What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-08-10 compared with 2020-05-11 · 245 added, 165 removed, 359 unchanged (53% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

ASSETS (unaudited)

Current Assets

1 unchanged sentence

Accounts receivable, net 12,528 14,648

Inventory 1,667 1,237

Prepaid expenses and other current assets 1,717 1,951

3 unchanged sentences

Other assets – long-term 199 135

Total assets $ 201,546 $ 119,746

LIABILITIES AND STOCKHOLDERS’ EQUITY

2 unchanged sentences

Accrued compensation 4,651 5,779

Medicare advance payment 8,350 —

Other accrued liabilities 2,746 1,812

2 unchanged sentences

Long-term debt 14,741 19,289

Deferred rent liability

Deferred rent and other liabilities 941 55

Total liabilities 43,924 34,633

2 unchanged sentences

Preferred stock, $ 0.001 par value;

10,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

no shares issued and outstanding as of March 31, 2020 and December 31, 2019.

10,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

no shares issued and outstanding as of June 30, 2020 and December 31, 2019.

Common stock, $ 0.001 par value;

200,000,000 shares authorized as of March 31, 2020 and December 31, 2019, 17,203,496 and 17,130,907 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

200,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

19,373,869 and 17,130,907 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.

Additional paid-in capital 210,621 137,308

4 unchanged sentences

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended

2020 2019 2020 2019

NET REVENUES $ 12,715 $ 10,739 $ 30,133 $ 19,456

COST OF SALES 2,146 1,993 4,537 3,591

OPERATING EXPENSES

Gross margin 10,569 8,746 25,596 15,865

OPERATING EXPENSES AND OTHER OPERATING INCOME

Research and development 2,704 1,317 5,617 2,711

Selling, general and administrative 10,392 6,821 21,470 12,868

Total operating expenses

Other operating income ( 1,882 ) — ( 1,882 ) —

Total operating expenses, net 11,214 8,138 25,205 15,579

Operating income (loss) ( 645 ) 608 391 286

2 unchanged sentences

Other expense, net — ( 189 ) — ( 222 )

Income (loss) before income taxes

Loss before income taxes ( 1,376 ) ( 1,269 ) ( 806 ) ( 2,627 )

Income tax expense — — — —

Net income (loss) and comprehensive income (loss)

Net loss and comprehensive loss ( 1,376 ) ( 1,269 ) ( 806 ) ( 2,627 )

Convertible preferred stock cumulative dividends — 939 — 1,867

Accretion of redeemable convertible preferred stock to redemption value

Net income (loss) and comprehensive income (loss) attributable to common stockholders

Earnings (loss) per share attributable to common stockholders:

Net loss and comprehensive loss attributable to common stockholders $ ( 1,376 ) $ ( 2,265 ) $ ( 806 ) $ ( 4,607 )

Loss per share attributable to common stockholders:

$ ( 0.08 ) $ ( 1.05 ) $ ( 0.05 ) $ ( 2.26 )

Diluted $ ( 0.08 ) $ ( 1.05 ) $ ( 0.05 ) $ ( 2.26 )

Weighted-average shares outstanding:

Basic 17,544 2,153 17,458 2,036

Diluted 17,544 2,153 17,458 2,036

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

6 unchanged sentences

E-2, E-2A, E-3 and F

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

BALANCE, APRIL 1, 2019 503,056 $ 1,501 9,456,775 $ 45,051 — $ — 1,916,701 $ 2 $ 9,412 $ ( 58,847 ) $ ( 49,433 )

Stock compensation expense — — — — — — — — 139 — 139

Exercise of common stock options — — — — — — 275,760 — 416 — 416

Accretion of redeemable convertible preferred stock to redemption value:

Series E-1 — — — 1 — — — — ( 1 ) — ( 1 )

Series E-3 — — — 3 — — — — ( 3 ) — ( 3 )

Series F — — — 53 — — — — ( 53 ) — ( 53 )

Net loss — — — — — — — — — ( 1,269 ) ( 1,269 )

BALANCE, JUNE 30, 2019 503,056 $ 1,501 9,456,775 $ 45,108 — $ — 2,192,461 $ 2 $ 9,910 $ ( 60,116 ) $ ( 50,204 )

BALANCE, APRIL 1, 2020 — $ — — $ — — $ — 17,203,496 $ 17 $ 139,559 $ ( 51,642 ) $ 87,934

Stock compensation expense — — — — — — — — 1,653 — 1,653

Exercise of common stock options — — — — — — 170,373 — 330 — 330

Public offering of common stock, net of underwriting discounts, commissions and offering costs

— — — — — — 2,000,000 2 69,079 — 69,081

Net loss — — — — — — — — — ( 1,376 ) ( 1,376 )

BALANCE, JUNE 30, 2020 — $ — — $ — — $ — 19,373,869 $ 19 $ 210,621 $ ( 53,018 ) $ 157,622

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

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

(in thousands, except share data)

Stock Series C

Preferred Stock

Series A, B, D, E-1,

E-2, E-2A, E-3 and F

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

BALANCE, JANUARY 1, 2019 503,056 $ 1,501 9,456,775 $ 44,995 — $ — 1,916,224 $ 2 $ 921 $ ( 57,489 ) $ ( 56,566 )

2 unchanged sentences

Accretion of redeemable convertible preferred stock to redemption value:

Series E-1 — — — 2 — — — — ( 2 ) — ( 2 )

Series E-3 — — — 6 — — — — ( 6 ) — ( 6 )

Series F — — — 105 — — — — ( 105 ) — ( 105 )

Recognition of beneficial conversion feature on convertible promissory notes

BALANCE, MARCH 31, 2019

— — — — — — — — 8,378 — 8,378

Net loss — — — — — — — — — ( 2,627 ) ( 2,627 )

BALANCE, JUNE 30, 2019 503,056 $ 1,501 9,456,775 $ 45,108 — $ — 2,192,461 $ 2 $ 9,910 $ ( 60,116 ) $ ( 50,204 )

BALANCE, JANUARY 1, 2020 — $ — — $ — — $ — 17,130,907 $ 17 $ 137,308 $ ( 52,212 ) $ 85,113

2 unchanged sentences

Issuance of common stock under the employee stock purchase plan

BALANCE, MARCH 31, 2020

— — — — — — 39,987 — 603 — 603

Public offering of common stock, net of underwriting discounts, commissions and offering costs

— — — — — — 2,000,000 2 69,079 — 69,081

Net loss — — — — — — — — — ( 806 ) ( 806 )

BALANCE, JUNE 30, 2020 — $ — — $ — — $ — 19,373,869 $ 19 $ 210,621 $ ( 53,018 ) $ 157,622

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

2 unchanged sentences

(in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

OPERATING ACTIVITIES

Net income (loss)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Net loss $ ( 806 ) $ ( 2,627 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation 193 163

Stock compensation expense 3,230 307

6 unchanged sentences

Prepaid expenses and other current assets 234 ( 99 )

Inventory ( 430 ) 331

Other assets ( 62 ) ( 11 )

Accounts payable 444 ( 524 )

Accrued compensation ( 1,127 ) ( 1,786 )

Medicare advance payment 8,350 —

Other accrued liabilities 263 902

Deferred rent liability

Net cash (used in) provided by operating activities

INVESTING ACTIVITES

Deferred rent and other liabilities 172 13

Net cash provided by operating activities 13,250 1,770

INVESTING ACTIVITIES

Purchases of property and equipment ( 2,256 ) ( 424 )

1 unchanged sentence

FINANCING ACTIVITIES

Proceeds from issuance of convertible promissory notes (including $4,756 from related parties for the three months ended March 31, 2019), net of issuance costs

Proceeds from public offering of common stock, net of underwriting discounts, commissions and offering costs

Proceeds from issuance of convertible promissory notes (including $ 4,756 from related parties for the six months ended June 30, 2019), net of issuance costs

Proceeds from issuance of term debt, net of issuance costs — 1,776

Repayments on term debt ( 833 ) —

Repayments on line of credit — ( 1,791 )

Payments of deferred offering costs — ( 454 )

Proceeds from exercise of common stock options 400 417

4 unchanged sentences

End of period $ 179,759 $ 17,468

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

Six Months Ended June 30,

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Accrued capital expenditures

Initial public offering costs incurred but not paid

Accrued purchases of property and equipment $ 194 $ 12

Property and equipment acquired with tenant improvement allowance $ 714 $ —

Common stock and debt issuance costs incurred but not paid $ 451 $ 1,205

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

12 unchanged sentences

The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing.

The Company has recently experienced a decline in orders, which it believes is linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19.

For example, from April 1, 2020 to May 6, 2020, orders for the Company’s lead product, DecisionDx-Melanoma, declined significantly compared to the same period in 2019.

As it relates to the impact of COVID-19 on the Company’s uveal melanoma test, DecisionDx-UM, order volume has exhibited some softening since early April 2020.

The Company experienced a decline in test report volume in the second quarter of 2020, which it believes is linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19.

T he extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.

Refer to Note 2 for information on certain payments received by the Company in April 2020 as a result of these actions.

The Company intends to fund planned operations for the next 12 months using a portion of its cash and cash equivalents on hand, which totaled $98.7 million at March 31, 2020 , and collections from test report sales.

T he extent to which COVID-19 may impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

The Company intends to fund planned operations for the next 12 months using a portion of its cash and cash equivalents on hand, which totaled $ 179.8 million at June 30, 2020, and collections from test report sales.

Summary of Significant Accounting Policies

3 unchanged sentences

Unaudited Interim Financial Information

The accompanying balance sheet as of March 31, 2020 ;

the statements of operations and comprehensive income (loss), the statements of convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2020 and 2019 ;

and the statements of cash flows for the three months ended March 31, 2020 and 2019 are unaudited.

The unaudited interim 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 the Company’s financial position as of March 31, 2020 and the results of its operations and its cash flows for the three months ended March 31, 2020 and 2019 .

The financial data and other information disclosed in these notes related to the three months ended March 31, 2020 and 2019 are also unaudited.

The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.

The accompanying condensed balance sheet as of June 30, 2020;

the condensed statements of operations and comprehensive loss, the condensed statements of convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2020 and 2019;

and the condensed statements of cash flows for the six months ended June 30, 2020 and 2019 are unaudited.

The unaudited interim 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 the Company’s financial position as of June 30, 2020 and the results of its operations and its cash flows for the three and six months ended June 30, 2020 and 2019.

The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2020 and 2019 are also unaudited.

The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.

The balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date.

10 unchanged sentences

Actual results could differ from those estimates and assumptions.

the extent to which the COVID-19 pandemic may impact the Company’s estimates is uncertain and subject to change.

The Company has considered the potential impact of the COVID-19 pandemic on its estimates and assumptions and while there was not a material impact to the Company’s condensed financial statements as of and for the three and six months ended June 30, 2020, the extent to which the COVID-19 pandemic may impact the Company’s estimates is uncertain and subject to change.

Operating Segments

40 unchanged sentences

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, 2020 and 2019 were $3,160,000 and $648,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Included in revenues for the three months ended June 30, 2020 and 2019 were $ 2,291,000 and $ 3,257,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the six months ended June 30, 2020 and 2019 were revenue increases of $ 1,048,000 and $ 2,794,000 , respectively.

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.

1 unchanged sentence

Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of the Company’s contracts.

Contract balances consisted solely of accounts receivable (both current and noncurrent) as of March 31, 2020 and December 31, 2019 .

Contract balances consisted of accounts receivable (both current and noncurrent) and the Medicare advance payment (discussed further below) as of June 30, 2020 and consisted solely of accounts receivable (both current and noncurrent) as of December 31, 2019.

Medicare Advance Payment

On April 16, 2020, the Company received an advance payment of $ 8.3 million (the “Advance Payment”) from the Centers for Medicare & Medicaid Services (“CMS”) under its Accelerated and Advance Payment Program, which was recently expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

Starting on August 14, 2020 ( 120 days after the issuance of the Advance Payment), the recoupment process will begin, and all claims the Company submits for reimbursement to Medicare will be applied against the balance of the Advance Payment.

If the Advance Payment is not fully recovered by CMS by November 12, 2020 ( 210 days from the issuance of the Advance Payment), the Company will make arrangements with its Medicare Administrative Contractor for CMS to recoup the remaining balance.

The Company has recorded the receipt of the Advance Payment as a current liability on its balance sheet in the second quarter of 2020.

The Company will reduce the balance as it is applied to new claims or is otherwise recouped by CMS.

As of June 30, 2020, no revenue has been recognized related to any portion of the Advance Payment.

DecisionDx-Melanoma Claims Consolidation

In June 2017, the Company 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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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.

2 unchanged sentences

On March 12, 2020, OMHA issued a decision denying payment on all claims in the consolidation.

The Company plans to appeal the decision.

The Company has 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, the Company has not recognized (fully constrained the variable consideration) any revenues attributable to these claims in its financial statements pending the outcome of this matter.

1 unchanged sentence

The Company relies upon reimbursements from third-party government payors (primarily Medicare) and private-payor insurance companies to collect accounts receivable related to sales of its diagnostic tests.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

The Company’s 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

Six Months Ended

June 30, Percentage of

Accounts Receivable

2 unchanged sentences

(non-current)

March 31, 2020

December 31, 2019

March 31, 2020

December 31, 2019

2020 2019 June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019

Medicare 58 % 45 % 9 % 7 % — % — %

Medicare Advantage plans 29 % 22 % 37 % 41 % 10 % 18 %

1 unchanged sentence

BlueCross BlueShield plans 6 % 7 % 29 % 25 % 51 % 46 %

* Less than 1%

Accounts Receivable and Allowance for Doubtful Accounts

5 unchanged sentences

Historically, the Company’s bad debt expense has not been significant.

The allowance for doubtful accounts was zero as of March 31, 2020 and December 31, 2019 .

The allowance for doubtful accounts was zero as of June 30, 2020 and December 31, 2019.

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 doubtful accounts.

Other Operating Income

Other operating income consists of an automatic payment of $ 1.9 million that the Company received on April 10, 2020 from the U.S.

Department of Health and Human Services (“HHS”) pursuant to the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, also known as the CARES Act, out of relief funds allocated by HHS to healthcare providers to reimburse healthcare related expenses or lost revenues attributable to COVID-19.

This automatic payment was calculated by HHS in proportion to the providers’ share of Medicare fee-for-service reimbursements in 2019 and was applicable to all facilities and providers that received Medicare fee-for-service reimbursements in 2019.

As determined by HHS, the funds will not need to be repaid.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Fair Value of Financial Instruments

6 unchanged sentences

The Company also accrues for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets.

As of March 31, 2020 and December 31, 2019 , the Company accrued $1,794,000 and $4,785,000 , respectively, for liabilities associated with these bonus plans.

As of June 30, 2020 and December 31, 2019, the Company accrued $ 3,060,000 and $ 4,785,000 , respectively, for liabilities associated with these bonus plans.

These amounts are classified as current or noncurrent accrued liabilities in the balance sheets based on the expected timing of payment.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources.

The Company’s comprehensive income (loss) was the same as its reported net income (loss) for all periods presented.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

CARES Act Payroll Tax Deferral

The CARES Act permits employers to defer the payment of the employer share of social security taxes due for the period beginning March 27, 2020 and ending December 31, 2020.

Of the amounts deferred, 50% are required to be paid by December 31, 2021 and the remaining 50% are required to be paid by December 31, 2022.

The Company began deferring payment of the employer share of social security taxes in May 2020.

As of June 30, 2020, the Company had deferred payment of $ 176,000 of such taxes, which are classified as noncurrent liabilities in the balance sheet.

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.

The Company’s comprehensive loss was the same as its reported net loss for all periods presented.

Accounting Pronouncements Yet to be Adopted

7 unchanged sentences

For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019.

However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842):

However, in November 2019, the FASB issued ASU No.

2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842):

Effective Dates (“ASU 2019-10”), which included a one-year deferral of the effective date of ASU 2016-02 for certain entities.

In June 2020, the FASB issued ASU No.

2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842):

Effective Dates for Certain Entities , which further defers the effective date for certain entities.

As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

The Company expects to adopt the new standard in the fourth quarter of 2022 using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods.

The Company anticipates that the adoption will not have a material impact on its statements of operations and comprehensive income (loss) or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

The Company anticipates that the adoption will not have a material impact on its statements of operations and comprehensive loss or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts.

The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The main objective of this ASU is

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

In November 2018, the FASB issued ASU No.

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The Company is currently evaluating the impact of ASU 2019-12 on its financial statements.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders for the period by the weighted-average number of common shares outstanding during the period.

The weighted-average number of common shares outstanding includes shares associated with an outstanding warrant, issued in July 2019, to purchase 209,243 shares of common stock, which are deemed to have been issued for purposes of calculating basic and diluted earnings (loss) per share, due to the nominal exercise price.

Loss Per Share

Loss per share is computed by dividing net loss attributable to common stockholders for the period by the weighted-average number of common shares outstanding during the period.

On July 29, 2019, the Company completed the initial public offering of its common stock (the “IPO”), in which it issued and sold 4,600,000 shares of common stock.

Also on that date, all of the Company’s outstanding convertible preferred stock and convertible promissory notes automatically converted into 8,181,992 and 1,661,106 shares, respectively, of common stock and certain outstanding warrants to purchase Series F convertible redeemable preferred stock were net exercised for an aggregate of 27,207 shares of common stock.

These shares are included in the Company’s weighted-average number of common shares outstanding starting on that date.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Diluted earnings (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”), as well as from the possible conversion of the Company’s convertible preferred stock, convertible promissory notes and exercise of outstanding warrants.

On June 29, 2020, the Company completed a follow-on public offering in which it issued and sold 2,000,000 shares of common stock, as discussed further in Note 10.

The foregoing shares are included in the Company’s weighted-average number of common shares outstanding starting on the respective issuance/conversion dates.

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”), as well as from the possible conversion of the Company’s convertible preferred stock, convertible promissory notes and exercise of outstanding warrants.

The treasury stock and if-converted methods are 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.

The following table shows the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019 (in thousands, except per share data):

Three Months Ended March 31,

Net income (loss) attributable to common stockholders

Weighted-average common shares outstanding, basic

Assumed exercise of common stock warrants

Assumed exercise of stock options

Assumed issuance of shares under the ESPP

Weighted-average common shares outstanding, diluted

Earnings (loss) per share attributable to common stockholders:

Due to the Company reporting a net loss attributable to common stockholders for the three months ended March 31, 2019, all potentially dilutive securities are antidilutive and are excluded from the computations of diluted loss per share for such period.

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in the Company’s calculation of diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019 because to do so would be antidilutive (in thousands):

Three Months Ended March 31,

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Due to the Company reporting a net loss attributable to common stockholders for all periods presented, all potentially dilutive securities are antidilutive and are excluded from the computations of diluted loss per share for all such periods.

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in the Company’s calculation of diluted loss per share for the three and six months ended June 30, 2020 and 2019 because to do so would be antidilutive (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Convertible preferred stock — 8,171 — 8,171

1 unchanged sentence

Stock options 2,728 1,901 2,715 1,827

Common stock warrants 35 — 35 —

Preferred stock warrants — 141 — 141

Employee stock purchase plan 107 — 105 —

Total 2,870 11,133 2,855 10,868

(1) Based on conversion of the aggregate principal amount, plus accrued interest thereon, of the convertible promissory notes into shares of common stock based on the IPO price of $ 16.00 per share and assuming the occurrence of such conversion as of the beginning of 2019 or the date of issuance, if later.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Lab equipment $ 1,674 $ 1,563

3 unchanged sentences

Construction in progress 2,852 2

Total 6,420 3,263

Less accumulated depreciation ( 1,396 ) ( 1,203 )

Property and equipment, net $ 5,024 $ 2,060

Depreciation expense was recorded in the statements of operations and comprehensive income (loss) as follows (in thousands):

Three Months Ended March 31,

Depreciation expense was recorded in the statements of operations and comprehensive loss as follows (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Cost of sales $ 74 $ 69 $ 140 $ 133

1 unchanged sentence

Selling, general and administrative 25 16 48 27

Total $ 102 $ 86 $ 193 $ 163

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Other Accrued Liabilities

Other accrued liabilities consisted of the following (in thousands) :

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Accrued service fees $ 1,883 $ 1,162

3 unchanged sentences

Accrued state income taxes 79 79

Total $ 2,746 $ 1,812

Convertible Promissory Notes

4 unchanged sentences

The Company determined that certain features of the Q1 2019 Notes were subject to bifurcation and separate accounting under ASC 815-15, Embedded Derivatives .

The embedded derivative was recorded at fair value each reporting period, with changes in fair value recorded as “other expense, net” in the statements of operations and comprehensive income (loss).

The embedded derivative was recorded at fair value each reporting period, with changes in fair value recorded as “other expense, net” in the statements of operations and comprehensive loss.

No hedge accounting treatment was applied.

The Company also determined the Q1 2019 Notes contained a beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options, related to the optional conversion of the Q1 2019 Notes into

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Series F redeemable convertible preferred stock at maturity.

The debt discounts created from the initial recognition of the embedded derivative and the beneficial conversion feature were being amortized to interest expense over the life of the debt using the effective interest method.

Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $204,000 for the three months ended March 31, 2019 and were included in interest expense.

The amounts recognized in net loss for three months ended March 31, 2019 for the embedded derivative liability are as follows (in thousands) :

Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $ 767,000 for the three months ended June 30, 2019 and $ 971,000 for the six months ended June 30, 2019 and were included in interest expense.

The amounts recognized in net loss for three and six months ended June 30, 2019 for the embedded derivative liability are as follows (in thousands) :

Gain (Loss) Recognized in Net Loss

Statement of Operations and Comprehensive Income (Loss) Location

Three Months Ended

March 31, 2019

Statement of Operations and Comprehensive Loss Location Three Months Ended

June 30, 2019 Six Months Ended

June 30, 2019

Derivatives Not Classified as Hedging Instruments

Embedded derivative in convertible promissory notes

Other expense, net

Embedded derivative in convertible promissory notes Other expense, net $ ( 90 ) $ ( 136 )

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Long-Term Debt

The Company’s long-term debt balances are presented in the table below (in thousands):

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Term debt $ 25,854 $ 26,688

Unamortized discount and issuance costs ( 1,113 ) ( 1,566 )

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Amounts prepaid or repaid under the Term Loan may not be reborrowed.

Previously, the 2018 LSA contained a financial covenant that required the Company to achieve a monthly trailing three-month revenue target each month throughout the term of the agreement, but the covenant was amended in February 2020 and is now tested quarterly instead of monthly, as discussed further below.

As of March 31, 2020 and December 31, 2019, the Company was in compliance with this covenant.

For each month through December 31, 2019, the trailing three-month revenue requirements were calculated as a percentage of the Company’s previously approved applicable monthly revenue projections.

In February 2020, the Company entered into an amendment of the 2018 LSA (the “Second Amendment”) that, among other things, changed the covenant from being tested monthly to quarterly testing.

In March 2020, the Company entered into an amendment of the 2018 LSA (the “Third Amendment”) with the Lenders to establish revenue targets for the year ending December 31, 2020.

The 2018 LSA contains a financial covenant, which is discussed further below.

Previously, the financial covenant in the 2018 LSA was based on a trailing three-month revenue target tested monthly throughout the term of the agreement.

In February 2020, the Company entered into a second amendment of the 2018 LSA (the “Second Amendment”) that, among other things, changed the covenant from being tested monthly to quarterly testing.

In March 2020, the Company entered into a third amendment of the 2018 LSA (the “Third Amendment”) with the Lenders to establish revenue targets for the year ending December 31, 2020, which were calculated a percentage of the Company’s previously approved quarterly revenue projections.

For quarterly periods ending after December 31, 2020, the trailing three-month revenue requirements will be determined by the Lenders upon receipt and review of the Company’s quarterly financial projections for the year, subject to certain specified criteria regarding minimum requirements.

Revenues, if any, that the Company recognizes as a result of an ALJ appeal process from consolidated claims initiatives for DecisionDx-Melanoma do not count toward the minimum revenue requirements.

On May 10, 2020, the Company entered into an amendment of the 2018 LSA (the “Fourth Amendment”) to modify the covenant structure such that the Company is required to comply with either (i) the trailing three-month revenue target or (ii) a liquidity ratio, in both cases measured quarterly.

On May 10, 2020, the Company entered into a fourth amendment of the 2018 LSA (the “Fourth Amendment”) to modify the covenant structure such that the Company is required to comply with either (i) the trailing three-month revenue target or (ii) a liquidity ratio, in both cases measured quarterly.

The liquidity ratio covenant requires that the ratio of (i) unrestricted cash and cash equivalents (as defined in the 2018 LSA) held at SVB or its affiliates to (ii) the outstanding obligations under the 2018 LSA be at least 2.00 to 1.00.

The Company requested the Fourth Amendment from the Lenders due to the Company’s anticipated noncompliance with the trailing three-month revenue covenant as of June 30, 2020 as a result of the impacts to its

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

business attributable to COVID-19.

The liquidity ratio, had it been measured and effective as of March 31, 2020, would have been 3.66 to 1.00.

As of June 30, 2020, the Company was in compliance with this covenant by satisfying the liquidity ratio test, with a liquidity ratio of 6.89 to 1.00 as of June 30, 2020.

In addition, the 2018 LSA contains customary conditions of borrowing, events of default and covenants, including covenants that restrict the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of the Company’s capital stock.

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LIBOR rate as reported in the Wall Street Journal on the last business day of the month that precedes the month in which the interest will accrue, plus 6.48 %.

The applicable interest rate on the 2018 Term Loan was 8.55% as of March 31, 2020 and December 31, 2019 .

The applicable interest rate on the Term Loan was 8.55 % as of June 30, 2020 and December 31, 2019.

Interest on the Term Loan is payable monthly in arrears.

The Company is permitted to make interest-only payments on the 2018 Term Loan through May 31, 2020.

The principal is required to be repaid in 30 equal monthly installments of $833,333 each beginning on June 1, 2020.

The Company is permitted to make interest-only payments on the Term Loan through

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

May 31, 2020.

As required, the Company began to repay the principal in 30 equal monthly installments of $ 833,333 each beginning on June 1, 2020.

All unpaid principal and accrued and unpaid interest are due on November 1, 2022 (the “Term Loan Maturity Date”).

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Accordingly, the fair value estimates disclosed, or amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

The table below provides information, by level within the fair value hierarchy, of the Company’s financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):

As of March 31, 2020

Quoted Prices in Active Markets for Identical Items (Level 1)

Significant Other Observable Inputs

Significant Unobservable Inputs

The table below provides information, by level within the fair value hierarchy, of the Company’s financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):

As of June 30, 2020

Quoted Prices in Active Markets for Identical Items (Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

(Level 3) Total

Money market funds (1)

$ 178,643 $ — $ — $ 178,643

As of December 31, 2019

Quoted Prices in Active Markets for Identical Items (Level 1)

Significant Other Observable Inputs

Significant Unobservable Inputs

Quoted Prices in Active Markets for Identical Items (Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

(Level 3) Total

Money market funds (1)

$ 98,389 $ — $ — $ 98,389

(1) Classified as “Cash and cash equivalents” in the condensed balance sheets.

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The Company believes there is no threatened litigation or litigation pending that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Stockholders’ Equity

Information about common stock warrants outstanding as of March 31, 2020 and December 31, 2019 are presented in the table below:

Expiration date

Number of shares

Exercise price

Common Stock Offering

On June 29, 2020, the Company issued and sold 2,000,000 shares of its common stock in a follow-on public offering at a price of $ 37.00 per share.

The Company received approximately $ 69.1 million in net proceeds, after deducting underwriting discounts and commissions and offering costs (including $ 0.5 million in offering costs that were incurred but not paid as of June 30, 2020).

In connection with the offering, the Company granted the underwriters a 30 -day option to purchase up to 300,000 additional shares of common stock at the public offering price, less underwriting discounts and commissions.

On July 2, 2020, the Company issued and sold an additional 300,000 shares of common stock pursuant to the underwriters’ exercise in full of their option to purchase additional shares, which resulted in additional net proceeds to the Company of $ 10.4 million.

Common Stock Warrants

Information about common stock warrants outstanding as of June 30, 2020 and December 31, 2019 are presented in the table below:

Expiration date Number of shares Exercise price

July 12, 2026 209,243 $ 0.001

1 unchanged sentence

November 30, 2028 8,809 $ 7.10

Total 244,480

The common stock warrants are classified as stockholders’ equity and no adjustments are recorded for changes in fair value.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Stock Incentive Plans and Stock-Based Compensation

Stock Incentive Plans

Activity under the Company’s stock plans for the three months ended March 31, 2020 is set forth below:

Activity under the Company’s stock plans for the six months ended June 30, 2020 is set forth below:

Weighted-Average

4 unchanged sentences

Additional options authorized 856,545 — —

Granted ( 290,120 ) 290,120 $ 33.04

Exercised — ( 202,975 ) $ 1.97

Forfeited/Canceled 24,850 ( 24,850 ) $ 26.44

Balance as of March 31, 2020

Exercisable at March 31, 2020 (1)

Balance as of June 30, 2020 1,454,402 2,700,261 $ 16.15 8.62 $ 58,172

Exercisable at June 30, 2020 (1)

628,392 $ 2.56 7.06 $ 22,076

(1) Vested and exercisable options.

Additionally, outstanding unvested options to purchase an aggregate of 111,571 shares of common stock with a weighted-average exercise price of $2.39 per share may be exercised prior to vesting as of March 31, 2020 under early-exercise provisions.

Additionally, outstanding unvested options to purchase an aggregate of 97,097 shares of common stock with a weighted-average exercise price of $ 2.39 per share may be exercised prior to vesting as of June 30, 2020 under early-exercise provisions.

In the event of such exercise, the shares obtained upon exercise would be restricted and subject to forfeiture prior to vesting.

No such early exercises have occurred as of March 31, 2020 .

No such early exercises have occurred as of June 30, 2020.

Employee Stock Purchase Plan

1 unchanged sentence

On February 28, 2020, the Company issued 39,987 shares of its common stock under a scheduled purchase under the ESPP.

As of March 31, 2020 , 543,257 shares remained available for issuance under the ESPP.

As of June 30, 2020, 543,257 shares remained available for issuance under the ESPP.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Determining Fair Value - Summary of Assumptions

1 unchanged sentence

The following table sets forth the assumptions used to determine the fair value of stock options:

Three Months Ended March 31,

Six Months Ended

Average expected term (years) 6 6

1 unchanged sentence

58.22 % - 58.84 %

58.22% - 58.84%

Risk-free interest rate 0.41 % - 1.76 %

1.82 % - 2.47 %

2.18% - 2.47%

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,

Average expected term (years)

Not applicable

Six Months Ended

Average expected term (years) 1.2 Not applicable

Expected stock price volatility

2 unchanged sentences

Risk-free interest rate 0.84 % - 0.95 %

0.84% - 0.95%

Not applicable

Dividend yield

Not applicable

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Dividend yield — % Not applicable

The fair value of the Company’s common stock is also an assumption used to determine the fair value of stock options and purchase rights under the ESPP.

2 unchanged sentences

Stock-Based Compensation Expense

Stock-based compensation expense related to stock options and the ESPP is included in the statements of operations and comprehensive income (loss) as follows (in thousands):

Three Months Ended March 31,

Stock-based compensation expense related to stock options and the ESPP is included in the statements of operations and comprehensive loss as follows (in thousands):

Three Months Ended June 30, Six Months Ended

2020 2019 2020 2019

Cost of sales $ 200 $ 12 $ 406 $ 22

2 unchanged sentences

Total stock-based compensation expense $ 1,653 $ 139 $ 3,230 $ 307

For the three months ended March 31, 2020 and 2019, the weighted-average grant date fair value of options granted was $17.32 and $1.90 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $12.70 and nil per share, respectively.

As of March 31, 2020 , the total unrecognized compensation cost related to stock options and the ESPP was $19,751,000 and $966,000 , respectively, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.2 years and 1.6 years, respectively.

For the six months ended June 30, 2020 and 2019, the weighted-average grant date fair value of options granted was $ 18.69 and $ 1.95 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 12.70 and nil per share, respectively.

As of June 30, 2020, the total unrecognized compensation cost related to stock options and the ESPP was $ 20,533,000 and $ 867,000 , respectively, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.0 years and 1.3 years, respectively.

The total unrecognized compensation costs will be adjusted for forfeitures in future periods as they occur.

Subsequent Events

On April 1, 2020, the Company granted to a new member of the Company’s board of directors an option to purchase 16,000 shares of common stock at an exercise price of $28.77 per share.

The option was granted pursuant to the 2019 Equity Incentive Plan (the “2019 Plan”), has a ten -year term and vests over a three -year period (with one-third vesting on April 15, 2021 and the remaining shares vesting in 24 equal monthly installments thereafter).

On April 15, 2020, the Company granted to various employees, options to purchase an aggregate of 10,400 shares of our common stock at an exercise price of $29.69 per share.

The option awards were granted pursuant to the 2019 Plan, have a ten -year term and vest over a four -year period (with 25% vesting after one year from the vesting start date and the remainder vesting in 36 equal monthly installments thereafter).

On April 10, 2020, the Company received an automatic payment of $1.9 million from the U.S.

As determined by HHS, the funds will not need to be repaid.

On April 16, 2020, the Company received an advance payment of $8.3 million (the “Advance Payment”) from the Centers for Medicare & Medicaid Services (“CMS”) under its Accelerated and Advance Payment Program, which was recently expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

Starting on August 14, 2020 ( 120 days after the issuance of the Advance Payment), the recoupment process will begin and claims the Company submits for reimbursement will be applied against the balance of the Advance Payment.

The Company expects to reflect the receipt of the Advance Payment as a liability on its balance sheet in the second quarter of 2020 and the Company will reduce the balance as it is applied to new claims or is otherwise recouped by CMS.

On May 10, 2020, the Company and the Lenders amended the 2018 LSA, as discussed in Note 7.

As discussed in Note 10, the underwriters in the Company’s June 2020 follow-on public offering of common stock had a 30 -day option to purchase up to 300,000 additional shares of common stock at the public offering price of $ 37.00 per share, less underwriting discounts and commissions.

On July 2, 2020, the Company issued and sold 300,000 shares of common stock

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

pursuant to the underwriters’ exercise in full of their option to purchase additional shares, which resulted in additional net proceeds to the Company of $ 10.4 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements