10-Q 1 cstl-20220331.htm 10-Q cstl-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ 

Commission File Number: 001-38984
CASTLE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)

Delaware77-0701774
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
505 S. Friendswood Drive, Suite 401, Friendswood, Texas
77546
(Address of principal executive offices)
(Zip Code)
(866) 788-9007
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareCSTLThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
As of May 2, 2022, there were 26,260,916 shares of common stock, $0.001 par value per share, issued and outstanding.


Table of Contents
Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, 2022December 31, 2021
ASSETS(unaudited)
Current Assets  
Cash and cash equivalents$309,017 $329,633 
Accounts receivable, net19,910 17,282 
Inventory2,350 2,021 
Prepaid expenses and other current assets5,164 4,807 
Total current assets336,441 353,743 
Long-term accounts receivable, net1,406 1,308 
Property and equipment, net9,385 9,501 
Operating lease assets7,219 7,383 
Intangible assets, net87,275 88,922 
Other assets – long-term2,699 1,715 
Total assets$444,425 $462,572 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable$3,314 $2,546 
Accrued compensation8,566 15,483 
Contingent consideration20,849  
Operating lease liabilities1,199 1,179 
Other accrued and current liabilities5,593 5,678 
Total current liabilities39,521 24,886 
Noncurrent portion of contingent consideration 18,287 
Noncurrent operating lease liabilities6,711 6,900 
Deferred tax liability757 635 
Other liabilities100 124 
Total liabilities47,089 50,832 
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Preferred stock, $0.001 par value per share; 10,000,000 shares authorized as of March 31, 2022 and December 31, 2021; no shares issued and outstanding as of March 31, 2022 and December 31, 2021
  
Common stock, $0.001 par value per share; 200,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 25,485,420 and 25,378,520 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively
25 25 
Additional paid-in capital515,701 505,482 
Accumulated deficit(118,390)(93,767)
Total stockholders’ equity397,336 411,740 
Total liabilities and stockholders’ equity$444,425 $462,572 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended
March 31,
20222021
NET REVENUES$26,852 $22,813 
OPERATING EXPENSES
Cost of sales (exclusive of amortization of acquired intangible assets)5,944 3,028 
Research and development10,761 5,908 
Selling, general and administrative30,453 18,161 
Amortization of acquired intangible assets1,648  
Change in fair value of contingent consideration2,562  
Total operating expenses51,368 27,097 
Operating loss(24,516)(4,284)
Interest income30 4 
Interest expense(3) 
Loss before income taxes(24,489)(4,280)
Income tax expense134  
Net loss and comprehensive loss$(24,623)$(4,280)
Loss per share, basic and diluted$(0.97)$(0.17)
Weighted-average shares outstanding, basic and diluted25,424 24,912 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmount
BALANCE, JANUARY 1, 2021 $ 24,812,487 $25 $478,162 $(62,496)$415,691 
Adoption of ASU No. 2016-02— — — — — 21 21 
Stock compensation expense— — — — 4,913 — 4,913 
Exercise of common stock options— — 171,315 — 991 — 991 
Issuance of common stock under the employee stock purchase plan— — 70,711 — 1,233 — 1,233 
Public offering of common stock, adjustment to offering costs— — — — 39 — 39 
Net loss— — — — — (4,280)(4,280)
BALANCE, MARCH 31, 2021 $ 25,054,513 $25 $485,338 $(66,755)$418,608 
BALANCE, JANUARY 1, 2022 $ 25,378,520 $25 $505,482 $(93,767)$411,740 
Stock compensation expense— — — — 8,419 — 8,419 
Exercise of common stock options— — 62,102 — 399 — 399 
Issuance of common stock from vested restricted stock units and payment of employees’ taxes        — — 2,466 — (56)— (56)
Issuance of common stock under the employee stock purchase plan— — 42,332 — 1,457 — 1,457 
Net loss— — — — — (24,623)(24,623)
BALANCE, MARCH 31, 2022 $ 25,485,420 $25 $515,701 $(118,390)$397,336 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Three Months Ended
March 31,
 20222021
OPERATING ACTIVITIES  
Net loss$(24,623)$(4,280)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,151 233 
Stock-based compensation expense8,419 4,913 
Change in fair value of contingent consideration2,562  
Deferred income taxes123  
Other12 33 
Change in operating assets and liabilities:
Accounts receivable(2,725)(1,558)
Prepaid expenses and other current assets(357)1,679 
Inventory(329)(93)
Operating lease assets222 231 
Other assets42 (225)
Accounts payable187 (40)
Operating lease liabilities(226)(295)
Accrued compensation(6,917)(3,899)
Other accrued liabilities29 (330)
Net cash used in operating activities(21,430)(3,631)
INVESTING ACTIVITIES
Purchases of property and equipment(402)(750)
Net cash used in investing activities(402)(750)
FINANCING ACTIVITIES
Payment of common stock offering costs (336)
Proceeds from exercise of common stock options399 991 
Payment of employees’ taxes on vested restricted stock units(56) 
Proceeds from contributions to the employee stock purchase plan897 855 
Repayment of principal portion of finance lease liabilities(24) 
Net cash provided by financing activities1,216 1,510 
NET CHANGE IN CASH AND CASH EQUIVALENTS(20,616)(2,871)
Beginning of period329,633 409,852 
End of period$309,017 $406,981 
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued purchases of property and equipment$32 $220 
Deferred acquisition costs$1,026 $ 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Organization and Description of Business
Castle Biosciences, Inc. (the ‘‘Company,’’ “we,” “us” or “our”) was incorporated in the state of Delaware on September 12, 2007. We are a commercial-stage diagnostics company focused on providing physicians and their patients with personalized, clinically actionable information to inform treatment decisions and improve health outcomes. We are based in Friendswood, Texas (a suburb of Houston, Texas) and our laboratory operations are conducted at our facilities located in Phoenix, Arizona and in Pittsburgh, Pennsylvania.
Impact of COVID-19 Pandemic
Since the COVID-19 pandemic began in March 2020, we have maintained uninterrupted business operations with normal turnaround times for delivery of test reports, but have experienced declines in test report volume in certain periods, which we believe is linked to delays and/or cancellations in patient visits in response to COVID-19, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma. The extent to which COVID-19 may further impact our business, consolidated results of operations, consolidated financial condition and consolidated cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Castle Biosciences, Inc. and our wholly owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). All intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts in our condensed consolidated statements of operations and comprehensive loss have been reclassified to conform to the current year presentation. Specifically, we no longer present gross margin on our statements of operations and comprehensive loss and therefore the cost of sales line is now presented within the operating expenses section of the condensed consolidated statements of operations and comprehensive loss. This reclassification had no impact on operating loss, loss before income taxes, net loss, comprehensive loss or loss per share.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of March 31, 2022; the condensed consolidated statements of operations and comprehensive loss, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of March 31, 2022 and the results of our consolidated operations and our consolidated cash flows for the three months ended March 31, 2022 and 2021. The financial data and other information disclosed in these notes related to the three months ended March 31, 2022 and 2021 are also unaudited. The results for the three months ended March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim consolidated financial statements. These consolidated financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 28, 2022.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax exposure and the realization of deferred tax assets, the useful lives and recoverability of long-lived assets, the valuation of acquired intangible assets, the valuation of contingent consideration and other contingent liabilities. We base these estimates on historical and anticipated results, trends, and various other assumptions that we believe are reasonable under
5

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. We have considered the potential impact of the COVID-19 pandemic on our estimates and assumptions. The extent to which the COVID-19 pandemic may impact our estimates in future periods is uncertain and subject to change.
Cash and Cash Equivalents including Concentrations of Credit Risk
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Our cash equivalents consist of money market funds, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”), that are primarily invested in short-term U.S. government obligations. Cash deposits at financial institutions may exceed the amount of insurance provided by the FDIC. Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the institutions in which deposits are held. We have not experienced any losses on our cash or cash equivalents.
Revenue Recognition
Revenue is recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 606, Revenue from Contracts with Customers (‘‘ASC 606’’). In accordance with ASC 606, we follow a five-step process to recognize revenues: (1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenues when the performance obligations are satisfied. We have determined that we have a contract with the patient when the treating clinician orders the test. Our contracts generally contain a single performance obligation, which is the delivery of the test report, and we satisfy our performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point we can bill for the report. The amount of revenue recognized reflects the amount of consideration to which we expect to be entitled, or the transaction price, and considers the effects of variable consideration. See Note 3 for further details.
Accounts Receivable and Allowance for Credit Losses
We classify accounts receivable balances that are expected to be paid more than one year from the consolidated balance sheet date as non-current assets. The estimated timing of payment utilized as a basis for classification as non-current is determined by analyses of historical payor-specific payment experience, adjusted for known factors that are expected to change the timing of future payments.
We accrue an allowance for credit losses against our accounts receivable based on management’s current estimate of amounts that will not be collected. Management’s estimates are typically based on historical loss information adjusted for current conditions. We generally do not perform evaluations of customers’ financial condition and generally do not require collateral. Historically, our credit losses have not been significant. The allowance for credit losses was zero as of March 31, 2022, and December 31, 2021. Adjustments for implicit price concessions attributable to variable consideration, as discussed above, are incorporated into the measurement of the accounts receivable balances and are not part of the allowance for credit losses.
Contingent Consideration
Under the terms of business combinations or asset acquisitions, we may be required to pay additional consideration if specified future events occur or if certain conditions are met. With respect to the additional consideration that may be payable in connection with the Cernostics, Inc. (“Cernostics”) asset acquisition, we account for the contingent consideration as a 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 statements of operations and comprehensive loss each period. For additional information on the contingent consideration, see Note 9.
Accrued Compensation
We accrue for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by our board of directors, compensation levels of eligible individuals, and target bonus percentage levels. The board of directors reviews and evaluates the performance against these objectives and ultimately determines what discretionary payments are made. We also accrue for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets. As of March 31, 2022 and December 31, 2021, we accrued $4,380,000 and $12,071,000, respectively, for liabilities associated with these bonus plans.
6

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
These amounts are classified as current or noncurrent accrued liabilities in the condensed consolidated balance sheets based on the expected timing of payment.
Comprehensive Loss
Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Our comprehensive loss was the same as our reported net loss for all periods presented.
3. Revenue
All of our revenues from contracts with customers are associated with the provision of diagnostic and prognostic testing services. Most of our revenues are attributable to DecisionDx®-Melanoma for cutaneous melanoma. We also provide a test for uveal melanoma, DecisionDx®-UM, a test for patients with cutaneous squamous cell carcinoma, DecisionDx®-SCC and a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma. We began offering a test for difficult-to-diagnose melanocytic lesions, myPath Melanoma, following an asset acquisition completed in May 2021 and began offering the TissueCypher® Barrett’s Esophagus test for patients with Barrett’s esophagus following an asset acquisition completed in December 2021. Information on the disaggregation of revenues is included below.
Once we satisfy our performance obligations and bill for the service, the timing of the collection of payments may vary based on the payment practices of the third-party payor and the existence of contractually established reimbursement rates. Most of the payments for our services are made by third-party payors, including Medicare and commercial health insurance carriers. Certain contracts contain a contractual commitment of a reimbursement rate that differs from our list prices. However, absent a positive coverage policy, with or without a contractually committed reimbursement rate, with a commercial carrier or governmental program, our diagnostic tests may or may not be paid by these entities. In addition, patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse us. We may pursue, on a case-by-case basis, reimbursement from such patients in the form of co-payments and co-insurance, in accordance with the contractual obligations that we have with the insurance carrier or health plan. These situations may result in a delay in the collection of payments.
The Medicare claims that are covered by policy under a Local Coverage Determination (“LCD”) or otherwise are generally paid at a rate established on Medicare’s Clinical Laboratory Fee Schedule or by the respective Medicare contractor within 30 days from receipt. Medicare claims that were either submitted to Medicare prior to the LCD or other coverage commencement date or are not covered but meet the definition of being medically reasonable and necessary pursuant to the controlling Section 1862(a)(1)(A) of the Social Security Act are generally appealed and may ultimately be paid at the first (termed ‘‘redetermination’’), second (termed ‘‘reconsideration’’) or third level of appeal (de novo hearing with an Administrative Law Judge (“ALJ”)). A successful appeal at any of these levels results in payment.
In the absence of LCD coverage, contractually established reimbursements rates or other coverage, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions. Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606. The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties. Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. Variable consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor. Accordingly, in such situations revenues are recognized on the basis of actual cash collections. 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 (i.e., 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. Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues. Included in revenues for the three months ended March 31, 2022 and 2021 were $602,000 and $5,335,000, respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.
7

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Because our contracts with customers have an expected duration of one year or less, we have elected the practical expedient in ASC 606 to not disclose information about our remaining performance obligations. Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of our contracts. Contract balances consisted solely of accounts receivable (both current and noncurrent) at March 31, 2022 and December 31, 2021.
DecisionDx-Melanoma Claims Consolidation
In June 2017, we submitted to the Office of Medicare Hearings and Appeals (‘‘OMHA’’) a formal request to participate in a program that OMHA developed with the intent of providing appellants a means to have large volumes of claim disputes adjudicated at an accelerated rate. The program consolidates outstanding claims at the ALJ level and uses a statistical-sampling approach where five ALJs will determine reimbursement results for a sample of claims which are then extrapolated to the universe of claims. The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017. Hearings were held in April 2019 with a supplemental hearing in May 2019. On March 12, 2020, OMHA issued a decision denying payment on all claims in the consolidation. We have filed an appeal to the decision, although no ruling on such appeal has been issued to date. In accordance with ASC 606 and consistent with prior periods, we have not recognized (fully constrained the variable consideration) any revenues attributable to these claims in our consolidated financial statements pending the outcome of this matter.
Disaggregation of Revenues
The table below provides the disaggregation of revenue by type (in thousands):
Three Months Ended
March 31,
20222021
Dermatologic$24,339 $20,910 
Other2,513 1,903 
Total net revenues$26,852 $22,813 
Payor Concentration
We rely upon reimbursements from third-party government payors (primarily Medicare) and private-payor insurance companies to collect accounts receivable related to sales of our diagnostic tests.
Our significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows:
 Percentage of Revenues
 Three Months Ended
March 31,
Percentage of
 Accounts Receivable
 (current)
Percentage of
 Accounts Receivable
 (non-current)
 20222021March 31, 2022December 31, 2021March 31, 2022December 31, 2021
Medicare53 %57 %27 %24 % % %
Medicare Advantage plans33 %24 %40 %40 % % %
BlueCross BlueShield plans7 %6 %19 %22 %59 %58 %
4. Loss Per Share
Basic loss per share is computed by dividing net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or purchases under the 2019 Employee Stock Purchase Plan (“ESPP”). The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. However, potentially dilutive shares are excluded from the computation of diluted loss per share when their effect is antidilutive.
Due to us reporting a net loss for all periods presented, all potentially dilutive securities are antidilutive and are excluded from the computation of diluted loss per share for such periods.
8

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss earnings per share for the three months ended March 31, 2022 and 2021 because to do so would be antidilutive (in thousands):
Three Months Ended
March 31,
20222021
Stock options and restricted stock units (“RSUs”)4,681 3,464 
Employee stock purchase plan91 76 
Total4,772 3,540 
In addition, in connection with the acquisition of Cernostics, we may issue shares of our common stock to satisfy the contingent consideration obligation, pending the outcome of certain commercial milestones, as discussed in Note 9.
5. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 March 31, 2022December 31, 2021
Leasehold improvements$4,930 $5,044 
Lab equipment(1)
3,774 3,727 
Computer equipment2,659 2,457 
Furniture and fixtures1,263 1,288 
Construction in progress48 27 
Total12,674 12,543 
Less accumulated depreciation(1)
(3,289)(3,042)
Property and equipment, net$9,385 $9,501 
(1)    Includes lab equipment under a finance lease of $237 thousand and accumulated depreciation of $34 thousand.
Depreciation expense was recorded in the unaudited condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
Three Months Ended
March 31,
 20222021
Cost of sales (exclusive of amortization of acquired intangible assets)$169 $102 
Research and development90 44 
Selling, general and administrative244 87 
Total$503 $233 
9

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
6. Intangible Assets, Net
Our intangible assets, net consists of the following (in thousands):
March 31, 2022
 Gross carrying valueAccumulated amortizationNetWeighted-Average Remaining Life (in years)
Developed technology$90,318 $(3,569)$86,749 12.9
Assembled workforce563 (37)526 4.7
Total intangible assets, net$90,881 $(3,606)$87,275 
December 31, 2021
 Gross carrying valueAccumulated amortizationNetWeighted-Average Remaining Life (in years)
Developed technology$90,317 $(1,949)$88,368 13.2
Assembled workforce563 (9)554 4.9
Total intangible assets, net$90,880 $(1,958)$88,922 
The estimated future aggregate amortization expense as of March 31, 2022 is as follows (in thousands):
Years Ending December 31,
2022 (remainder of year)$5,034 
20236,681 
20246,700 
20256,681 
20266,672 
Thereafter55,507 
Total$87,275 
Amortization expense of intangible assets was $1.6 million for the three months ended March 31, 2022. No amortization expense was recorded for the three months ended March 31, 2021.
7. Other Accrued and Current Liabilities
Other accrued liabilities consisted of the following (in thousands):
 March 31, 2022December 31, 2021
Accrued service fees$2,589 $1,905 
Clinical studies2,173 1,655 
Payroll tax liabilities260 695 
Employee stock purchase plan contributions201 760 
Other370 663 
Total$5,593 $5,678 
10

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
8. Leases
Adoption of ASC 842
In the fourth quarter of 2021, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), and Accounting Standards Codification Topic 842, Leases (“ASC 842”) using the modified retrospective approach with an effective date of January 1, 2021. The adoption had no effect on the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021. Net cash (used in) provided by operating activities, investing activities or financing activities for the three months ended March 31, 2021 were also unchanged, but the presentation of certain prior period amounts within the operating activities section of the condensed consolidated statements of cash flows has been retrospectively adjusted to give effect to the adoption of ASC 842. The changes are set forth in the table below (in thousands):
Three Months Ended
March 31, 2021
Before Adoption of ASC 842Effect of AdoptionAfter Adoption of ASC 842
Effect on Condensed Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Operating lease assets$ $231 $231 
Operating lease liabilities$ $(295)$(295)
Other liabilities$(64)$64 $ 
Additionally, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2021 has been retrospectively adjusted to reflect a credit to accumulated deficit of $21,000 in connection with the adoption of ASC 842 effective January 1, 2021.
Lease Amendment
On March 11, 2022, we amended one of our operating leases to expand rentable space in Phoenix, Arizona. We intend to use the additional space for general office and laboratory use. The term of the amended lease will begin upon the completion of certain leasehold improvements by the Phoenix landlord (the “Phoenix Commencement Date”) and continue for an initial term of 10.3 years from the Phoenix Commencement Date. Total undiscounted future minimum payment obligations as of March 31, 2022 associated with the lease amendment totaled approximately $1.4 million. As of March 31, 2022, we have not recorded the lease amendment on our condensed consolidated balance sheet because we do not have possession or control of the underlying asset.
11

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
9. Fair Value Measurements
The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):
As of March 31, 2022
 Quoted Prices in Active Markets for Identical Items (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total
Assets:
Money market funds(1)
$306,926 $ $ $306,926 
Liabilities
Contingent consideration$ $ $20,849 $20,849 
As of December 31, 2021
 Quoted Prices in Active Markets for Identical Items (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total
Assets:
Money market funds(1)
$327,721 $ $ $327,721 
Liabilities
Contingent consideration$ $ $18,287 $18,287 
(1)Classified as “Cash and cash equivalents” in the condensed consolidated balance sheets.
Contingent Consideration
In connection with our acquisition of Cernostics, we have recorded a contingent consideration liability for the additional consideration of up to $50.0 million that may become payable based on the achievement of certain commercial milestones relating to the year ending December 31, 2022 (“Earnout Payments”). The Earnout Payments may be settled in cash or shares of our common stock, at our sole discretion. The portion of any Earnout Payments that may be settled in shares of our common stock is subject to certain limitations and the aggregate number of shares that may be issued for the Earnout Payments may not exceed 5,034,653 shares. Any Earnout Payments in shares of our common stock will be based on the volume weighted-average price of our common stock for the 15 trading days ending December 30, 2022. If the settlement were to occur as of March 31, 2022, we would make no Earnout Payments based on the achievement of the performance conditions to date.
The contingent consideration is classified as a Level 3 fair value measurement 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, which were 25.0% and 16.2%, respectively, as of March 31, 2022, and 20.0% and 16.1%, respectively, as of December 31, 2021. The contingent consideration liability is remeasured at fair value at each reporting period taking into account any updated assumptions or changes in circumstances. Any change in the fair value is recorded as a gain or loss in our condensed consolidated statement of operations and comprehensive loss.
The following table discloses the summary of changes in the contingent consideration liability measured at fair value using Level 3 inputs as of March 31, 2022 (in thousands):
Balance, December 31, 2021$18,287 
Change in fair value2,562 
Balance, March 31, 2022$20,849 
12

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
10. Commitments and Contingencies
From time to time, we may be involved in legal proceedings arising in the ordinary course of business. We believe there is no threatened litigation or litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.
11. Stock Incentive Plans and Stock-Based Compensation
Stock Incentive Plans
Effective January 1, 2022, an additional 1,268,926 shares became available under our 2019 Equity Incentive Plan (the “2019 Plan”) pursuant to an automatic annual increase. As of March 31, 2022, 1,213,698 shares remained available for grant under the 2019 Plan.
Stock Options
Stock option activity under our stock plans for the three months ended March 31, 2022 is set forth below:
  Weighted-Average 
 Stock Options
Outstanding
Exercise
Price
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
(in thousands)
Balance as of December 31, 20213,586,688 $34.75 
Granted27,605 $36.69 
Exercised(62,102)$6.42 
Forfeited/Cancelled(58,143)$40.28 
Balance as of March 31, 20223,494,048 $35.17 8.1$48,222 
Exercisable at March 31, 2022
1,457,846 $25.22 7.4$31,983 
Restricted Stock Units
The following table summarizes our RSU activity for the three months ended March 31, 2022:
Restricted Stock Units OutstandingWeighted-Average Grant Date Fair Value
Balance as of December 31, 2021
1,050,174 $44.31 
Granted150,845 $37.43 
Vested(3,767)$75.37 
Forfeited/Cancelled(17,037)$48.06 
Balance as of March 31, 2022
1,180,215$43.28 
Employee Stock Purchase Plan
The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 253,785 shares becoming available under the ESPP effective January 1, 2022. During the three months ended March 31, 2022, we issued 42,332 of common stock pursuant to scheduled purchases under the ESPP. As of March 31, 2022, 850,919 shares remained available for issuance under the ESPP.
13

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Determining Fair Value - Summary of Assumptions
We use the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or any other measurement date. The following table sets forth the assumptions used to determine the fair value of stock options:
 Three Months Ended
March 31,
20222021
Average expected term (years)6.16
Expected stock price volatility
68.34% - 68.44%
59.87% - 67.68%
Risk-free interest rate
1.63% - 1.64%
0.43% - 1.71%
Dividend yield%%
The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP:
 Three Months Ended
March 31,
20222021
Average expected term (years)1.31.3
Expected stock price volatility
62.98% - 66.75%
68.43% - 86.50%
Risk-free interest rate
0.60% - 1.30%
0.07% - 0.13%
Dividend yield%%
The fair value of our common stock is also an assumption used to determine the fair value of stock options and purchase rights under the ESPP. The fair value of our common stock is the closing selling price per share of as reported on the Nasdaq Global Market on the date of grant or other relevant determination date.
Previously, because of the limited period of time our stock had been traded in an active market, we calculated expected volatility by using the historical stock prices of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies. In the third quarter of 2021, we adjusted this calculation to include our own stock price on a relative basis to the peer group in the calculation of expected volatility, as our common stock has now been traded in an active market for more than two years.
We use the closing price of our common stock on the date of grant to determine the fair value of RSUs.
Stock-Based Compensation Expense
Stock-based compensation expense related to stock options, RSUs and the ESPP is included in the statements of operations and comprehensive loss as follows (in thousands):
 Three Months Ended
March 31,
 20222021
Cost of sales (exclusive of amortization of acquired intangible assets)$853 $510 
Research and development1,828 1,058 
Selling, general and administrative5,738 3,345 
Total stock-based compensation expense$8,419 $4,913 

For the three months ended March 31, 2022 and 2021, the weighted-average grant date fair value of options granted was $22.76 and $44.83 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $19.91 and $39.26 per share, respectively. As of March 31, 2022, the total unrecognized compensation cost related to outstanding awards was $97,147,000, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.1 years. The total unrecognized compensation cost will be adjusted for forfeitures in future periods as they occur.
14

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
12. Subsequent Events
On April 1, 2022, we entered into a lease agreement (the “Pittsburgh Lease”) for the lease of certain office space in Pittsburgh, Pennsylvania. We intend to use such space for general office and laboratory use. The term of the Pittsburgh Lease will begin upon the completion of certain leasehold improvements by the Pittsburgh landlord (the “Pittsburgh Commencement Date”) and continue for an initial period of 10.5 years from the Pittsburgh Commencement Date. During the first six months of the lease term, we are required to remit base rent of $37,800 for the period. Beginning with month seven, the base rent will be $0.6 million per year with annual increases ultimately to $1.5 million per year. The Pittsburgh Lease provides us with an option to extend the term of the Pittsburgh Lease for one additional five-year period. If we elect to extend the term of the Pittsburgh Lease, then the base rent for the additional five-year period will be the then-fair market rent of the leased premises, subject to a specified minimum amount. The Pittsburgh Landlord has agreed to contribute up to $2.5 million towards the cost of the leasehold improvements and we shall be responsible for any costs exceeding this amount. The Pittsburgh Lease also provides us a one-time option that would terminate the lease effective at the end of the 90th month following the Commencement Date, subject to certain conditions. If exercised, we would pay an early termination fee of $2.3 million, subject to adjustment in the event the Pittsburgh Lease is amended to adjust the base rent. The Pittsburgh Lease also provides us a right of first refusal with respect to the lease of certain additional space in the same building.
On April 26, 2022, we completed the acquisition of AltheaDx. AltheaDx is a commercial-stage molecular diagnostics company specializing in the field of pharmacogenomics (“PGx”) testing services that are focused on mental health. IDgenetix is its PGx test for depression, anxiety and other mental health conditions. Under the terms of the definitive agreement dated April 4, 2022 (the “Merger Agreement”), AltheaDx became a wholly owned subsidiary of Castle and we paid $65.0 million in initial consideration to AltheaDx security holders, which consisted of approximately $32.5 million in cash, subject to adjustments for cash, debt, transaction expenses and working capital and approximately $32.5 million in common stock of ours. We issued 763,887 shares of our common stock at closing, based on a price per share equal to the volume-weighted-average price of our common stock for the 20 trading days immediately preceding the date of the merger agreement governing the acquisition. Further, up to an additional $75.0 million in cash and common stock may become payable in connection with the achievement of certain milestones based on 2022, 2023 and 2024 performance and expanded Medicare coverage for the IDgenetix test. Upon achievement of each relevant milestone event, each milestone will be paid 50% in cash and 50% in shares of our common stock based on a price per share equal to the volume-weighted-average price of our common stock for the 20 trading days as of the applicable milestone determination date. The maximum number of shares of our common stock issuable to AltheaDx security holders may not exceed 1,271,718 shares, and therefore, a maximum of 507,831 additional shares of our common stock remain issuable with respect to the milestone payments. In the event a number of shares in excess of the 1,271,718 limit would otherwise be issuable as consideration in the Merger, each AltheaDx security holder will receive a pro rata reduction of their portion of the milestone stock consideration and a corresponding increase in their portion of the milestone cash consideration. Our entry into the Merger Agreement was approved by our board of directors based upon the unanimous recommendation of a special transaction committee comprised solely of independent and disinterested directors. Derek J. Maetzold, our President and Chief Executive Officer, and a member of our board of directors, and Daniel M. Bradbury, the chairperson of our board of directors, each served on the board of directors of AltheaDx. Further, each of the following individuals was a direct or indirect beneficial owner of AltheaDx securities and received consideration in the transaction: Mr. Bradbury; Mr. Maetzold; Thomas Sullivan, John Maetzold and Peter Maetzold, immediate family members of Mr. Maetzold; Frank Stokes, the Company’s Chief Financial Officer; Tobin Juvenal, our Chief Commercial Officer; Kristen Oelschlager, our Chief Operating Officer; and Joshua Albers and Allysa Topel, immediate family members of Ms. Oelschlager.
15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto as of and for the years ended December 31, 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, 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 “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,” “potential,” “may,” “plan,” “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.
Overview
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 tests provide.
We currently market five proprietary multi-analyte assays with algorithmic analysis (“MAAAs”) designed to answer clinical questions in dermatologic cancers, uveal melanoma (“UM”) (a rare cancer of the eye) and Barrett’s esophagus (“BE”). We also have a pharmacogenomic 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. 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). On November 2, 2020, we commercially launched our proprietary GEP test for difficult-to-diagnose melanocytic lesions, DecisionDx® DiffDx™-Melanoma, for use in patients with a melanocytic lesion and uncertainty related to the malignancy of the lesion. We believe that these two additional skin cancer tests address areas of high clinical need in dermatological cancer and, together, represent an estimated addressable population of approximately 500,000 patients in the United States.
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We further expanded our commercially available dermatologic portfolio in May 2021 when we acquired Myriad myPath, LLC (the “Myriad myPath Laboratory”) from Myriad Genetics, Inc. for a cash purchase price of $32.5 million. myPath Melanoma is a clinically validated GEP test that addresses the same unmet clinical need as our DecisionDx DiffDx-Melanoma test. Today, we offer both our myPath Melanoma test and our DecisionDx DiffDx-Melanoma test under an offering that we refer to as our comprehensive diagnostic offering (“CDO”) of molecular testing solutions. By offering both of these tests in a single offering, we believe we have demonstrated the ability to improve the test result performance for patients with difficult-to-diagnose melanocytic lesions.
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 52 committed sites and approximately 146 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.
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 believe the addition of expertise in the spatialomics area positions us for continued growth and success in the diagnostics space, complementing our first-to-market dermatologic franchise and our proprietary test for UM.
On April 26, 2022, we completed our acquisition of AltheaDx, a commercial-stage molecular diagnostics company specializing in the field of pharmacogenomics (“PGx”) testing services that are focused on mental health, and the provider of IDgenetix, a PGx test for mental health conditions. At closing, $65.0 million in initial consideration was payable by us to AltheaDx security holders, which consisted of $32.5 million in cash, subject to adjustments for cash, debt, transaction expenses and working capital, and $32.5 million in shares of our common stock. Further, up to an additional $75.0 million in cash and common stock may become payable in connection with the achievement of certain milestones based on 2022, 2023 and 2024 performance and expanded Medicare coverage for the IDgenetix test. 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 $5.0 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 three months ended March 31, 2022 and 2021 and for the year ended December 31, 2021 are presented in the table below:
Proprietary Dermatologic GEP Tests
 DecisionDx-
Melanoma
DecisionDx-SCC
CDO(1)
Dermatologic TotalDecisionDx-UM
TissueCypher Barrett’s Esophagus(2)
Grand Total
Q1 20226,023 1,142 950 8,115 456 56 8,627 
Q1 20214,060 527 218 4,805 337 — 5,142 
Q2 20215,128 784 627 6,539 468 — 7,007 
Q3 20215,505 934 913 7,352 375 — 7,727 
Q4 20215,635 1,265 904 7,804 438 27 8,269 
For year ended December 31, 202120,328 3,510 2,662 26,500 1,618 27 28,145 
(1)Includes DecisionDx DiffDx-Melanoma, which we commercially launched on November 2, 2020, and myPath Melanoma, which we began offering following our acquisition of the Myriad myPath Laboratory on May 28, 2021. We offer both myPath Melanoma and DecisionDx DiffDx-Melanoma under our CDO.
(2)We began offering the TissueCypher Barrett’s Esophagus test on December 3, 2021, following the completion of our acquisition of Cernostics.
For the three months ended March 31, 2022, our dermatologic test report volume increased by 68.9% 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 first half of 2021, we expanded our dermatologic commercial team, bringing our dermatologic sales force to the mid-60s. 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 test. This dedicated team focuses on gastroenterology specialists that diagnose and manage patients with BE. Similar to our dermatology commercial team, we will continue to assess market response and determine what an appropriate commercial expansion will look like. Based on our initial market research, as well as initial provider response, we expect to add approximately 10-15 additional outside sales territories sometime in the third quarter, ending the year with approximately 25-30 outside sales territories. AltheaDx, which we acquired in late April 2022, had a commercial team covering approximately 20 outside sales territories, all of whom have continued with Castle following the transaction.
We continue to see new clinicians order our dermatologic tests for the first time. For the three months ended March 31, 2022, we saw approximately 592 new ordering clinicians for our dermatologic tests compared to 410 during the same period of 2021. Total ordering clinicians for our dermatologic tests were approximately 3,629 and 2,456 for the three months ended March 31, 2022 and 2021, respectively.
For additional information on the metrics we disclose, refer to “Information About Certain Metrics” below.
In developing our DecisionDx-SCC and DecisionDx DiffDx-Melanoma tests, we believed that in addition to addressing significant unmet clinical needs, we would see strategic opportunities for leverage, as many of the clinicians currently ordering DecisionDx-Melanoma would likely be the same clinicians who would find value in these other dermatologic GEP tests. For example, we found that for the three months ended March 31, 2022, approximately 56% 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 Barret’s Esophagus test is paid by Medicare at the rate published on Medicare’s Clinical Laboratory Fee Schedule (“CLFS”) for the test. Effective March
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24, 2022, we received 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.
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. The Noridian 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, Centers for Medicare & Medicaid Services (“CMS”) determined that DecisionDx-UM meets the criteria for “existing advanced diagnostic laboratory test” status, also referred to as “existing ADLT” status. For 2020, our rate was set by Noridian, our local MAC, but effective in 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 2021 was $7,776 and will remain at $7,776 for 2022, in each case 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. Accordingly, from July 1, 2019, through March 31, 2020, the Medicare reimbursement rate was equal to the initial list price of $7,193. From April 1, 2020, through December 31, 2021, the rate was also $7,193, which was calculated based upon the median private payor rate for DecisionDx-Melanoma from July 1, 2019 to November 30, 2019. CMS has informed us that the rate for 2022 will continue 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 will be $1,950.
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.
TissueCypher is performed 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 amount 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 payer rates received between April 1, 2022 and August 31, 2022. Note that for TissueCypher tests reported for April 1, 2022 through December 31, 2022, CMS has the right to recoup the difference between the actual list and 130% of the weighted median if the original list price was greater than 130% of the weighted median of private payor rates.
IDgenetix is currently covered under a MolDX LCD policy 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 DecisionDx DiffDx-Melanoma. The dossier was accepted as complete in the first quarter of 2021. We are unable to predict when draft LCDs for DecisionDx-SCC and DecisionDx DiffDx-Melanoma will be posted and 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.
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 includes commentary about two publications regarding the clinical utility of GEP tests and includes 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
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August 8, 2021. Potential outcomes following the public comment period include the posting of a final LCD consistent with the draft LCD, issuing a final LCD with coverage changes or not issuing a final LCD at all. We are unable to predict the ultimate outcome of this matter.
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 and the timing of revenue recognition under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). We expect our expenses will increase substantially over time as we:
execute clinical studies to generate evidence supporting our current and future product candidates;
execute our commercialization strategy for our current and future commercial products;
continue our 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 staff; and
add additional operational, financial and management information systems and personnel.
Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses.
Impact of COVID-19 Pandemic
We are continuing to closely monitor the impact of the ongoing COVID-19 pandemic on our business and taking proactive efforts designed to protect the health and safety of our workforce, continue our business operations and advance our corporate objectives. We are providing the following update with respect to the impact of COVID-19 on our business:
We have maintained and expect to continue to maintain uninterrupted business operations, with adequate access to reagents and consumables needed for testing patient samples and normal turnaround times for our delivery of test reports. We have continued to maintain our previously implemented adjustments to our operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing.
Following the onset of the COVID-19 pandemic, we experienced declines in orders and test report volume in certain periods. For example, in the second quarter of 2020, test reports delivered for our lead product, DecisionDx-Melanoma, decreased 18.5% compared to the second quarter of 2019. We believe these decreases in our test report volume were linked to delays and/or cancellations in patient visits, resulting in fewer diagnostic biopsies and thus a reduction in the number of diagnoses of cutaneous melanoma in response, as well as the cumulative impact on promotional responsiveness as a result of reduced sales calls per day and in-person sales calls during the ongoing COVID-19 pandemic.
Our commercial team uses a combination of in-person, virtual and non-personal promotional and educational efforts. Since the beginning of 2021, we have seen improvements in the number of promotional calls per day, as well as a continued shift from virtual to in-person sales calls. During the three months ended March 31, 2022 and 2021, in-person sales calls accounted for over 95% and 75% of all calls during such periods, respectively. However, we have not yet achieved pre-COVID-19 levels of calls per day per sales representative.
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 certain 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 test 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.
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As conditions are continuously 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 there are several important factors that have impacted, and that we expect will continue to impact, 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. In the near term, our report volume may be negatively impacted by ongoing developments of the ongoing COVID-19 pandemic, 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 for diagnostic and prognostic products. Our revenue depends on our ability to demonstrate the value of our products 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 About Certain Metrics
The following provides additional information about certain metrics we have disclosed in this Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Test reports delivered for DecisionDx-Melanoma, DecisionDx-SCC, myPath Melanoma/DecisionDx DiffDx-Melanoma, DecisionDx-UM and the TissueCypher Barrett’s Esophagus test 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. 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 and our CDO. 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 the Results of Operations
Net Revenues
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.
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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 (i.e., 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. Additionally, our ability to recognize revenue for our recently launched tests, DecisionDx-SCC and DecisionDx DiffDx-Melanoma, is dependent on the development of reimbursement experience and coverage decisions for these tests. Due to limited reimbursement experience, we are currently recognizing revenues for these two tests 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, obtain reimbursement from additional third-party payors and increase our reimbursement rate for tests performed.
Cost of Sales (exclusive of amortization of acquired intangible assets)
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.
Gross margin and gross margin percentage are key indicators we use to assess our business. See the table in “Results of Operations—Comparison of the three months ended March 31, 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.
We expect to use a portion of our cash and cash equivalents to further support and accelerate our research and development activities, including three important studies that are underway to support our DecisionDx-Melanoma test. The first is the PERSONALize study, in which we are evaluating DecisionDx-Melanoma for interactions with adjuvant therapies. The second is the CONNECTION study, which is collecting long-term outcomes for up to 10,000 patients who have been tested with DecisionDx-Melanoma. The third 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.
Selling, General and Administrative
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,
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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”) (in particular as we have become a large accelerated filer), investor relations activities and additional insurance expenses. 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 are primarily associated with developed technology.
Change in Fair Value of Contingent Consideration
Change in fair value of contingent consideration is associated with our acquisition of Cernostics and the related additional consideration of up to $50.0 million that may become payable based on the achievement of certain commercial milestones relating to the year ending December 31, 2022 (the “Earnout Payments”).
Interest Income
Interest income consists primarily of earnings on cash and cash equivalents, primarily money market funds.
Interest Expense
Interest expense is primarily attributable to a finance lease.
Income Tax Expense
Our consolidated financial statements do not reflect any federal or state income tax benefits attributable to the net 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.
Results of Operations
Certain prior year amounts in the tables below have been reclassified to conform to the current year presentation. Specifically, we no longer present gross margin on the face of our financial statements and therefore the cost of sales line is now presented within the operating expenses section. This reclassification had no impact on operating loss, loss before income taxes or net loss. The calculation of our gross margin is instead presented in a separate table in following section.
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Comparison of the three months ended March 31, 2022 and 2021
The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):
 Three Months Ended
March 31,
Change
 20222021
(unaudited)
Net revenues$26,852 $22,813 $4,039 17.7 %
Operating expenses
Cost of sales (exclusive of amortization of acquired intangible assets)5,944 3,028 2,916 96.3 %
Research and development10,761 5,908 4,853 82.1 %
Selling, general and administrative30,453 18,161 12,292 67.7 %
Amortization of acquired intangible assets1,648 — 1,648 NA
Change in fair value of contingent consideration2,562 — 2,562 NA
Total operating expenses51,368 27,097 24,271 89.6 %
Operating loss(24,516)(4,284)(20,232)(472.3)%
Interest income30 26 NM
Interest expense(3)— (3)NA
Loss before income taxes(24,489)(4,280)(20,209)(472.2)%
Income tax expense134 — 134 NA
Net loss$(24,623)$(4,280)$(20,343)(475.3)%
NA = Not applicable
NM = Not meaningful
The following table provides a disaggregation of net revenues by type (in thousands):
Three Months Ended
March 31,
20222021Change
(unaudited)
Dermatologic(1)
$24,339 $20,910 $3,429 
Other(2)
2,513 1,903 610 
Total net revenues$26,852 $22,813 $4,039 
(1)Consists of DecisionDx-Melanoma, DecisionDx-SCC and CDO.
(2)Consists primarily of DecisionDx-UM.
The following table presents the calculation of gross margin (in thousands, except percentages):
 Three Months Ended
March 31,
 20222021Change
(unaudited)
Net revenues$26,852 $22,813 $4,039 
Less: Cost of sales (exclusive of amortization of acquired intangible assets)5,944 3,028 2,916 
Less: Amortization of acquired intangible assets1,648 — 1,648 
Gross margin$19,260 $19,785 $(525)
Gross margin percentage71.7 %86.7 %(15.0)%
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The following table indicates the amount of stock-based compensation expense (non-cash) reflected in the line items above (in thousands):
Three Months Ended
March 31,
20222021Change
(unaudited)
Cost of sales (exclusive of amortization of acquired intangible assets)$853 $510 $343 
Research and development1,828 1,058 770 
Selling, general and administrative5,738 3,345 2,393 
Total stock-based compensation expense$8,419 $4,913 $3,506 

Net Revenues
Net revenues for the three months ended March 31, 2022 increased by $4.0 million, or 17.7%, to $26.9 million compared to the three months ended March 31, 2021, primarily due to $3.4 million higher revenue from dermatologic tests, primarily DecisionDx-Melanoma, and to a lesser extent, higher revenues from our other tests (non-dermatologic) of $0.6 million. The increase in dermatologic revenue was primarily attributable to a 69% increase in test volumes, with higher test reports delivered across each of our dermatologic offerings, due to a combination of increased patient flow attributable to the easing of COVID-19 restrictions and the effects of our dermatologic sales force expansion during the first half of 2021. The higher volumes were partially offset by the effect of lower positive 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 March 31, 2022 compared to $5.3 million for the three months ended March 31, 2021. The year-over-year decrease is primarily attributable to the effect of favorable adjustments related to the settlement and collection during the three months ended March 31, 2021 of certain groups of receivables from prior years that did not recur during the three months ended March 31, 2022. The increase in revenue from our other tests (non-dermatologic) of $0.6 million was primarily attributable to higher volume of DecisionDx-UM, which we believe is largely attributable to the easing of COVID-19 restrictions.
Cost of Sales (exclusive of amortization of acquired intangible assets)
Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended March 31, 2022 increased by $2.9 million, or 96.3%, compared to the three months ended March 31, 2021, primarily due to higher personnel costs, attributable to additional headcount in our laboratory testing operations, including headcount attributable to the addition of Cernostics, as well as increased costs of supplies and services, attributable to the higher activity levels. Due to the nature of our business, a significant portion of our cost of sales expenses represent 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 (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 71.7% for the three months ended March 31, 2022, compared to 86.7% for the same period in 2021. The decrease was primarily due to this year’s amortization expense associated with our acquired intangible assets, lower positive revenue adjustments related to tests delivered in previous periods and additional investments in laboratory headcount. 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 $4.9 million, or 82.1%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. Approximately 51% of the increase is attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, including higher stock-based compensation expense of $0.8 million, and approximately 20% is attributable to higher costs for clinical studies, including costs related to the PERSONALize, CONNECTION and DECIDE studies. 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.
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Selling, General and Administrative
The following table provides a breakdown of SG&A expenses (in thousands):
Three Months Ended
March 31,
20222021Change
(unaudited)
Sales and marketing$18,221 $9,656 $8,565 
General and administrative12,232 8,505 3,727 
Total selling, general and administrative expense$30,453 $18,161 $12,292 
Sales and marketing expenses increased by $8.6 million, or 88.7%, for the three months ended March 31, 2022, compared to three months ended March 31, 2021. Approximately $5.4 million, or 63%, of the increase is attributable to higher personnel costs including salaries, bonuses and stock-based compensation. Stock-based compensation expense included in sales and marketing expense was $2.8 million for the three months ended March 31, 2022, compared to $1.5 million for the three months ended March 31, 2021. Personnel costs have increased through the expansion of our dermatology-facing commercial team headcount to the mid-60s during the first and second quarters of 2021 and through our acquisition of Cernostics in December 2021, where 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 test and to serve as a dedicated team focused on gastroenterology specialists that diagnose and manage patients with BE. 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 both a higher headcount as well a return to more in-person activities resulting from the continued easing of COVID-19 restrictions. 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 $3.7 million, or 43.8%, for the three months ended March 31, 2022, compared to three months ended March 31, 2021. The increase is primarily attributable to $2.6 million in higher personnel costs including salaries, bonuses and stock-based compensation. Stock-based compensation expense included in general and administrative expense was $2.6 million for the three months ended March 31, 2022, compared to $1.4 million for the three months ended March 31, 2021. The higher personnel costs reflect expanded headcount in our administrative support functions. 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 was $1.6 million for the three months ended March 31, 2022 and was primarily associated with amortization of developed technology attributable to the acquisitions of Myriad myPath, LLC and Cernostics in May 2021 and December 2021, respectively. There was no such amortization during the three months ended March 31, 2021.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration for the three months ended March 31, 2022 of $2.6 million is related to the remeasurement of the Earnout Payments associated with our acquisition of Cernostics and primarily reflects the passage of time. There was no such activity during the three months ended March 31, 2021.
Stock-Based Compensation Expense
Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $8.4 million for the three months ended March 31, 2022, compared to $4.9 million for the three months ended March 31, 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 March 31, 2022, we had 400 employees compared to 242 as of March 31, 2021. As of March 31, 2022, the total unrecognized stock-based compensation cost related to outstanding awards was $97.1 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.1 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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Liquidity 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 March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $309.0 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 May 6, 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 Requirements
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical research and development services, laboratory operations, equipment and related supplies, legal and other regulatory expenses, general administrative costs and, from time to time, expansion of our laboratory and office facilities in support of our growth. We anticipate that a substantial portion of our cash requirements in the foreseeable future will relate to the further commercialization of our currently marketed products, the development of our future product candidates in our pipeline and the potential commercialization of these pipeline products, should their development be successful.
In December 2021, we acquired Cernostics for $30.7 million in cash and in April 2022, we acquired AltheaDx, for $32.5 million in cash and $32.5 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. 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 test (acquired from Cernostics) and IDgenetix (acquired from AltheaDx) into our suite of commercial product offerings.
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 three months ended March 31, 2022, we had a net loss of $24.6 million and an accumulated deficit of $118.4 million as of March 31, 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 commencement and completion of clinical study protocols;
successful identification and acquisition of tissue samples;
the development and validation of genomic classifiers; and
acceptance of new genomic tests by physicians, patients and third-party payors.
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Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate our exact working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including those listed above as well as those listed in Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q.
We do not currently have any committed external source of funds. 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 March 31, 2022 totaled approximately $10.3 million, of which $1.0 million is payable through the remainder of 2022 and $9.3 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 March 31, 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 $13.8 million.
Cash Flows
The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented (in thousands):
 Three Months Ended
March 31,
 20222021
(unaudited)
Net cash used in operating activities$(21,430)$(3,631)
Net cash used in investing activities(402)(750)
Net cash provided by financing activities1,216 1,510 
Net change in cash and cash equivalents(20,616)