CASTLE BIOSCIENCES INC 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework) . Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective based on those criteria. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information. None. 89 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item and not set forth below will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders, or the Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2020, and is incorporated herein by reference. We have adopted a written Code of Business Conduct and Ethics, or Ethics Code, that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Ethics Code is available on our website at www.CastleBiosciences.com. If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website or in a Current Report on Form 8-K. Item 11. Executive Compensation. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. 90 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a)(1) Financial Statements. The financial statements and supplementary data required by this item are included after the Signature page of this Annual Report on Form 10-K beginning on page F-1 . (a)(2) Financial Statement Schedules. All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes thereto. (a)(3) Exhibits. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report. Exhibit Index Exhibit Number Description of document 3.1 Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019. 3.2 Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019. 4.1 Description of securities registered under Section 12 of the Exchange Act, incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K filed with the SEC on March 10, 2020. 4.2 Form of Common Stock Certificate of the Registrant, incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 4.3 Sixth Amended and Restated Investors’ Rights Agreement, dated July 12, 2019, by and among the Registrant and certain of its stockholders, incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.1+ Form of Indemnity Agreement by and between the Registrant and its directors and officers, incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.2+ Castle Biosciences, Inc. 2008 Stock Plan, incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.3+ Forms of Stock Option Agreement, Exercise Notice and Investment Representation Statement under the 2008 Stock Plan, incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.4+ Castle Biosciences, Inc. 2018 Equity Incentive Plan, as amended, incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.5+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.6+ Castle Biosciences, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.7+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020. 10.9+ Castle Biosciences, Inc. 2019 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 91 Table of Contents Exhibit Number Description of document 10.10+ Form of Director Agreement by and between the Registrant and certain of its directors, incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.11+* Non-Employee Director Compensation Policy, as amended effective January 28, 2021. 10.12+ Amended and Restated Executive Employment Agreement, dated September 20, 2012, as amended, by and between the Registrant and Derek J. Maetzold, incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.13+ Offer Letter Agreement, dated March 2, 2016, by and between the Registrant and Bernhard Spiess, incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.14+ Offer Letter Agreement, dated November 9, 2017, by and between the Registrant and Frank Stokes, incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.15+ Separation Agreement dated May 29, 2020, by and between the Registrant and Federico A. Monzon, M.D., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2020. 10.16+ Master Services Agreement dated May 29, 2020, by and between the Registrant and Genomic Path LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2020. 10.17 Standard Office Lease, dated as of October 5, 2015, by and between the Registrant and Merced Restart Phoenix Investors II, LLC, incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.18 First Amendment to Lease, dated December 4, 2018, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.15 of the Registrant's Annual Report on Form 10-K, filed with the SEC on March 10, 2020. 10.19 Office Building Lease, dated as of March 11, 2015, by and between the Registrant and RMG Leasing (a/k/a Cedarwood Professional Building), as amended, incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.20 Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete, II, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.21 Second Amendment to Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.22 Commercial Lease, dated December 17, 2019, by and between the Registrant and Tannos Land Holding III, LLC, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.23* First Amendment to Commercial Lease, dated November 13, 2020, by and between the Registrant and Tannos Land Holdings III, LLC. 10.24# Exclusive License Agreement, dated as of November 14, 2009, by and between the Registrant and The Washington University, incorporated by reference to Exhibit 10.17 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm. 31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 32.1** Certification of Principa l Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C. Section 1350. 32.2** Certification of Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C. Section 1350. 101.INS* Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema. 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase. 92 Table of Contents Exhibit Number Description of document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase. 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase. 104* Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101). _____________________________________ * Filed herewith ** Furnished herewith. + Indicates management contract or compensatory plan. # Certain portions of this exhibit (indicated by “[***]”) have been omitted as we have determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to us if publicly disclosed. Item 16. Form 10-K Summary. None. 93 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASTLE BIOSCIENCES, INC. Date: March 11, 2021 By: /s/ Derek J. Maetzold Derek J. Maetzold President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. SIGNATURE TITLE DATE /s/ Derek J. Maetzold President, Chief Executive Officer and Director March 11, 2021 (Derek J. Maetzold) ( Principal Executive Officer ) /s/ Frank Stokes Chief Financial Officer March 11, 2021 (Frank Stokes) ( Principal Financial and Accounting Officer ) /s/ Daniel M. Bradbury Chairman of the Board of Directors March 11, 2021 (Daniel M. Bradbury) /s/ Mara G. Aspinall Member of the Board of Directors March 11, 2021 (Mara G. Aspinall) /s/ G. Bradley Cole Member of the Board of Directors March 11, 2021 (G. Bradley Cole) /s/ Joseph C. Cook III Member of the Board of Directors March 11, 2021 (Joseph C. Cook III) /s/ Miles D. Harrison Member of the Board of Directors March 11, 2021 (Miles D. Harrison) /s/ David Kabakoff, Ph.D. Member of the Board of Directors March 11, 2021 (David Kabakoff, Ph.D.) 94 Table of Contents INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Balance Sheets as of December 31, 2020 and 2019 F- 3 Statements of Operations and Comprehensive (Loss) Income for the Years Ended December 31, 2020 and 2019 F- 4 Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020 and 2019 F- 5 Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F- 7 Notes to Financial Statements F- 9 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Castle Biosciences, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Castle Biosciences, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive (loss) income, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2018. San Diego, California March 11, 2021 F-2 Table of Contents CASTLE BIOSCIENCES, INC. BALANCE SHEETS (in thousands, except share and per share data) December 31, 2020 2019 ASSETS Current Assets Cash and cash equivalents $ 409,852 $ 98,845 Accounts receivable, net 12,759 14,648 Inventory 2,217 1,237 Prepaid expenses and other current assets 4,766 1,951 Total current assets 429,594 116,681 Long-term accounts receivable, net 1,096 870 Property and equipment, net 7,102 2,060 Other assets – long-term 1,536 135 Total assets $ 439,328 $ 119,746 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 2,098 $ 1,865 Accrued compensation 9,108 5,779 Medicare advance payment 6,615 — Other accrued liabilities 3,055 1,812 Current portion of long-term debt — 5,833 Total current liabilities 20,876 15,289 Long-term debt — 19,289 Noncurrent portion of Medicare advance payment 1,735 — Deferred rent and other liabilities 1,026 55 Total liabilities 23,637 34,633 Commitments and Contingencies (Note 10) Stockholders’ Equity Preferred stock, $ 0.001 par value; 10,000,000 shares authorized as of December 31, 2020 and 2019; no shares issued and outstanding as of December 31, 2020 and 2019. — — Common stock, $ 0.001 par value; 200,000,000 authorized as of December 31, 2020 and 2019, respectively; 24,812,487 and 17,130,907 shares issued and outstanding as of December 31, 2020 and 2019, respectively. 25 17 Additional paid-in capital 478,162 137,308 Accumulated deficit ( 62,496 ) ( 52,212 ) Total stockholders’ equity 415,691 85,113 Total liabilities and stockholders’ equity $ 439,328 $ 119,746 The accompanying notes are an integral part of these financial statements. F-3 Table of Contents CASTLE BIOSCIENCES, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (in thousands, except per share data) Years Ended December 31, 2020 2019 NET REVENUES $ 62,649 $ 51,865 COST OF SALES 9,685 7,310 Gross margin 52,964 44,555 OPERATING EXPENSES AND OTHER OPERATING INCOME Research and development 13,256 7,385 Selling, general and administrative 48,132 29,842 Other operating income ( 1,882 ) — Total operating expenses, net 59,506 37,227 Operating (loss) income ( 6,542 ) 7,328 Interest income 373 312 Interest expense ( 2,634 ) ( 4,571 ) (Loss) gain on extinguishments of debt ( 1,397 ) 5,213 Other expense, net — ( 2,933 ) (Loss) income before income taxes ( 10,200 ) 5,349 Income tax expense 84 72 Net (loss) income and comprehensive (loss) income ( 10,284 ) 5,277 Convertible preferred stock cumulative dividends — 2,156 Accretion of redeemable convertible preferred stock to redemption value — 130 Net (loss) income and comprehensive (loss) income attributable to common stockholders $ ( 10,284 ) $ 2,991 (Loss) earnings per share attributable to common stockholders: Basic $ ( 0.54 ) $ 0.35 Diluted $ ( 0.54 ) $ ( 0.21 ) Weighted-average shares outstanding: Basic 18,929 8,584 Diluted 18,929 8,658 The accompanying notes are an integral part of these financial statements. F-4 Table of Contents CASTLE BIOSCIENCES, INC. STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (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-based compensation expense — — — — — — — — 1,249 — 1,249 Exercise of common stock options — — — — — — 693,140 1 1,174 — 1,175 Exercise of common stock warrants — — — — 51,238 — — — — Accretion of redeemable convertible preferred stock to redemption value: Series E-1 — — — 2 — — — — ( 2 ) — ( 2 ) Series E-3 — — — 7 — — — — ( 7 ) — ( 7 ) Series F — — — 121 — — — — ( 121 ) — ( 121 ) Exercise of redeemable convertible preferred stock warrants: Series E-1 — — 12,999 107 — — — — — — — Series F — — 1,054 10 — — — — — — — Recognition of beneficial conversion feature on convertible promissory notes — — — — — — — — 8,378 — 8,378 Extinguishment of beneficial conversion feature on convertible promissory notes — — — — — — — — ( 15,265 ) — ( 15,265 ) Initial public offering of common stock, net of underwriting discounts, commissions and offering costs — — — — — — 4,600,000 5 65,926 — 65,931 Conversion of convertible promissory notes — — — — — — 1,661,106 1 26,576 — 26,577 Conversion of convertible preferred stock ( 503,056 ) ( 1,501 ) ( 9,470,828 ) ( 45,242 ) — — 8,181,992 8 46,735 — 46,743 Reclassification of preferred stock warrant liability and net exercise of certain warrants in connection with initial public offering — — — — — — 27,207 — 1,744 — 1,744 Net income — — — — — — — — — 5,277 5,277 BALANCE, DECEMBER 31, 2019 — $ — — $ — — $ — 17,130,907 $ 17 $ 137,308 $ ( 52,212 ) $ 85,113 Stock-based compensation expense — — — — — — — — 8,309 — 8,309 Exercise of common stock options — — — — — — 459,074 1 1,592 — 1,593 Exercise of common stock warrants — — — — — — 241,052 — — — — F-5 Table of Contents CASTLE BIOSCIENCES, INC. STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) (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 Public offerings of common stock, net of underwriting discounts, commissions and offering costs — — — — — — 6,900,000 7 329,657 — 329,664 Issuance of common stock under the employee stock purchase plan — — — — — — 81,454 — 1,296 — 1,296 Net loss — — — — — — — — — ( 10,284 ) ( 10,284 ) BALANCE, DECEMBER 31, 2020 — $ — — $ — — $ — 24,812,487 $ 25 $ 478,162 $ ( 62,496 ) $ 415,691 The accompanying notes are an integral part of these financial statements. F-6 Table of Contents CASTLE BIOSCIENCES, INC. STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2020 2019 OPERATING ACTIVITIES Net (loss) income $ ( 10,284 ) $ 5,277 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 472 354 Stock-based compensation expense 8,309 1,249 Amortization of intangibles — 4 Amortization of debt discounts and issuance costs 839 1,925 Other non-cash interest — 442 Loss (gain) on extinguishments of debt 1,397 ( 5,213 ) Change in fair value of preferred stock warrant liability — 619 Change in fair value of embedded derivative — 237 Change in fair value of convertible promissory note accounted for under the fair value option — 2,077 Other ( 16 ) — Change in operating assets and liabilities: Accounts receivable 1,663 ( 896 ) Prepaid expenses and other current assets ( 2,815 ) ( 1,276 ) Inventory ( 980 ) ( 355 ) Other assets ( 1,401 ) ( 85 ) Accounts payable 169 557 Accrued compensation 3,329 1,208 Medicare advance payment 8,350 — Other accrued liabilities 561 879 Deferred rent and other liabilities 272 12 Net cash provided by operating activities 9,865 7,015 INVESTING ACTIVITIES Purchases of property and equipment ( 4,751 ) ( 937 ) Proceeds from sale of property and equipment 3 — Net cash used in investing activities ( 4,748 ) ( 937 ) FINANCING ACTIVITIES Proceeds from public offerings of common stock, net of underwriting discounts, commissions and offering costs 330,041 65,931 Proceeds from exercise of preferred stock warrants — 49 Proceeds from issuance of convertible promissory notes (including $ 4,756 from related parties for the year ended December 31, 2019), net of issuance costs — 11,695 Proceeds from issuance of convertible promissory note and common stock warrant, net of issuance costs — 9,236 Proceeds from issuance of term debt, net of issuance costs — 1,776 Repayment of term debt ( 27,359 ) — Repayments on line of credit — ( 1,791 ) Proceeds from exercise of common stock options 1,593 1,174 F-7 Table of Contents CASTLE BIOSCIENCES, INC. STATEMENTS OF CASH FLOWS (Continued) (in thousands) Years Ended December 31, 2020 2019 Proceeds from contributions to the employee stock purchase plan 1,615 218 Net cash provided by financing activities 305,890 88,288 NET CHANGE IN CASH AND CASH EQUIVALENTS 311,007 94,366 Beginning of year 98,845 4,479 End of year $ 409,852 $ 98,845 SUPPLEMENTAL DISCLOSURE OF CASH PAID (REFUNDED) FOR: Interest $ 1,978 $ 2,206 Income taxes $ 102 $ ( 150 ) DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 58 $ 7 Property and equipment acquired with tenant improvement allowance $ 714 $ — Common stock offering costs incurred but not paid $ 377 $ — Issuance of common stock upon conversion of convertible preferred stock $ — $ 46,743 Conversion of preferred stock warrants to common stock warrants $ — $ 1,744 Issuance of common stock upon conversion of convertible promissory notes $ — $ 26,577 Cashless exercise of common stock warrants $ 250 $ 455 The accompanying notes are an integral part of these financial statements. F-8 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS 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 facilities 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. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Since then, COVID-19 has caused significant disruptions and adverse economic impacts across multiple countries, including the United States. 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. During the second and fourth quarters of 2020, the Company experienced year-over-year declines in test report volume, which it believes is linked to delays and/or cancellations in patient visits in response to COVID-19, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma. The extent to which COVID-19 may further impact 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 $ 409.9 million at December 31, 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. 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. The extent to which the COVID-19 pandemic may impact the Company’s estimates in future periods is uncertain and subject to change. F-9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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. The Company launched a test for patients with cutaneous squamous cell carcinoma, DecisionDx®-SCC in August 2020 and launched a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma in November 2020. 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 clinician, 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 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 reimbursement 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 F-10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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 years ended December 31, 2020 and 2019 were $ 176,000 and $ 2,493,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration. 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 (both current and noncurrent, as discussed further below) as of December 31, 2020. Contract balances 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 expanded to provide increased cash flow to service providers during the COVID-19 pandemic. The Company has recorded the Advance Payment as a liability, consisting of both a current and noncurrent portion, on its balance sheet as of December 31, 2020. The Company will reduce the balance of the Advance Payment as it is applied to claims or is otherwise recouped by CMS. Under the Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, the recoupment of the Advance Payment will commence in April 2021. For the first eleven months of recoupment, CMS will apply 25% of the Medicare payments otherwise owed to the Company against the balance of the Advance Payment. After that eleven-month period, CMS will recoup at a rate of 50% of the Medicare payments otherwise owed to the Company for an additional six months. If the Advance Payment is not fully recovered by CMS after this recoupment period, the Company will be required to repay any remaining balance. The classification of Advance Payment between current and noncurrent liabilities is based on management’s estimated timing of recoupment. As of December 31, 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. 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. F-11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO 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 Percentage of Accounts Receivable (current) Percentage of Accounts Receivable (non-current) Year Ended December 31, As of December 31, As of December 31, 2020 2019 2020 2019 2020 2019 Medicare 58 % 49 % 15 % 7 % — % — % Medicare Advantage plans 29 % 29 % 40 % 41 % 25 % 18 % BlueCross BlueShield plans 6 % 6 % 26 % 25 % 44 % 46 % 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 December 31, 2020 and 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. Inventory The Company carries an inventory of test supplies in the Phoenix, Arizona laboratory. The inventory is carried at the lower of weighted average cost and net realizable value and expensed through cost of sales as the supplies are used. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between five and ten years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. The Company’s leasehold improvements primarily relate to its office and laboratory facilities in Phoenix, Arizona, and are generally being amortized through the end of the lease terms of July 2027 and March 2028. Maintenance and repairs are charged to expense as incurred, and material improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations and comprehensive (loss) income in the period realized. Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than the carrying amount. Impairment, if any, would be calculated based on the excess of the carrying amount of the long-lived asset over the long-lived asset’s fair value. There were no impairment charges recognized for the years ended December 31, 2020 and 2019. Other Operating Income On April 10, 2020, the Company received an automatic payment of $ 1.9 million 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. In the second quarter of 2020, based on guidance issued by HHS at F-12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) the time that stated any reasonable method could be used to calculate lost revenues attributable to COVID-19, the Company concluded it would qualify to retain the relief funds and recognized the funds received as other operating income during the three months ended June 30, 2020. On September 19, 2020, HHS issued a notice of reporting requirements that changed the methodology for determining lost revenues to be based on a patient care operating income metric, as defined by HHS. Due to this change in methodology and uncertainty in its application, the Company determined that it was no longer reasonably assured of keeping the funds. Therefore, in the three months ended September 30, 2020, the Company reversed the previously recognized income. On October 22, 2020, HHS again revised the methodology for calculating lost revenues, with such changes defining lost revenues as a negative change, if any, in calendar year 2020 revenues compared to calendar year 2019 revenues. Based on these developments, the Company issued a check to repay the funds in December 2020. However, on December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 was signed into law, which among other things included a provision amending the provider relief funds lost revenue calculation to be consistent with HHS’s June 2020 guidance, including allowing lost revenues to be determined by comparing actual 2020 revenues to 2020 budgeted revenues, subject to certain conditions, which was incorporated into revised HHS reporting requirements issued in January 2021. Given this development, subsequent to December 31, 2020, the Company notified HHS of its intention to keep the funds and canceled the repayment. Based on the changes to the requirements enacted on December 27, 2020 the Company determined that it is reasonably assured of keeping the funds and therefore recognized the $ 1.9 million as other operating income during the three months ended December 31, 2020. Fair Value of Financial Instruments As of December 31, 2019, the carrying amount of the Company’s long-term debt approximated fair value due to its variable market interest rate and management’s opinion that then-current rates and terms that would have been available to the Company with the same maturity and security structure would have been essentially equivalent to that of the Company’s long-term debt. This estimated fair value was a ‘‘Level 3’’ fair value measurement as defined in Note 9. Deferred Rent The Company has negotiated certain landlord/tenant incentives, rent holidays and escalations in the base price of rent payments under operating leases. The Company recognizes these incentives, rent holidays and rent escalations on a straight-line basis over the lease term. Deferred rent balances are classified as current or non-current in the accompanying balance sheets based upon the period when reversal of the liability is expected to occur. Cost of Sales Cost of sales is expensed as incurred and includes direct labor costs, equipment, supplies, materials and infrastructure expenses associated with testing tissue samples, third-party lab processing and service costs, third-party collection costs, and shipping charges to transport samples. Research and Development Research and development costs are charged to operations as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on behalf of the Company will be expensed as services are rendered or when the milestone is achieved. Research and development costs include, but are not limited to, payroll and personnel-related expenses, stock-based compensation expense, materials, laboratory supplies, and consulting costs. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses are attributable to sales, marketing, executive, finance and accounting, legal and human resources functions. These expenses consist of personnel costs (including salaries, employee benefit costs, bonuses and equity-based compensation expenses), customer services expenses, direct marketing expenses, educational and promotional expenses, market research, audit and legal expenses, and consulting. The Company expenses all SG&A costs as incurred. 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 F-13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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 December 31, 2020 and 2019, the Company accrued approximately $ 7,175,000 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. Retirement Plan The Company has an Internal Revenue Code (“IRC”) Section 401(k) profit sharing plan (the “Plan”) for eligible employees. The Plan is funded by employee contributions and provides for discretionary contributions in the form of matching and/or profit-sharing contributions. For the years ended December 31, 2020 and 2019, the Company provided a discretionary matching contribution of $ 789,000 and $ 434,000 , respectively. Income Taxes The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense. No material amounts of tax-related interest or penalties were recorded during the years ended December 31, 2020 and 2019. Stock-Based Compensation Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards. The fair value of employee stock options and offerings under the 2019 Employee Stock Purchase Plan (the “ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing valuation model. For restricted stock units (“RSUs”), the fair value is equal to the closing price of the Company’s common stock on the date of grant. The Company recognizes compensation costs on a straight-line basis for all employee stock-based compensation awards over the requisite service period of the awards. For options and RSUs, the requisite service period is generally the awards’ vesting period (typically four years ). For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date. Forfeitures are accounted for as they occur. Comprehensive (Loss) Income Comprehensive (loss) income 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) income was the same as its reported net (loss) for all periods presented. 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 December 31, 2020, the Company had deferred payment of $ 551,000 of such taxes, which are allocated between current and noncurrent liabilities on the balance sheet. Accounting Pronouncements Yet to be Adopted In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes FASB ASC Topic 840, Leases, 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 F-14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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 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. If Company maintains EGC status, it will 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) income 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. 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. If the market value of the Company’s common stock held by non-affiliates exceeds $700.0 million as of June 30, 2021, the Company will cease to be an emerging growth company effective December 31, 2021. If that occurs, the Company will be required to apply the non-EGC effective dates in adopting accounting pronouncements that qualify for delayed adoption by EGCs, including the accounting pronouncements discussed above. 3. (Loss) Earnings Per Share Basic (loss) earnings per share is computed by dividing net (loss) income 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 a warrant, issued in July 2019, to purchase 209,243 shares of common stock, which were deemed to have been issued for purposes of calculating basic and diluted (loss) earnings per share, due to the nominal exercise price. On July 29, 2019, the Company completed the initial public offering of its common stock (“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, July 2, 2020 and December 18, 2020, the Company issued and sold 2,000,000 shares, 300,000 shares and 4,600,000 , respectively, of common stock in follow-on public offerings, as discussed further in Note 12. The foregoing shares are included in the Company’s weighted-average number of common shares outstanding starting on the respective issuance/conversion dates. F-15 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Diluted (loss) earnings per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options, the vesting of RSUs or purchases under the ESPP, as well as from the assumed conversion/exercise of the Company’s convertible preferred stock, convertible promissory notes and 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) earnings per share when their effect is antidilutive. The following table shows the computation of basic and diluted (loss) earnings per share for the years ended December 31, 2020 and 2019 (in thousands, except per share data): Years Ended December 31, 2020 2019 Numerator: Net (loss) income attributable to common stockholders $ ( 10,284 ) $ 2,991 Assumed conversion of convertible promissory notes (1) : Subtract: Extinguishment gain — ( 5,213 ) Add: Interest expense and change in fair value of embedded derivative — 420 Numerator for diluted loss per share $ ( 10,284 ) $ ( 1,802 ) Denominator: Weighted-average common shares outstanding, basic 18,929 8,584 Assumed conversion of convertible promissory notes (1) — 74 Weighted-average common shares outstanding, diluted 18,929 8,658 (Loss) earnings per share attributable to common stockholders: Basic $ ( 0.54 ) $ 0.35 Diluted $ ( 0.54 ) $ ( 0.21 ) (1) For the year ended December 31, 2019 , this figure reflects the assumed conversion of the Q1 2019 Notes (as defined in Note 6) into shares of common stock beginning July 1, 2019, in accordance with the requirements in ASC Topic 260, Earnings per Share , for contingently issuable shares due to the contingency not being met until the third quarter of 2019. The July 2019 Note (as defined in Note 6), was excluded from the computation of diluted earnings (loss) per share prior to its conversion on July 29, 2019 in connection with the IPO, as disclosed below. Due to the Company reporting a net loss attributable to common stockholders for the year ended December 31, 2020, all potentially dilutive securities are antidilutive and are excluded from the computations of diluted loss per share. For the year ended December 31, 2019, the computation of diluted loss per share excludes the assumed conversions of the convertible preferred stock, assumed conversion of the July 2019 Note (in each case, for the time prior to their actual conversions), assumed exercise of all stock options, assumed issuance of shares under the ESPP and the assumed exercise of all common stock warrants because to include them would be antidilutive. F-16 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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) earnings per share for the years ended December 31, 2020 and 2019 because to do so would be antidilutive (in thousands): Years Ended December 31, 2020 2019 Convertible preferred stock — 4,679 Convertible promissory note (1) — 33 Stock options and restricted stock units 2,789 1,820 Common stock warrants 35 41 Preferred stock warrants — 80 Employee stock purchase plan 100 24 Total 2,924 6,677 (1) Associated with the July 2019 Note. 4. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): As of December 31, 2020 2019 Lab equipment $ 2,037 $ 1,563 Computer equipment 1,305 887 Leasehold improvements 1,388 635 Furniture and fixtures 436 176 Construction-in-progress 3,590 2 Total 8,756 3,263 Less accumulated depreciation ( 1,654 ) ( 1,203 ) Property and equipment, net $ 7,102 $ 2,060 Depreciation expense was recorded in the statements of operations and comprehensive (loss) income as follows (in thousands): Years Ended December 31, 2020 2019 Cost of sales $ 341 $ 277 Research and development 31 7 Selling, general and administrative 100 70 Total $ 472 $ 354 F-17 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 5. Other Accrued Liabilities Other accrued liabilities consisted of the following (in thousands) : As of December 31, 2020 2019 Accrued service fees $ 1,891 $ 1,162 Employee stock purchase plan contributions 536 218 Deferred employer payroll tax liability 276 — Accrued royalties 151 169 Accrued state taxes 62 79 Accrued interest — 184 Other 139 — Total $ 3,055 $ 1,812 6. Convertible Promissory Notes Q1 2019 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. Such amendment was treated as a modification of the existing debt and therefore no extinguishment gain or loss was recognized in connection with the amendment. Prior to the actual conversion of the Q1 2019 Notes on July 29, 2019 (discussed below), on or before the maturity date, the entire outstanding principal amount of and accrued interest on the Q1 2019 Notes (the “Conversion Amount”), was automatically convertible into shares of the Company’s equity securities issued and sold in a single or series of related transactions, with the principal purpose of raising capital, in which the Company sold shares of such equity securities for aggregate gross proceeds of at least $ 10.0 million (the “Next Equity Financing”). The number of shares of such equity securities issuable in the Next Equity Financing was equal to the quotient of the Conversion Amount as of the closing date of the Next Equity Financing divided by a per share price that is equal to 80 % of the lowest per share purchase price of the equity securities sold in the Next Equity Financing. If the Q1 2019 Notes had not been repaid or converted prior to the maturity date, then, at the request of the holders of a majority of the then-outstanding principal amount of and accrued interest on the Q1 2019 Notes, the Conversion Amount as of the maturity date would have converted into shares of the Company’s Series F redeemable convertible preferred stock, or any senior equity security issued by the Company after the first issuance of the Q1 2019 Notes, in each case at a conversion price equal to the price at which such security was last sold (which was $ 5.8208 for shares of the Company’s Series F redeemable convertible preferred stock). If a change of control of the Company would have occurred while the Q1 2019 Notes were outstanding, the Company would have been required to repurchase each note from each holder at a repurchase price equal to two times the principal amount of such Note, plus any accrued and unpaid interest on such note as of the date of such repurchase. The Company determined that the Q1 2019 Notes contained embedded derivatives that required bifurcation and separate accounting under ASC 815-15, Embedded Derivatives . The Company determined that two such features in the Q1 2019 Notes were not considered clearly and closely related to the host debt instrument and therefore required separate accounting: (i) the automatic conversion feature in connection with the Next Equity Financing and (ii) the acceleration upon a change of control feature. Under ASC 815-15, these features are bundled together and accounted for as a single, compound embedded derivative. The Company determined the fair value of the embedded derivative liability at the issuance date, creating a discount to the carrying value of the Q1 2019 Notes, which was being amortized over the life of the debt using the effective interest method. 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) income. No hedge accounting treatment was applied. For details regarding the fair value measurement of the embedded derivative, see Note 9. The Company also assessed the optional conversion feature into Series F redeemable convertible preferred stock at maturity and determined that this feature did not meet the definition of a derivative instrument because the settlement terms involved the gross delivery of the underlying shares, which were not readily convertible to cash. The Company then assessed whether this F-18 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) feature caused the Q1 2019 Notes to be subject to ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) , and determined that the beneficial conversion feature guidance was applicable to the Q1 2019 Notes. At issuance, the Company concluded that the Q1 2019 Notes had a beneficial conversion feature because the fair value of the Series F preferred stock exceeded the conversion price of $ 5.8208 per share that would have been applicable under the optional conversion at maturity, assuming no other equity securities senior to Series F preferred stock were sold. Under ASC 470-20, this beneficial conversion feature was measured at intrinsic value as of the issuance date of the Q1 2019 Notes and was recognized as additional paid-in capital, creating a discount to the carrying value of the Q1 2019 Notes that was being amortized over the life of the debt using the effective interest method. The closing of the IPO on July 29, 2019 was considered to be the Next Equity Financing under the terms of the Q1 2019 Notes. Accordingly, on July 29, 2019, the Conversion Amount of the Q1 2019 Notes as of such date converted into 954,074 shares of common stock based on a price of $ 12.80 per share, or 80 % of the IPO price of $ 16.00 per share. The conversion of the Q1 2019 Notes was considered an extinguishment for accounting purposes. The Company recognized an extinguishment gain of $ 5,213,000 in connection with the conversion with extinguishment consideration measured at $ 15,265,000 , which is calculated as the number of shares issued upon conversion multiplied by the IPO price of $ 16.00 per share. All of this consideration was allocated to additional paid-in capital to redeem the beneficial conversion feature. The following table summarizes the aggregate values recorded for the Q1 2019 Notes as of their original issuance dates. As noted above, the Q1 2019 Notes were converted into shares of common stock in connection with the closing of the IPO on July 29, 2019 (in thousands) . At Original Issuance (1) Liability component: Principal (including $ 4,756 with related parties) $ 11,770 Unamortized issuance costs ( 75 ) Unamortized discount from beneficial conversion feature ( 8,378 ) Unamortized discount from embedded derivative ( 2,816 ) Net carrying amount of the liability component $ 501 Embedded derivative liability $ 2,816 Equity Component: Carrying value of beneficial conversion feature recorded in additional paid-in capital $ 8,378 (1) The Q1 2019 Notes were issued on January 31, 2019, February 12, 2019 and February 27, 2019. Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $ 1,216,000 for the year ended December 31, 2019, and were included in interest expense. The amounts recognized in net income for the year ended December 31, 2019 for the embedded derivative liability are as follows (in thousands) : (Loss) Recognized in Net Income Statement of Operations and Comprehensive (Loss) Income Location Year Ended December 31, 2019 Derivatives Not Classified as Hedging Instruments Embedded derivative in convertible promissory notes Other expense, net $ ( 237 ) July 2019 Note On July 12, 2019, the Company issued an unsecured convertible promissory note having a principal amount of $ 10,000,000 (the ‘‘July 2019 Note’’) to an investor. The July 2019 Note bore simple interest at a rate of 8 % per annum and had an original maturity date of June 30, 2020. The IPO triggered an automatic conversion feature of the July 2019 Note under which the outstanding principal amount plus accrued interest converted into 707,032 shares of common stock in connection with the F-19 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) closing of the IPO on July 29, 2019, based on a price derived from a valuation calculated pursuant to the terms of the July 2019 Note. In connection with the July 2019 Note issuance, the Company issued the purchaser of the July 2019 Note a warrant to purchase up to 209,243 shares of common stock at an exercise price of approximately $ 0.001 per share (the “July 2019 Warrant”). The Company elected to account for the July 2019 Note under the fair value option in accordance with ASC 825, Financial Instruments. Absent the election of the fair value option, there were several embedded features of the July 2019 Note which would have required separate accounting as an embedded derivative. Given the complexity of these features and the short time period the July 2019 Note was actually outstanding, the Company elected the fair value option to simplify the accounting for the July 2019 Note. Under the fair value option, changes in fair value are recorded in the statements of operations and comprehensive (loss) income each period as “Other expense, net.” The Company received $ 10,000,000 from the purchaser and incurred $ 764,000 in issuance costs, resulting in net proceeds of $ 9,236,000 . The Company subsequently adjusted the fair value of the July 2019 Note to its conversion date fair value of $ 11,313,000 , which was calculated as the number of common shares into which the July 2019 Note became actually convertible in connection with the IPO multiplied by the IPO price of $ 16.00 per share. No portion of the change in fair value was deemed to be associated with changes in instrument-specific credit risk, due to the short period of time the July 2019 Note was outstanding. Interest expense and the issuance costs associated with the July 2019 Note were included as part of the change in fair value recorded in “Other expense, net.” Because the initial fair value of the July 2019 Note exceeded the proceeds received, the Company did not allocate any portion of the proceeds to the July 2019 Warrant. 7. Long-Term Debt The Company’s long-term debt balances are presented in the table below (in thousands): As of December 31, 2020 2019 Term debt $ — $ 26,688 Unamortized discount and issuance costs — ( 1,566 ) Total long-term debt — 25,122 Less: Current portion of long-term debt — ( 5,833 ) Total long-term debt, less current portion $ — $ 19,289 On November 30, 2018, the Company entered into a Loan and Security Agreement (the ‘‘2018 LSA’’), with Oxford Finance LLC (‘‘Oxford’’), as collateral agent, and Oxford and Silicon Valley Bank as equal syndicated lenders. The 2018 LSA provided for a $ 20.0 million secured term loan credit facility (the ‘‘Term Loan’’) and a credit line of up to $ 5.0 million, prior to amendment of the 2018 LSA on June 13, 2019, as discussed below. The Company’s obligations under the 2018 LSA were secured by substantially all of its assets, excluding intellectual property and subject to certain other exceptions and limitations. In addition, the 2018 LSA contained customary conditions of borrowing, events of default and covenants. On June 13, 2019, the Company entered into an amendment to the 2018 LSA (the “First Amendment”), which, among other things eliminated the $ 5.0 million revolving line and increased the Term Loan by $ 5.0 million and amended a financial covenant requiring the Company to achieve certain revenue targets. The First Amendment was accounted for as a modification of the 2018 LSA, and therefore no extinguishment gain or loss was recognized. The Term Loan bore interest, payable monthly in arrears, 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 % at December 31, 2019. The Company was permitted to make interest-only payments on the Term Loan for the 18 months through May 31, 2020. As required, the Company began to repay the term loan in 30 equal monthly installments beginning on June 1, 2020. All unpaid principal and accrued and unpaid interest were to be due on November 1, 2022 (the “Term Loan Maturity Date”). Additionally, the Company was 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 was being amortized as additional interest expense using the effective interest method over the term of the debt. On December 21, 2020, the Company terminated the 2018 LSA and repaid in full all amounts due, which totaled $ 21.6 million, including the outstanding principal balance, the final payment amount, early termination and prepayment fees and accrued interest. The Company recognized a loss of $ 1.4 million in connection with the extinguishment of the 2018 LSA, which was F-20 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) attributable to the write off of the unamortized discount and issuance costs of $ 0.7 million, the early termination fee of $ 0.5 million and prepayment fees of $ 0.2 million. 8. Operating Leases In December 2019, the Company entered into an agreement to lease office space in Friendswood, Texas (the “Friendswood Lease”) to serve as its new headquarters. The Friendswood Lease commenced in December 2020 and has a 60-month term, with an option to renew for one additional five-year period. In addition, the Company leases another facility for office space in Friendswood, Texas on a month-to-month basis. The Company leases two facilities for office and laboratory space in Phoenix, Arizona. The Company took occupancy of the original facility in April 2016. Pursuant to an amendment in December 2019, the lease term was extended to July 31, 2027. Also in December 2019, the Company entered into a lease of the second facility for clinical and research laboratory purposes as well as general office use. This lease commenced in September 2020 and extends through March 31, 2028. Each of the leases provide the Company with an option to extend their respective term for two additional renewal periods of five years each. Other leasing arrangements include office equipment and a corporate apartment. All leases have been classified as operating leases. Rent expense is recognized on a straight-line basis over the term of the leases. Future non-cancellable commitments under all operating leases are as follows (in thousands): Years Ending December 31, 2021 $ 1,164 2022 1,148 2023 1,142 2024 1,154 2025 1,119 Thereafter 1,037 $ 6,764 Rent expense was $ 548,000 and $ 395,000 for the years ended December 31, 2020 and 2019 , respectively. 9. 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. F-21 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The table below provides information (in thousands), by level within the fair value hierarchy, of the Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis as of December 31, 2020 and 2019 in thousands): As of December 31, 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) $ 409,480 $ — $ — $ 409,480 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 balance sheets. There were no Level 3 fair value measurements as of December 31, 2020 and 2019. The following table discloses the summary of changes in the fair value of the Level 3 fair value measurements during the year ended December 31, 2019 (in thousands): Preferred stock warrant liability Embedded derivative liability in the Q1 2019 Notes The July 2019 Note Balance, January 1, 2019 $ 1,194 $ — $ — Issuance of convertible promissory notes — 2,816 9,236 Change in fair value included in net income 619 237 2,077 Extinguishment of convertible promissory notes and exercise of warrants ( 68 ) ( 3,053 ) ( 11,313 ) Reclassification of preferred stock warrant liability to stockholders’ equity ( 1,745 ) — — Balance, December 31, 2019 $ — $ — $ — The changes in fair value of the preferred stock warrant liability, the embedded derivative liability and the July 2019 Note were recorded as ‘‘Other expense, net’’ in the statements of operations and comprehensive (loss) income. The fair value of the warrants to purchase shares of redeemable convertible preferred stock was estimated by management using the Black-Scholes option pricing model. In connection with the IPO, all outstanding preferred stock warrants became exercisable for shares of common stock. The Company recorded a final fair value adjustment on the preferred stock warrant liability as of immediately prior to the closing of the IPO based on the IPO price of $ 16.00 per share. The preferred stock warrant liability was then reclassified to stockholders’ equity and no additional fair value adjustments were subsequently recorded. Certain features of the Q1 2019 Notes were determined to be an embedded derivative requiring bifurcation and separate accounting, as discussed in Note 6. The fair value of the embedded derivative was determined based on a probability-weighted income approach discounted at an interest rate that was consistent with the appropriate market interest rate (ranging from 8.93 % to 11.40 %) considering management’s estimates of the probability of the possible settlement outcomes. At inception of the Q1 2019 Notes, management assessed the probability of the occurrence of the Next Equity Financing at 90 %. The final fair value adjustment was based upon the actual settlement of the Q1 2019 Notes in connection with the IPO. F-22 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The Company elected the fair value option for the July 2019 Note, as discussed in Note 6. The change in fair value recorded for the July 2019 Note represents the difference between the net proceeds received and the fair value of the shares issued upon conversion of the July 2019 Note in connection with the IPO, valued at the IPO price of $ 16.00 per share. 10. 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. 11. Convertible Preferred Stock and Preferred Stock Warrants Convertible Preferred Stock In connection with the IPO, on July 29, 2019, all outstanding shares of the Company’s convertible preferred stock automatically converted into shares of common stock at a rate of one common share for each 1.219 shares of convertible preferred stock. The Company’s convertible preferred stock was classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities. The preferred stock was contingently redeemable upon events that are outside of the Company’s control including liquidation, sale, or transfer of control of the Company. The Company had determined not to adjust the carrying values of the convertible preferred stock to liquidation preferences of such shares because of the uncertainty of whether or when such events would occur. Further, except for Series C preferred stock, the preferred stock was redeemable upon the majority vote of specified holders of the preferred stock. As a result of a 1-for-1.219 reverse stock split effected on July 11, 2019, the conversion price for each series of preferred stock was adjusted to be the original issue price multiplied by 1.219 . Immediately prior to the closing of the IPO, 9,973,884 shares of outstanding convertible preferred stock were automatically converted into 8,181,992 shares of common stock. In connection with the conversion, the Company derecognized the convertible preferred stock at their carrying values and allocated such amounts to common stock and additional paid-in capital effective July 29, 2019. Any discount to the original issue price was being accreted with a charge to additional paid-in capital over the period through the earliest date the redeemable convertible preferred stock could become redeemable. Any unpaid cumulative accruing dividends would have been payable upon a liquidation event or a deemed liquidation event, but were not recorded in the financial statements since such events did not become probable of occurring. Preferred Stock Warrant Liabilities The Company previously issued warrants to purchase shares of its convertible preferred stock. The warrants provided the holder the option to purchase a specified number of shares of a particular series of the Company’s convertible preferred stock for a specified price. The holder was permitted to exercise the warrant in cash or exercise pursuant to a cashless exercise whereby a calculated number of shares would be withheld upon exercise to satisfy the cost of the exercise. In accordance with their terms, in connection with the IPO, all outstanding warrants to purchase shares of convertible preferred stock became exercisable for shares of common stock at a rate of one common stock warrant for every 1.219 preferred stock warrants. Exercise prices of the warrants were also adjusted upon conversion by multiplying each of the exercise prices by 1.219 . Immediately prior to the closing of the IPO, certain outstanding warrants to purchase shares of Series F convertible redeemable preferred stock were net exercised for an aggregate of 27,207 shares of common stock. In accordance with ASC 480-10, Distinguishing Liabilities from Equity, the Company accounted for preferred stock warrants outstanding as a liability at fair value and adjusted the instruments to fair value at each reporting period. This liability was subject to re-measurement at each balance sheet date until exercised, and any change in fair value was recognized in the Company’s statements of operations and comprehensive (loss) income as other income (expense), net. In connection with the preferred stock warrants becoming exercisable for common stock, the Company reclassified the preferred stock warrant liability balance to additional paid-in capital effective July 29, 2019 due to meeting the criteria under U.S. GAAP for classification in stockholders’ equity. See Note 12 for additional information on common stock warrants. 12. Stockholders’ Equity Capital Stock The Company’s Amended and Restated Certificate of Incorporation, dated July 29, 2019, authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The Company is also authorized to issue up to F-23 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 10,000,000 shares of preferred stock with a par value of $ 0.001 per share. No dividends were declared or paid during the years ended December 31, 2020 or 2019. On July 11, 2019, the Company effected a 1-for-1.219 reverse stock split of its common stock. The par value and the authorized number of shares of the common stock were not affected by the reverse stock split. The reverse stock split resulted in an adjustment to the preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split. On July 29, 2019, the Company completed the initial public offering of its common stock. In connection with the IPO, the Company issued and sold 4,600,000 shares of its common stock, including 600,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $ 16.00 per share. The Company received approximately $ 65.9 million in net proceeds from the IPO, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. On June 29, 2020 and July 2, 2020, the Company issued and sold 2,000,000 and 300,000 shares, respectively, of its common stock in a follow-on public offering at a price of $ 37.00 per share. The Company received $ 79.5 million in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs. The shares issued and sold on July 2, 2020 reflect the underwriters’ exercise in full of their 30-day option to purchase additional shares at the public offering price, less underwriting discounts and commissions. On December 18, 2020, the Company issued and sold 4,600,000 shares of its common stock in a follow-on public offering, including 600,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $ 58.00 per share. The Company received $ 250.5 million in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs (excluding $ 0.4 million in offering costs that were incurred but not paid as of December 31, 2020). Common Stock Warrants The Company issued an aggregate of 51,238 shares, 209,238 shares and 31,814 shares of common stock on November 29, 2019, December 11, 2020 and December 29, 2020, respectively, pursuant to net exercises by the holders of common stock warrants outstanding. In accordance with the net exercise provisions of the warrants, shares of common stock were withheld to satisfy the cost of these exercises. There were no common stock warrants outstanding as of December 31, 2020. Information about common stock warrants outstanding as of December 31, 2019 is presented in the table below: As of December 31, 2019 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 were classified as stockholders’ equity and no adjustments were recorded for changes in fair value. 13. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans The Company’s stock incentive plans provide for the granting of options to purchase common stock and other equity-based awards to employees, directors and consultants of the Company. On September 6, 2008, the Company adopted the 2008 Stock Plan (the “2008 Plan”), on August 15, 2018, the Company adopted the 2018 Stock Plan (the “2018 Plan”) and on July 24, 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). Following the adoption of the 2018 Plan, no additional stock awards were granted under the 2008 Plan and following the adoption of the 2019 Plan, no additional stock awards were granted under the 2018 Plan. F-24 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Options under the plans may be granted as incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”). ISOs may only be granted to Company employees (including directors who are also considered employees). NSOs may be granted to Company employees, directors and consultants. Options may be granted for terms up to ten years from the date of grant, as determined by the Board of Directors; provided, however, that with respect to an ISO granted to a person who owns stock representing more than 10 % of the voting power of all classes of stock of the Company, the terms shall be for no more than five years from the date of grant. The exercise price of options granted must be no less than 100 % of the fair market value of the shares on the date of grant, provided, however, that with respect to an ISO granted to an employee who at the time of grant of such options owns stock representing more than 10 % of the voting power of all classes of stock of the Company, the exercise price shall not be less than 110 % of the fair market value of the shares on the date of grant. Options generally vest over four years (generally 25 % after one year and monthly thereafter), subject to the option holder’s continued service with the Company. The Company issues new shares to satisfy option exercises. On July 11, 2019, the Company’s Board of Directors approved an increase of 144,878 in the number of shares authorized for issuance under the 2018 Plan. On July 24, 2019, the 2019 Plan became effective. The 2019 Plan authorized 1,931,020 new shares plus the number of shares (not to exceed 1,976,756 shares) that remained available under the 2018 Stock Plan at the time the 2019 Plan became effective and any shares underlying outstanding stock awards granted under the 2018 Plan and 2008 Stock Plan that expire or are repurchased, forfeited, cancelled or withheld. The 2019 Plan provides for automatic annual increases in the number of shares of common stock reserved for issuance, which resulted in 856,545 additional shares becoming available effective January 1, 2020. As of December 31, 2020, 366,452 shares remained available for grant under the 2019 Plan. On January 1, 2021, an additional 1,240,624 shares became available under the 2019 Plan pursuant to an automatic annual increase. Stock Options Stock option activity under the Company’s stock plans for the years ended December 31, 2020 and 2019 is set forth below: Weighted-Average Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2019 1,659,596 $ 1.99 Granted 1,711,325 19.41 Exercised ( 693,127 ) 1.70 Forfeited/Cancelled ( 39,828 ) 6.36 Balance as of December 31, 2019 2,637,966 $ 13.30 Granted 1,286,065 49.63 Exercised ( 460,207 ) 3.53 Forfeited/Cancelled ( 94,322 ) 27.51 Balance as of December 31, 2020 3,369,502 $ 28.11 8.72 $ 131,525 Exercisable at December 31, 2020 (1) 824,128 $ 10.67 7.54 $ 46,546 (1) Vested and exercisable options. Additionally, outstanding unvested options to purchase an aggregate of 68,150 shares of common stock with a weighted-average exercise price of $ 2.39 per share may be exercised prior to vesting as of December 31, 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 December 31, 2020. F-25 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Restricted Stock Units RSUs represent the right to receive shares of the Company’s common stock at a specified future date, subject to vesting. The Company’s RSUs generally vest annually from the grant date in four equal installments subject to the holder’s continued service with the Company. The Company issues new shares to satisfy RSUs upon vesting. The following table summarizes the Company’s RSU activity for the year ended December 31, 2020: Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value Balance as of December 31, 2019 — $ — Granted 161,477 59.16 Vested — — Forfeited/Cancelled — — Balance as of December 31, 2020 161,477 $ 59.16 Employee Stock Purchase Plan The ESPP became effective July 24, 2019. The ESPP provides for automatic annual increases in the number of shares of common stock reserved for issuance, which resulted in 171,309 additional shares becoming available effective January 1, 2020. On February 28, 2020 and August 31, 2020 the Company issued 39,987 and 41,467 shares, respectively, of its common stock pursuant to scheduled purchases under the ESPP. As of December 31, 2020, 501,790 shares of common stock are reserved for future issuance under the ESPP. On January 1, 2021, an additional 248,124 shares became available under the ESPP pursuant to an automatic annual increase. The Company commenced a series of offerings under the ESPP on October 1, 2019. The initial offering began October 1, 2019, ends on August 31, 2021 (unless terminated earlier, as described below) and consists of four purchase periods. The purchase periods end on the last trading day of February and August 31 of each year. Eligible employees who enroll in the initial offering or any subsequent offering will be able to purchase shares of the Company’s common stock at a discount through payroll deductions, subject to certain limitations. The purchase price of the shares of common stock is the lesser of (i) 85 % of the fair market value of such shares on the offering date and (ii) 85 % of the fair market value of such shares on the purchase date. Following the commencement of the initial offering, new 24-month offerings, each with four six-month purchase periods, automatically begin approximately every six months. Offerings are concurrent, but in the event the fair market value of a share of common stock on the first day of any purchase period during an offering (the “New Offering”) is less than or equal to the fair market value of a share of common stock on the offering date for an ongoing offering (the “Ongoing Offering”), then the Ongoing Offering terminates immediately following the purchase of shares on the purchase date immediately preceding the New Offering and the participants in the terminated Ongoing Offering are automatically enrolled in the New Offering. In such case, the Company would account for this event as a modification of the Ongoing Offering. Notwithstanding the above, the Company’s Board of Directors (or an authorized committee thereof) may modify the terms of or suspend any future offerings prior to their commencement. As of December 31, 2020, there were three offerings outstanding under the ESPP. The Company issues new shares for purchases of stock made pursuant to the ESPP. Determining Fair Value - Summary of Assumptions The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and purchase rights granted under the ESPP at the date of grant, start of the offering or other relevant measurement date. Following is a description of the significant assumptions used in the option pricing model: • Expected term . The expected term is the period of time that granted options are expected to be outstanding. For stock options, the Company has set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate the expected term. For the ESPP, the expected term is the period of time from the offering date to the purchase date. • Expected volatility . Because of the limited period of time the Company’s stock has been traded in an active market, the Company calculates volatility by using the historical stock price volatility of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies. F-26 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) • Risk-free interest rate . The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for the ESPP, provided from the Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms. • Dividend yield . The Company has not paid, and does not have plans to pay, cash dividends. Therefore, the Company use an expected dividend yield of zero in the Black-Scholes option valuation model. The fair value of the Company’s common stock is also an assumption used to determine the fair value of stock options. 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. 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: Years Ended December 31, 2020 2019 Average expected term (years) 6 6 Expected stock price volatility 59.57 % - 67.02 % 56.74 %- 60.17 % Risk-free interest rate 0.28 % - 1.76 % 1.63 % - 2.47 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Years Ended December 31, 2020 2019 Average expected term (years) 1.2 1.2 Expected stock price volatility 56.80 % - 100.49 % 61.12 % - 68.89 % Risk-free interest rate 0.12 % - 0.95 % 1.56 % - 1.80 % Dividend yield — % — % The Company uses the closing price of its common stock on the date of grant to determine the fair value of RSUs. Stock-Based Compensation Expense Stock-based compensation expense is included in the statements of operations and comprehensive (loss) income as follows (in thousands): Years Ended December 31, 2020 2019 Cost of sales $ 1,049 $ 170 Research and development 1,492 165 Selling, general and administrative 5,768 914 Total stock-based compensation expense $ 8,309 $ 1,249 For the years ended December 31, 2020 and 2019, the weighted-average grant date fair value of stock options was $ 28.95 and $ 10.89 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 17.43 and $ 7.32 per share, respectively. As of December 31, 2020, the total unrecognized stock-based compensation cost related to outstanding awards was $ 57,120,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3.4 years. The total unrecognized compensation cost will be adjusted for forfeitures in future periods as they occur. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020 and 2019 was $ 18,377,000 and $ 5,151,000 , respectively. The aggregate intrinsic value of shares issued under the ESPP was $ 1,797,000 F-27 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) during the year ended December 31, 2020. There were no shares issued under the ESPP during the year ended December 31, 2019. No tax benefits related to stock-based compensation were recorded in the statements of operations and comprehensive (loss) income during the years ended December 31, 2020 and 2019 due to the valuation allowance on net deferred tax assets. 14. Income Taxes The components of income tax expense are as follows (in thousands): Years Ended December 31, 2020 2019 Current tax expense U.S. Federal $ — $ — State and local 84 72 Total current 84 72 Deferred tax expense U.S. Federal — — State and local — — Total deferred — — Total income tax expense $ 84 $ 72 The differences between income taxes expected at the U.S. federal statutory rate (21%) and the reported income tax expense are summarized as follows (in thousands): Years Ended December 31, 2020 2019 Pre-tax (loss) income $ ( 10,200 ) $ 5,349 U.S. federal taxes at statutory rate ( 2,142 ) 1,123 State income taxes ( 311 ) 958 Mark-to-market losses — 566 Non-deductible meals 235 224 Convertible debt interest — 95 Research and development (“R&D”) tax credit ( 703 ) ( 251 ) Change in valuation allowance 2,784 ( 2,747 ) Stock-based compensation ( 781 ) 65 Non-deductible officers’ compensation 963 — Other 39 39 Total income tax expense $ 84 $ 72 F-28 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Significant components of deferred tax assets and liabilities are as follows (in thousands): As of December 31, 2020 2019 Deferred tax assets: Net operating loss (“NOL”) carryforwards $ 13,720 $ 14,077 Accounts payable — 456 Accrued liabilities 2,730 1,817 R&D tax credit 1,777 993 Intangible assets 46 50 Stock-based compensation 761 127 Charitable contributions — 2 Total deferred tax assets 19,034 17,522 Less valuation allowance ( 15,204 ) ( 12,420 ) Deferred tax assets, net $ 3,830 $ 5,102 Deferred tax liabilities: Accounts receivable $ — $ ( 3,796 ) Prepaid expenses ( 289 ) ( 757 ) Property and equipment ( 776 ) ( 246 ) Section 481(a) adjustment (cash to accrual) ( 2,765 ) ( 303 ) Total deferred tax liabilities ( 3,830 ) ( 5,102 ) Net deferred tax asset (liability) $ — $ — At December 31, 2020, the Company had NOL carryforwards for federal income tax purposes of approximately $ 55,851,000 of which $ 41,958,000 will begin to expire in 2033 if not utilized to offset taxable income, and $ 13,893,000 may be carried forward indefinitely. Future changes in ownership, as defined by Section 382 of the IRC, could limit the amount of NOL carryforwards used in any one year. Also, as of December 31, 2020, the Company had state net operating loss carryforwards of approximately $ 41,551,000 , which begin to expire in 2028 if not utilized to offset state taxable income. In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years). The Company performed a Section 382 analysis from inception through the year ended December 31, 2020 and concluded the Company had experienced an ownership change in 2011, 2014 and 2020. These changes in ownership did not result in the expiration of any NOLs or R&D credits. However, future changes in ownership may further limit the ability of the Company to utilize its NOL carryforwards and R&D tax credit carryforwards. At December 31, 2020 and 2019, the Company placed a valuation allowance of $ 15,204,000 and $ 12,420,000 , respectively, against the entirety of its net deferred tax asset balance, as the Company has not determined that it is more likely than not to be realized. The Company assessed whether it had any significant uncertain tax positions related to open tax years and concluded there were none. Accordingly, no reserve for uncertain tax positions has been recorded as of December 31, 2020 and 2019. The Company is generally no longer subject to tax examinations for U.S. federal income tax purposes for fiscal years prior to 2017 and fiscal years prior to 2015 for multiple state jurisdictions. However, since the Company has been in an NOL position since 2008, the Company’s 2008 to 2016 federal tax returns and its 2008 to 2014 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards. F-29 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 15. Selected Quarterly Financial Data (Unaudited) The following is a summary of selected unaudited quarterly financial data for the years ended December 31, 2020 and 2019 (in thousands, except per share data): Year Ended December 31, 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year Net revenues $ 17,418 $ 12,715 $ 15,217 $ 17,299 $ 62,649 Gross margin $ 15,027 $ 10,569 $ 12,742 $ 14,626 $ 52,964 Net income (loss) (1) $ 570 $ ( 1,376 ) $ ( 4,589 ) $ ( 4,889 ) $ ( 10,284 ) Net income (loss) attributable to common stockholders (1) $ 570 $ ( 1,376 ) $ ( 4,589 ) $ ( 4,889 ) $ ( 10,284 ) Earnings (loss) per share (3) : Basic $ 0.03 $ ( 0.08 ) $ ( 0.23 ) $ ( 0.23 ) $ ( 0.54 ) Diluted $ 0.03 $ ( 0.08 ) $ ( 0.23 ) $ ( 0.23 ) $ ( 0.54 ) Year Ended December 31, 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year Net revenues $ 8,717 $ 10,739 $ 14,774 $ 17,635 $ 51,865 Gross margin $ 7,119 $ 8,746 $ 13,066 $ 15,624 $ 44,555 Net (loss) income (2) $ ( 1,358 ) $ ( 1,269 ) $ 5,849 $ 2,055 $ 5,277 Net (loss) income attributable to common stockholders (2) $ ( 2,342 ) $ ( 2,265 ) $ 5,543 $ 2,055 $ 2,991 (Loss) Earnings per share (3) : Basic $ ( 1.22 ) $ ( 1.05 ) $ 0.43 $ 0.12 $ 0.35 Diluted $ ( 1.22 ) $ ( 1.05 ) $ 0.05 $ 0.11 $ ( 0.21 ) (1) For the second, third and fourth quarters of 2020, includes other operating income (loss) of $ 1.9 million, ($ 1.9 million) and $ 1.9 million, respectively, associated with CARES Act provider relief funds, as discussed in Note 2 to the financial statements. For the fourth quarter of 2020, includes a loss on extinguishment of debt of $ 1.4 million. (2) For the third quarter of 2019, includes a gain on extinguishment of debt of $ 5.2 million. (3) Basic and diluted (loss) earnings per share are computed independently for each quarterly and annual period presented. Therefore, t he sum of the quarterly basic and diluted (loss) earnings per share amounts may not equal annual basic and diluted (loss) earnings per share. F-30