ended June 30,
2021, primarily due to a $11.5 million increase in revenue from our dermatologic
tests, primarily DecisionDx-Melanoma and DecisionDx-SCC. The increase in
dermatologic revenue was primarily attributable to a 44.1% increase in test
volumes, with higher test reports delivered across each of our dermatologic
offerings, due to a combination of the effects of our dermatologic sales force
expansion during the second quarter of 2021 and increased patient flow
potentially attributable to the easing of COVID-19 restrictions. The higher
revenues also reflect Medicare payments on DecisionDx-SCC, as discussed above,
and the effect of higher positive (negative) revenue adjustments related to
tests delivered in previous periods, associated with changes in estimated
variable consideration, which were $0.6 million for the three months ended June
30, 2022 compared to $(0.2) million for the three months ended June 30, 2021.
The increase in revenue from our other tests (non-dermatologic) of $0.6 million
was primarily attributable to our acquisitions of Cernostics in December 2021
and AltheaDx in April 2022.

Cost of sales (excluding amortization of intangible assets acquired)

Cost of sales (exclusive of amortization of acquired intangible assets) for the
three months ended June 30, 2022 increased by $4.0 million, or 107.9%, compared
to the three months ended June 30, 2021, primarily due to higher personnel costs
and increased costs of supplies and third-party services. Personnel costs have
increased with additions in headcount in our laboratory testing operations,
including headcount attributable to our acquisitions of Cernostics and AltheaDx.
The increased personnel costs also reflect higher salaries and wages for
existing employees. Supply and services expense have increased due to higher
laboratory activity, which is attributable to higher test 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.

Gross margin

Our gross margin percentage was 71.9% for the three months ended June 30, 2022,
compared to 82.6% for the same period in 2021. The decrease was primarily due to
this year's additional investments in laboratory headcount, higher salaries and
wages,

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and higher amortization expense associated with our acquired intangible assets.
In the near term, we expect that our gross margin percentage will decline,
compared to prior periods, as we invest in additional laboratory personnel and
related resources to support the anticipated growth in our test report volumes
in advance of obtaining reimbursement coverage. Additionally, our gross margin
percentage will continue to be negatively impacted by amortization of intangible
assets associated with recent acquisitions.

Research and development

Research and development expenses increased by $5.1 million, or 75.6%, for the
three months ended June 30, 2022, compared to the three months ended June 30,
2021. Approximately 50.1% of the increase is attributable to higher personnel
costs, primarily due to expansions in headcount in support of our growth, higher
salaries and wages, and higher stock-based compensation expense, and
approximately 23.6% is attributable to higher costs for clinical studies,
including costs related to the PERSONALize, CONNECTION and DECIDE studies. In
the second quarter of 2022, we decided to close our PERSONALize study. The
remainder of the increase is primarily associated with higher costs incurred for
outside legal fees. We expect to continue to increase our research and
development expenses as we fund ongoing evidence development for our existing
products as well as additional pipeline programs.

Selling, general and administrative expenses

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

                                                          Three Months Ended
                                                               June 30,
                                                          2022           2021         Change
                                                             (unaudited)
Sales and marketing                                   $   21,581      $ 11,867      $  9,714
General and administrative                                15,917         

8,955 6,962 Total selling, general and administrative expenses $37,498 $20,822 $16,676


Sales and marketing expenses increased by $9.7 million, or 81.8%, for the three
months ended June 30, 2022, compared to three months ended June 30, 2021.
Approximately $5.2 million, or 53.6%, of the increase is attributable to higher
personnel costs including salaries, bonuses and stock-based compensation.
Personnel costs have increased through the expansion of our dermatology-facing
commercial team headcount to the mid-60s in the second quarter of 2021 and
through our acquisitions of Cernostics in December 2021 and AltheaDx in April
2022. Following our acquisition of Cernostics in December 2021, we hired an
initial commercial team of approximately 14 outside sales territories, along
with commensurate internal sales associates and other personnel, to support our
launch of the TissueCypher Barrett's Esophagus Assay and to serve as a dedicated
team focused on gastroenterology specialists that diagnose and manage patients
with BE. Through our acquisition of AltheaDx, we added a commercial team of
approximately 20 outside sales territories to support our launch of the
IDgenetix test. In addition to increases through sales force expansion, higher
personnel costs also reflect salary increases for members of our existing sales
force. The remainder of the increase in sales and marketing expenses was
primarily associated with training events, meetings, travel and other general
increases. The higher expenses for training events and travel reflect an
increase in our sales and commercial operations related to our expanded
headcount and expanded test offerings, as well a return to more in-person
activities resulting from the continued easing of COVID-19 restrictions.
Stock-based compensation expense included in sales and marketing expense was
$2.9 million for the three months ended June 30, 2022, compared to $1.5 million
for the three months ended June 30, 2021.We expect sales and marketing expenses
to increase in future periods as we intend to expand our outside sales
territories and sales force further during 2022, as discussed under "Overview"
above.

General and administrative expenses increased by $7.0 million, or 77.7%, for the
three months ended June 30, 2022, compared to three months ended June 30, 2021.
The increase is primarily attributable to $3.6 million in higher personnel costs
including salaries, bonuses and stock-based compensation. The higher personnel
costs reflect expanded headcount in our administrative support functions,
including that related to the acquisitions of Cernostics and AltheaDx, as well
as higher rates of pay. Stock-based compensation expense included in general and
administrative expense was $3.2 million for the three months ended June 30,
2022, compared to $1.8 million for the three months ended June 30, 2021.
Furthermore, we incurred $1.7 million of transaction costs associated with our
acquisition of AltheaDx. The remainder of the increase in general and
administrative expenses was primarily associated with professional fees and
other general increases.

Amortization of acquired intangible assets

Amortization of acquired intangible assets increased by $1.8 million for the
three months ended June 30, 2022, compared to the three months ended June 30,
2021. The increase is primarily associated with amortization of developed
technology attributable

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

Change in fair value of contingent consideration

The change in fair value of contingent consideration for the three months ended
June 30, 2022 of $20.4 million, a net gain, is primarily related to the
remeasurement of the Earnout Payments associated with our acquisition of
Cernostics and reflects changes in management's projections regarding attainment
of certain commercial milestones. There was no such activity during the three
months ended June 30, 2021.

Interest Income

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

Income Tax (Benefit) Expense

Our income tax benefit was $2.0 million for the three months ended June 30, 2022
and was primarily attributable to a reduction of $1.8 million in our valuation
allowance on net deferred tax assets resulting from our acquisition of AltheaDx
in April 2022. Specifically, we took into consideration the additional deferred
tax liabilities resulting from the acquisition and determined that a portion of
our existing valuation allowance should be reduced. Other than this item, we
recorded minimal amounts in income tax benefit because in both the three months
ended June 30, 2022 and 2021, the income tax benefit of the pre-tax loss was
largely offset by corresponding changes in the valuation allowance on net
deferred tax assets, as we have determined that it is more likely than not that
these benefits will not be realized.

Stock-based compensation expense

Stock-based compensation expense, which is allocated among cost of sales,
research and development expense and SG&A expense, totaled $8.8 million for the
three months ended June 30, 2022, compared to $4.8 million for the three months
ended June 30, 2021. We expect material increases in stock-based compensation
expense in future periods, reflecting mainly higher awards outstanding due to
growth in our headcount. As of June 30, 2022, we had 482 employees compared to
292 as of June 30, 2021. As of June 30, 2022, the total unrecognized stock-based
compensation cost related to outstanding awards was $99.5 million, which is
expected to be recognized on a straight-line basis over a weighted-average
period of 3.0 years. We expect to continue granting stock-based compensation
awards, which we expect to further contribute to increases in stock-based
compensation expense in future periods.

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

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

                                                         Six Months Ended
                                                             June 30,
                                                      2022               2021                         Change
                                                            (unaudited)
Net revenues                                      $  61,690          $  45,571          $  16,119                  35.4  %
Operating expenses and other operating income
Cost of sales (exclusive of amortization of
acquired intangible assets)                          13,630              6,725              6,905                 102.7  %
Research and development                             22,687             12,701              9,986                  78.6  %
Selling, general and administrative                  67,951             38,983             28,968                  74.3  %
Amortization of acquired intangible assets            3,745                256              3,489               1,362.9  %
Change in fair value of contingent consideration    (17,836)                 -            (17,836)                      NA

Total operating expenses, net                        90,177             58,665             31,512                  53.7  %
Operating loss                                      (28,487)           (13,094)           (15,393)               (117.6) %
Interest income                                         400                 28                372               1,328.6  %
Interest expense                                         (7)                 -                 (7)                      NA

Loss before income taxes                            (28,094)           (13,066)           (15,028)               (115.0) %
Income tax (benefit) expense                         (1,823)                 5             (1,828)                      NM
Net loss                                          $ (26,271)         $ (13,071)         $ (13,200)               (101.0) %




NA = Not applicable

NM = Not meaningful

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

                         Six Months Ended
                             June 30,
                        2022          2021         Change
                           (unaudited)
Dermatologic(1)      $ 56,236      $ 41,288      $ 14,948
Other(2)                5,454         4,283         1,171
Total net revenues   $ 61,690      $ 45,571      $ 16,119




(1)Includes the DecisionDx-Melanoma, DecisionDx-SCC and GEP Diagnostic offer. (2) Mainly consists of DecisionDx-UM. Also includes TissueCypher and IDgenetix.

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

                                                                Six Months Ended
                                                                    June 30,
                                                            2022                2021               Change
                                                                  (unaudited)
Net revenues                                           $    61,690          $   45,571          $   16,119
Less: Cost of sales (exclusive of amortization of
acquired intangible assets)                                 13,630               6,725               6,905
Less: Amortization of acquired intangible assets             3,745                 256               3,489
Gross margin                                           $    44,315          $   38,590          $    5,725
Gross margin percentage                                       71.8  %             84.7  %            (12.9) %


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

                                                            Six Months Ended
                                                                June 30,
                                                        2022                 2021               Change
                                                               (unaudited)
Cost of sales (exclusive of amortization of
acquired intangible assets)                        $      1,750          $      925          $      825
Research and development                                  3,659               2,131               1,528
Selling, general and administrative                      11,793               6,623               5,170
Total stock-based compensation expense             $     17,202          $    9,679          $    7,523


Net Revenues

Net revenues for the six months ended June 30, 2022 increased by $16.1 million,
or 35.4%, to $34.8 million compared to the six months ended June 30, 2021,
primarily due to a $14.9 million increase in revenue from our dermatologic
tests, primarily DecisionDx-Melanoma and DecisionDx-SCC, and to a lesser extent,
a $1.2 million increase in revenue from our other tests (non-dermatologic). The
increase in dermatologic revenue was primarily attributable to a 54.6% increase
in test volumes, with higher test reports delivered across each of our
dermatologic offerings, due to a combination of the effects of our dermatologic
sales force expansion during the second quarter of 2021 and increased patient
flow potentially attributable to the easing of COVID-19 restrictions. The higher
revenues also reflect Medicare payments on DecisionDx-SCC, as discussed above.
The higher volumes were partially offset by the effect of lower positive
(negative) revenue adjustments related to tests delivered in previous periods,
associated with changes in estimated variable consideration, which were $(0.3)
million for the six months ended June 30, 2022 compared to $5.1 million for the
six months ended June 30, 2021. The year-over-year decrease is primarily
attributable to the effect of favorable adjustments related to the settlement
and collection during the six months ended June 30, 2021 of certain groups of
receivables from prior years that did not recur during the six months ended June
30, 2022. The increase in revenue from our other tests (non-dermatologic) of
$1.2 million was primarily attributable to higher test report volume of
DecisionDx-UM and the acquisitions of Cernostics in December 2021 and AltheaDx
in April 2022.

Cost of sales (excluding amortization of intangible assets acquired)

Cost of sales (exclusive of amortization of acquired intangible assets) for the
six months ended June 30, 2022 increased by $6.9 million, or 102.7%, compared to
the six months ended June 30, 2021, primarily due to higher personnel costs and
increased costs of supplies and third-party services. Personnel costs have
increased with additions in headcount in our laboratory testing operations,
including headcount attributable to our acquisitions of Cernostics and AltheaDx.
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 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.

Gross margin

Our gross margin percentage was 71.8% for the six months ended June 30, 2022,
compared to 84.7% for the same period in 2021. The decrease was primarily due to
lower revenue adjustments related to tests delivered in previous periods, higher
personnel costs attributable to investments in laboratory headcount as well as
higher salaries and wages, and higher amortization expense associated with our
acquired intangible assets. In the near term, we expect that our gross margin
percentage will decline, compared to prior periods, as we invest in additional
laboratory personnel and related resources to support the anticipated growth in
our report volumes for tests in advance of obtaining reimbursement coverage.
Additionally, our gross margin percentage will continue to be negatively
impacted by amortization of intangible assets associated with recent
acquisitions.

Research and development

Research and development expenses increased by $10.0 million, or 78.6%, for the
six months ended June 30, 2022, compared to the six months ended June 30, 2021.
Approximately 50.7% of the increase is attributable to higher personnel costs,
primarily due to expansions in headcount in support of our growth, higher pay
rates and higher stock-based compensation expense, and

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approximately 22.0% is attributable to higher costs for clinical studies,
including costs related to the PERSONALize, CONNECTION and DECIDE studies. In
the second quarter of 2022, we decided to close our PERSONALize study. The
remainder of the increase is primarily associated with meeting costs and travel
expenses. We expect to continue to increase our research and development
expenses as we fund ongoing evidence development for our existing products as
well as additional pipeline programs.

Selling, general and administrative expenses

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

                                                          Six Months Ended
                                                              June 30,
                                                         2022          2021         Change
                                                            (unaudited)
Sales and marketing                                   $ 39,802      $ 21,523      $ 18,279
General and administrative                              28,149        

17,460 10,689 Total selling, general and administrative expenses $67,951 $38,983 $28,968


Sales and marketing expenses increased by $18.3 million, or 84.9%, for the six
months ended June 30, 2022, compared to six months ended June 30, 2021.
Approximately $10.6 million, or 57.9%, of the increase is attributable to higher
personnel costs including salaries, bonuses and stock-based compensation.
Personnel costs have increased through the expansion of our dermatology-facing
commercial team headcount to the mid-60s during the second quarter of 2021 and
through our acquisitions of Cernostics in December 2021 and AltheaDx in April
2022. Following our acquisition of Cernostics, we hired an initial commercial
team of approximately 14 outside sales territories, along with commensurate
internal sales associates and other personnel, to support our launch of the
TissueCypher Barrett's Esophagus Assay and to serve as a dedicated team focused
on gastroenterology specialists that diagnose and manage patients with BE.
Through our acquisition of AltheaDx, we added a commercial team of approximately
20 outside sales territories to support our launch of the IDgenetix test. In
addition to increases through sales force expansion, higher personnel costs also
reflect salary increases for members of our existing sales force. The remainder
of the increase in sales and marketing expenses was primarily associated with
training events, meetings, travel and other general increases. The higher
expenses for training events and travel reflect an increase in our sales and
commercial operations related to our expanded headcount and expanded test
offerings, as well a return to more in-person activities resulting from the
continued easing of COVID-19 restrictions. Stock-based compensation expense
included in sales and marketing expense was $5.7 million for the six months
ended June 30, 2022, compared to $3.0 million for the six months ended June 30,
2021. We expect sales and marketing expenses to increase in future periods as we
intend to expand our outside sales territories and sales force further during
2022, as discussed under "Overview" above.

General and administrative expenses increased by $10.7 million, or 61.2%, for
the six months ended June 30, 2022, compared to six months ended June 30, 2021.
The increase is primarily attributable to $6.3 million in higher personnel costs
including salaries, bonuses and stock-based compensation. The higher personnel
costs reflect expanded headcount in our administrative support functions,
including that related to the acquisitions of Cernostics and AltheaDx, as well
as higher rates of salaries and wages. Stock-based compensation expense included
in general and administrative expense was $6.1 million for the six months ended
June 30, 2022, compared to $3.6 million for the six months ended June 30, 2021.
Furthermore, we incurred $1.7 million of transaction costs associated with our
acquisition of AltheaDx. The remainder of the increase in general and
administrative expenses was primarily associated with professional fees and
other general increases.

Amortization of acquired intangible assets

Amortization of acquired intangible assets increased by $3.5 million for the six
months ended June 30, 2022, compared to the six months ended June 30, 2021. The
increase is primarily associated with amortization of developed technology
attributable to the acquisitions of the Myriad MyPath Laboratory, Cernostics,
and AltheaDx in May 2021, December 2021 and April 2022, respectively.

Change in fair value of contingent consideration

The change in fair value of contingent consideration for the six months ended
June 30, 2022 of $17.8 million, a net gain, is primarily related to the
remeasurement of the Earnout Payments associated with our acquisition of
Cernostics and reflects changes in management's projections regarding attainment
of certain commercial milestones. There was no such activity during the six
months ended June 30, 2021.

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interest income

Interest income increased by $0.3 million for the six months ended June 30, 2022compared to the half-year ended June 30, 2021mainly due to rising interest rates.

Income Tax (Benefit) Expense

Our income tax benefit was $1.8 million for the six months ended June 30, 2022,
and was primarily attributable to a reduction of $1.8 million in our valuation
allowance on net deferred tax assets resulting from our acquisition of AltheaDx
in April 2022. Specifically, we took into consideration the additional deferred
tax liabilities resulting from the acquisition and determined that a portion of
our existing valuation allowance should be reduced. Other than this item, we
recorded minimal amounts in income tax benefit because in both the six months
ended June 30, 2022 and 2021, the income tax benefit of the pre-tax loss was
largely offset by corresponding changes in the valuation allowance on net
deferred tax assets, as we have determined that it is more likely than not that
these benefits will not be realized.

Stock-based compensation expense

Stock-based compensation expense, which is allocated among cost of sales,
research and development expense and SG&A expense, totaled $17.2 million for the
six months ended June 30, 2022, compared to $9.7 million for the six months
ended June 30, 2021. We expect material increases in stock-based compensation
expense in future periods, reflecting mainly higher awards outstanding due to
growth in our headcount. As of June 30, 2022, we had 482 employees compared to
292 as of June 30, 2021. As of June 30, 2022, the total unrecognized stock-based
compensation cost related to outstanding awards was $99.5 million, which is
expected to be recognized on a straight-line basis over a weighted-average
period of 3.0 years. We expect to continue granting stock-based compensation
awards, which we expect to further contribute to increases in stock-based
compensation expense in future periods.

Cash and capital resources

Sources of liquidity

Our principal sources of liquidity are our cash and cash equivalents and cash
generated from the sale of our products. As of June 30, 2022 and December 31,
2021, we had cash and cash equivalents of $273.2 million and $329.6 million,
respectively. In addition to the revenue generated from the sale of our
commercial products, we have financed our operations through our IPO in July
2019, two follow-on public offerings of common stock in June 2020 and December
2020, and a $25.0 million secured term loan credit facility, which we repaid in
full in December 2020.

On December 14, 2020, we filed an automatically effective shelf registration
statement on Form S-3 (File No. 333-251331) (our "Shelf Registration Statement")
with the SEC as a "well-known seasoned issuer." The Shelf Registration Statement
allows us to issue an indeterminate number or amount of common stock, preferred
stock, debt securities and warrants from time to time in one or more offerings.
However, there can be no assurance that we will complete any further offerings
of securities under our Shelf Registration Statement. Any future offerings under
our Shelf Registration Statement will be dependent upon, among other factors,
market conditions, available pricing, our financial condition, investor
perception of our prospects, our capital needs and our ability to maintain
status as a well-known seasoned issuer. Our market capitalization as of August
1, 2022 is below the level required to maintain status as well-known seasoned
issuer in the future.

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

Material cash needs

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 December 2021, we acquired Cernostics for $30.7 million in cash and in April
2022, we acquired AltheaDx, for $30.5 million in cash and $17.1 million in
shares of our common stock. Under the definitive agreement to acquire
Cernostics, we also agreed to pay up to an additional $50.0 million of Earnout
Payments, based on the achievement of certain commercial milestones relating to
the year ending December 31, 2022. With respect to AltheaDx, we agreed to pay up
to an additional $75.0 million, 50% in cash and 50% in common stock, based on
the achievement of certain commercial milestones relating to the years ending
December 31, 2022, 2023 and 2024. In each case, the number of shares of our
common stock that may be issued in connection with the Earnout Payments is
subject to limitations, as discussed in Notes 5 and 10 to the unaudited

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

Since our inception, we have generally incurred significant losses and negative
cash flows. For the year ended December 31, 2021 we had a net loss of $31.3
million and an accumulated deficit of $93.8 million as of December 31, 2021. For
the six months ended June 30, 2022, we had a net loss of $26.3 million and an
accumulated deficit of $120.0 million as of June 30, 2022. Our ability to
generate revenue sufficient to achieve profitability will depend heavily on the
successful commercialization of our currently marketed products and the products
we plan to launch in the future as well as our spending on research and
development activities. We expect to incur additional expenses and losses in the
future as we invest in the commercialization of our existing products, the
development of our future product candidates and the commercialization of our
product candidates. Further, we expect that any acquisitions of businesses,
products, assets or technologies will also increase our expenses. We believe
that our existing cash and cash equivalents and anticipated cash generated from
the sale of our commercial products will be sufficient to fund our operations
for the next twelve months. We believe we will meet longer-term expected cash
requirements and obligations through a combination of existing cash and cash
equivalents, anticipated cash generated from sales of our products and issuances
of equity securities or debt offerings, including through our Shelf Registration
Statement. However, we have based these estimates on assumptions that may prove
to be wrong, and we could utilize our available capital resources sooner than we
expect. There are numerous risks and uncertainties associated with developing
genomic tests, including, among others, the uncertainty of:

• successful initiation and completion of clinical study protocols;

•successful identification and acquisition of tissue samples;

•the development and validation of genomic classifiers; and

•the acceptance of new genomic tests by doctors, patients and third-party payers.

Because of the numerous risks and uncertainties associated with research,
development and commercialization of product candidates, we are unable to
estimate our exact working capital requirements. Our future funding requirements
will depend on and could increase significantly as a result of many factors,
including those listed above as well as those listed in Part II, Item 1A., "Risk
Factors" in this Quarterly Report on Form 10-Q.

We do not currently have any committed external source of funds. 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. To the extent that we raise
additional capital through the sale of equity or convertible debt securities,
the ownership interest of our stockholders will be diluted, and the terms of
these securities may include liquidation or other preferences that adversely
affect the rights of common stockholders. Debt financing and preferred equity
financing, if available, may involve agreements that include covenants limiting
or restricting our ability to take specific actions, such as incurring
additional debt, making acquisitions or capital expenditures or declaring
dividends. Any disruptions to, or volatility in, the credit and financial
markets or any deterioration in overall economic conditions may make any
necessary debt or equity financing more difficult to obtain, more costly and/or
more dilutive. If we are unable to raise additional funds through debt or equity
financings 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.

Leases

We have entered into various operating and finance leases, which are primarily
associated with our laboratory facilities and office space. Total undiscounted
future minimum payment obligations under our operating leases and finance leases
as of June 30, 2022 totaled approximately $10.1 million, of which $0.7 million
is payable through the remainder of 2022 and $9.4 million through the end of
2033. The leases expire on various dates through 2033 and provide certain
options to renew for additional periods. On March 11, 2022, we amended an
existing lease agreement to lease additional laboratory space in Phoenix,
Arizona. On April 1, 2022, we entered into a new lease agreement with an initial
term of 10.5 years for laboratory and office space located in Pittsburgh,
Pennsylvania. As of June 30, 2022, neither of the two leases had commenced. Upon
commencement, we expect these two leases to increase our undiscounted future
minimum payment obligations by a total of approximately $13.8 million.

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Cash flow

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

                                                           Six Months Ended
                                                               June 30,
                                                                       2022           2021
                                                                           (unaudited)
Net cash used in operating activities                               $ (30,431)     $ (10,069)
Net cash used in investing activities                                 (27,913)       (34,845)
Net cash provided by financing activities                               1,877          3,401
Net change in cash and cash equivalents                               (56,467)       (41,513)
Cash and cash equivalents, beginning of period                        329,633        409,852
Cash and cash equivalents, end of period                            $ 273,166      $ 368,339


Operating Activities

Net cash used in operating activities was $30.4 million for the six months ended
June 30, 2022, and was primarily attributable to the net loss of $26.3 million,
the change in fair value of contingent consideration of $17.8 million, increases
in accounts receivable of $5.6 million and deferred income taxes of $1.8
million, partially offset by non-cash stock compensation expense of $17.2
million and depreciation and amortization of $4.8 million.

Net cash used in operating activities was $10.1 million for the six months ended
June 30, 2021, and was primarily attributable to the net loss of $13.1 million,
increases in accounts receivable of $5.3 million and recoupment of $2.2 million
of an advance payment from CMS under its Accelerated and Advance Payment
Program, partially offset by non-cash stock compensation expense of $9.7 million
and decreases in prepayments and other current assets of $1.3 million.

The $20.4 million additional net cash used in operating activities for the six
months ended June 30, 2022 compared to the six months ended June 30, 2021 is
primarily due to cash requirements associated with the increases in operating
expenses, the majority of which were attributable to salaries, bonuses and
benefits due to our growth in headcount, as discussed in further detail under
"Results of Operations-Comparison of the six months ended June 30, 2022 and
2021" above. The effect of the higher expenses on net cash used in operating
activities was partially offset by cash inflows from the higher revenues.

Investing activities

Net cash used in investing activities was $27.9 million for the six months ended
June 30, 2022 and consisted primarily of the cash portion of the AltheaDx
purchase consideration of $26.7 million (net of cash and cash equivalents
acquired) and purchases of property and equipment of $1.8 million. Net cash used
in investing activities was $34.8 million for the six months ended June 30, 2021
and consisted primarily of the purchase of Myriad MyPath Laboratory of $33.2
million (including transaction costs) and purchases of property and equipment of
$1.7 million.

Financing Activities

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

Net cash provided by financing activities was $3.4 million for the six months
ended June 30, 2021, and primarily consisted of $2.3 million in proceeds from
the exercise of stock options and $1.4 million in proceeds from contributions to
the employee stock purchase plan.

Inflation

In 2021, the rate of inflation in the United States began to increase and has
since risen to levels not experienced in over 40 years. We are experiencing
inflationary pressures, primarily in personnel costs, and we anticipate impacts
on other cost areas within the next twelve months. The extent of any future
impacts from inflation on our business and our results of operations will be
dependent upon how long the elevated inflation levels persist and the extent to
which the rate of inflation further increases, if at all, neither of which we
are able to predict. If elevated levels of inflation were to persist or if the
rate of inflation were to accelerate, the purchasing power of our cash and cash
equivalents may be diminished, our expenses could increase faster than
anticipated and we may utilize our capital resources sooner than expected.
Further, given the complexities of the reimbursement landscape in which we
operate, our payors may be unwilling or unable to increase reimbursement rates
to

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compensate for inflationary effects. Thus, the effects of inflation could adversely affect our results of operations, financial condition and cash flows.

Critical accounting estimates

During the six months ended June 30, 2022, except as noted below, there were no
significant changes to the information discussed under "Critical Accounting
Estimates" included in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of our Annual Report on Form 10-K
for the year ended December 31, 2021.

The following is an updated discussion of our critical accounting estimates related to contingent consideration. This information should be read in conjunction with our other information about critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Conditional consideration

Pursuant to business combinations or asset acquisitions, we may be required to pay additional consideration if specific future events occur or certain conditions are met.

In a business combination, in accordance with to ASC Topic 805, Business
Combinations, contingent consideration is recorded at fair value as of the
acquisition date and classified as liabilities or equity based on applicable
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). For contingent consideration classified as liabilities, we remeasure the
contingent consideration at fair value each period with changes in fair value
recorded in the statements of operations and comprehensive loss each period.

For contingent consideration in transactions that are not business combinations,
we apply applicable U.S. GAAP. With respect to the additional consideration that
may be payable in connection with the acquisition of Cernostics, an asset
acquisition we completed on December 3, 2021, we account for the contingent
consideration as liability in accordance with ASC 480, Distinguishing
Liabilities from Equity ("ASC 480"), under the guidance for obligations that
must or may be settled by issuance of a variable number of shares. In accordance
with ASC 480, we record the contingent consideration initially and subsequently
at fair value with changes in fair value recorded in the condensed consolidated
statements of operations and comprehensive loss each period.

Liabilities for contingent consideration are classified as a "Level 3" fair
value measurements (as defined in Note 11 to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2021) due to the use of significant unobservable inputs and a Monte
Carlo simulation to determine its fair value. The Monte Carlo simulation uses
projections of the commercial milestones for the applicable period as well as
the corresponding targets and approximate timing of payment based on the terms
of the arrangement. The analysis also uses assumptions for expected volatility
of the financial metrics and a risk-adjusted discount rate. The assumptions and
estimates we use in the Monte Carlo simulation require considerable judgment and
may change in future periods as a result of new information. For example, during
the three months ended June 30, 2022, as a result of a change in management's
projections regarding the outcome of certain commercial milestones associated
with our acquisition of Cernostics, the fair value of the related contingent
consideration liability decreased by $20.8 million.

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