CASTLE BIOSCIENCES INC 10-Q

Item 1. Financial Statements. CASTLE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS (in thousands, except share and per share data) June 30, 2020 December 31, 2019 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 179,759 $ 98,845 Accounts receivable, net 12,528 14,648 Inventory 1,667 1,237 Prepaid expenses and other current assets 1,717 1,951 Total current assets 195,671 116,681 Long-term accounts receivable, net 652 870 Property and equipment, net 5,024 2,060 Other assets – long-term 199 135 Total assets $ 201,546 $ 119,746 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 2,495 $ 1,865 Accrued compensation 4,651 5,779 Medicare advance payment 8,350 — Other accrued liabilities 2,746 1,812 Current portion of long-term debt 10,000 5,833 Total current liabilities 28,242 15,289 Long-term debt 14,741 19,289 Deferred rent and other liabilities 941 55 Total liabilities 43,924 34,633 Commitments and Contingencies (Note 9) Stockholders’ Equity Preferred stock, $ 0.001 par value; 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 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. 19 17 Additional paid-in capital 210,621 137,308 Accumulated deficit ( 53,018 ) ( 52,212 ) Total stockholders’ equity 157,622 85,113 Total liabilities and stockholders’ equity $ 201,546 $ 119,746 The accompanying notes are an integral part of these unaudited condensed financial statements. 1 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 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 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 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 Interest income 38 5 336 26 Interest expense ( 769 ) ( 1,693 ) ( 1,533 ) ( 2,717 ) Other expense, net — ( 189 ) — ( 222 ) Loss before income taxes ( 1,376 ) ( 1,269 ) ( 806 ) ( 2,627 ) Income tax expense — — — — 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 — 57 — 113 Net loss and comprehensive loss attributable to common stockholders $ ( 1,376 ) $ ( 2,265 ) $ ( 806 ) $ ( 4,607 ) Loss per share attributable to common stockholders: Basic $ ( 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. 2 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) (in thousands, except share data) Convertible Preferred Stock Series C Redeemable Convertible Preferred Stock Series A, B, D, E-1, E-2, E-2A, E-3 and F Preferred Stock Common Stock Additional Paid-in 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. 3 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED) (UNAUDITED) (in thousands, except share data) Convertible Preferred Stock Series C Redeemable Convertible Preferred Stock Series A, B, D, E-1, E-2, E-2A, E-3 and F Preferred Stock Common Stock Additional Paid-in 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 ) Stock compensation expense — — — — — — — — 307 — 307 Exercise of common stock options — — — — — — 276,237 — 417 — 417 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 — — — — — — — — 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 Stock compensation expense — — — — — — — — 3,230 — 3,230 Exercise of common stock options — — — — — — 202,975 — 401 — 401 Issuance of common stock under the employee stock purchase plan — — — — — — 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. 4 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended June 30, 2020 2019 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 Amortization of intangibles — 4 Amortization of debt discounts and issuance costs 452 1,250 Change in fair value of preferred stock warrant liability — 86 Change in fair value of embedded derivative — 136 Change in operating assets and liabilities: Accounts receivable 2,337 3,625 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 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 ) Net cash used in investing activities ( 2,256 ) ( 424 ) FINANCING ACTIVITIES Proceeds from public offering of common stock, net of underwriting discounts, commissions and offering costs 69,530 — 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 — 11,695 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 Proceeds from contributions to the employee stock purchase plan 823 — Net cash provided by financing activities 69,920 11,643 NET CHANGE IN CASH AND CASH EQUIVALENTS 80,914 12,989 Beginning of period 98,845 4,479 End of period $ 179,759 $ 17,468 5 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (in thousands) Six Months Ended June 30, 2020 2019 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 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. 6 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Description of Business Castle Biosciences, Inc. (the ‘‘Company’’) was incorporated in the state of Delaware on September 12, 2007. The Company is a commercial-stage dermatological cancer company focused on providing physicians and their patients with personalized, clinically actionable genomic information to make more accurate treatment decisions. The Company is based in Friendswood, Texas (a suburb of Houston, Texas) and its laboratory operations are conducted at the Company’s facility located in Phoenix, Arizona. Impact of COVID-19 Pandemic In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. To date, the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of test reports. 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 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 $ 179.8 million at June 30, 2020, and collections from test report sales. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The Company has no subsidiaries and all operations are conducted by the Company. Unaudited Interim Financial Information 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. Certain disclosures have been condensed or omitted from the interim financial statements. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 10, 2020. 7 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Use of Estimates The preparation of 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 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 property and equipment, and contingent liabilities. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under 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. 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 Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. All revenues are attributable to U.S.-based operations and all assets are held in the United States. 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. The Company’s 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 the Company is not exposed to significant credit risk on its cash deposits due to the financial position of the institutions in which deposits are held. The Company has not experienced any losses on its 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, the Company follows 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. All of the Company’s revenues from contracts with customers are associated with the provision of diagnostic and prognostic cancer testing services. Most of the Company’s revenues are attributable to DecisionDx-Melanoma for cutaneous melanoma. The Company also provides a test for uveal melanoma, DecisionDx-UM. Information on the disaggregation of revenues by the Company’s significant third-party payors is included under Payor Concentration below. The Company has determined that it has a contract with the patient when the treating clinician orders the test. The Company’s contracts generally contain a single performance obligation, which is the delivery of the test report, and the Company satisfies its performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point the Company can bill for the report. The amount of revenue recognized reflects the amount of consideration to which the Company expects to be entitled (the ‘‘transaction price’’) and considers the effects of variable consideration, which is discussed further below. Once the Company satisfies its performance obligations and bills 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 the Company’s 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 the Company’s list prices. However, absent a contractually committed reimbursement rate with a commercial carrier or governmental program, the Company’s diagnostic tests may or may not be covered by these entities’ existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse the Company. The Company 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 8 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) that the Company has 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’’) are generally paid at the established rate by the Company’s Medicare contractor within 30 days from receipt. Medicare claims that were either submitted to Medicare prior to the LCD coverage commencement date or are not covered by the terms of the LCD 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 or contractually established reimbursements rates, the Company has concluded that its contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than the Company’s 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 the Company’s past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s 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. Variable consideration for Medicare claims that are not covered by an LCD, including those claims subject to approval by an ALJ at an appeal hearing, is deemed to be fully constrained due to factors outside the Company’s 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 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. Because the Company’s contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606 to not disclose information about its 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 the Company’s contracts. 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 9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 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. Payor Concentration 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. 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 Six Months Ended June 30, Percentage of Accounts Receivable (current) Percentage of Accounts Receivable (non-current) 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 % United Healthcare * 9 % 2 % 9 % — % — % BlueCross BlueShield plans 6 % 7 % 29 % 25 % 51 % 46 % * Less than 1% Accounts Receivable and Allowance for Doubtful Accounts The Company classifies accounts receivable balances that are expected to be paid more than one year from the 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. The Company accrues an allowance for doubtful accounts against its accounts receivable when it is probable that an account is not collectible, based on write off history, credit risk of specific accounts, aging analysis and other information available on specific accounts. The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are written off when all efforts to collect the balance have been exhausted. Historically, the Company’s bad debt expense has not been significant. 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. 10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Fair Value of Financial Instruments The carrying amount of the Company’s long-term debt approximates fair value due to its variable market interest rate and management’s opinion that current rates and terms that would be available to the Company with the same maturity and security structure would be essentially equivalent to that of the Company’s long-term debt. This estimated fair value is a ‘‘Level 3’’ fair value measurement, as defined in Note 8. Accrued Compensation The Company accrues for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by the Company’s 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. 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 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. 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 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes FASB ASC Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. For companies that are not emerging growth companies (‘‘EGCs’’), ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019. 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 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 11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses , which included an amendment of the effective date for nonpublic entities. For non-EGCs, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. For EGCs, the standard was to be effective for fiscal years beginning after December 15, 2021. However, in November 2019, the FASB issued ASU 2019-10, which included a one-year deferral of the effective date of ASU 2016-13 for certain entities. As a result, ASU is now effective for EGCs for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not currently believe the adoption of this standard will have a significant impact on its financial statements, given its history of minimal bad debt expense relating to trade accounts receivable. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the existing guidance. For non-EGCs, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For EGCs, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2019-12 on its financial statements. 3. 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. 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 loss per share, due to the nominal exercise price. 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. 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. 12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 June 30, 2020 2019 2020 2019 Convertible preferred stock — 8,171 — 8,171 Convertible promissory notes (1) — 920 — 729 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. 4. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): June 30, 2020 December 31, 2019 Lab equipment $ 1,674 $ 1,563 Computer equipment 1,044 887 Leasehold improvements 635 635 Furniture and fixtures 215 176 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 loss as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Cost of sales $ 74 $ 69 $ 140 $ 133 Research and development 3 1 5 3 Selling, general and administrative 25 16 48 27 Total $ 102 $ 86 $ 193 $ 163 13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 5. Other Accrued Liabilities Other accrued liabilities consisted of the following (in thousands) : June 30, 2020 December 31, 2019 Accrued service fees $ 1,883 $ 1,162 Accrued interest 172 184 Employee stock purchase plan contributions 438 218 Accrued royalties 164 169 Accrued state income taxes 79 79 Other 10 — Total $ 2,746 $ 1,812 6. Convertible Promissory Notes In January and February 2019, the Company issued $ 11,770,000 principal amount of unsecured convertible promissory notes (the “Q1 2019 Notes”), of which $ 4,756,000 was with related parties (executive officers, members of the Company’s board of directors or entities affiliated with them). The Q1 2019 Notes bore simple interest at a rate of 8 % per annum. Originally, the Q1 2019 Notes had a maturity date of January 31, 2020, but on July 3, 2019, the Company entered into an amendment with the holders of the Q1 2019 Notes to extend the maturity to June 30, 2020. The entire amount of the outstanding principal amount plus accrued interest on the Q1 2019 Notes converted into 954,074 shares of common stock in connection with the IPO on July 29, 2019. 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 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 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 $ 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 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 $ ( 90 ) $ ( 136 ) 14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 7. Long-Term Debt The Company’s long-term debt balances are presented in the table below (in thousands): June 30, 2020 December 31, 2019 Term debt $ 25,854 $ 26,688 Unamortized discount and issuance costs ( 1,113 ) ( 1,566 ) Total long-term debt 24,741 25,122 Less: Current portion of long-term debt ( 10,000 ) ( 5,833 ) Total long-term debt, less current portion $ 14,741 $ 19,289 The Company has a Loan and Security Agreement (the ‘‘2018 LSA’’) with Oxford Finance LLC (‘‘Oxford’’), as collateral agent, and Oxford and Silicon Valley Bank (‘‘SVB’’) as equal syndicated lenders (collectively, the ‘‘Lenders’’). The 2018 LSA currently consists of a $ 25.0 million secured term loan credit facility (the ‘‘Term Loan’’). The Company’s obligations under the 2018 LSA are secured by substantially all of its assets, excluding intellectual property and subject to certain other exceptions and limitations. The Company has the right to prepay the Term Loan in whole or in part at any time, subject to a prepayment fee of 1.50 % prior to November 30, 2020 and 0.75 % thereafter. Upon prepayment, the Company is also obligated to pay a non-refundable early termination fee of $ 497,000 . Amounts prepaid or repaid under the Term Loan may not be reborrowed. 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 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. 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. Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the 2018 LSA. The Second Amendment included a waiver, by the Lenders, of an event of default of the Company attributable to maintaining a balance in a certain third-party deposit account, beyond the maximum level permitted, without obtaining a control agreement for such deposit account in favor of the collateral agent, Oxford. In addition to the waiver, the Second Amendment also provided a modification to increase the maximum balance permitted for this deposit account. The Company is currently in compliance with this provision of the 2018 LSA. The Company’s ability to further amend the terms of the 2018 LSA is subject to the approval of Oxford and SVB. Accordingly, should the Company seek to amend the 2018 LSA, there can be no assurance that an amendment would be available on terms acceptable to the Company or at all. The Term Loan bears interest at a floating rate equal to the greater of (1) 8.55 % and (2) the 30-day U.S. 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 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 Term Loan through 15 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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”). The Company is also obligated to make an additional final payment of 6.75 % of the aggregate original principal amount, or $ 1,687,500 , upon any prepayment or on the Term Loan Maturity Date. The final payment amount is being amortized as additional interest expense using the effective interest method over the term of the debt. 8. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions. Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. 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. 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 Assets: 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 (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 98,389 $ — $ — $ 98,389 (1) Classified as “Cash and cash equivalents” in the condensed balance sheets. 9. Commitments and Contingencies From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. 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. 16 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 10. Stockholders’ Equity 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 March 31, 2027 26,428 $ 7.10 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. 11. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans Activity under the Company’s stock plans for the six months ended June 30, 2020 is set forth below: Weighted-Average Shares Available for Grant Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of December 31, 2019 863,127 2,637,966 $ 13.30 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 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 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 June 30, 2020. 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 171,309 shares becoming available under the ESPP effective January 1, 2020. On February 28, 2020, the Company issued 39,987 shares of its common stock under a scheduled purchase under the ESPP. As of June 30, 2020, 543,257 shares remained available for issuance under the ESPP. 17 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Determining Fair Value - Summary of Assumptions The Company uses 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: Six Months Ended June 30, 2020 2019 Average expected term (years) 6 6 Expected stock price volatility 59.15 % - 63.80 % 58.22 % - 58.84 % Risk-free interest rate 0.41 % - 1.76 % 1.82 % - 2.47 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Six Months Ended June 30, 2020 2019 Average expected term (years) 1.2 Not applicable Expected stock price volatility 56.80 % - 63.65 % Not applicable Risk-free interest rate 0.84 % - 0.95 % Not applicable 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. Prior to the IPO, our common stock was not publicly traded, therefore the Company estimated the fair value of its common stock. Following the IPO, the fair value of the Company’s common stock is the closing selling price per share of its common stock as reported on the Nasdaq Global Market on the date of grant or other relevant determination date. Stock-Based Compensation Expense 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 June 30, 2020 2019 2020 2019 Cost of sales $ 200 $ 12 $ 406 $ 22 Research and development 231 27 465 47 Selling, general and administrative 1,222 100 2,359 238 Total stock-based compensation expense $ 1,653 $ 139 $ 3,230 $ 307 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. 12. Subsequent Events 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 18 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 19 Table of Contents