What changed in this filing

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Item 1. Financial Statements

2021-05-10 compared with 2020-11-09 · 190 added, 464 removed, 245 unchanged (73% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

ASSETS (unaudited)

15 unchanged sentences

Other accrued liabilities 2,020 3,055

Current portion of long-term debt 10,000 5,833

Total current liabilities 17,578 20,876

Long-term debt 12,455 19,289

Noncurrent portion of Medicare advance payment 172 1,735

Deferred rent and other liabilities 995 1,026

3 unchanged sentences

Preferred stock, $ 0.001 par value;

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

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

10,000,000 shares authorized as of March 31, 2021 and December 31, 2020;

no shares issued and outstanding as of March 31, 2021 and December 31, 2020.

Common stock, $ 0.001 par value;

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

19,844,426 and 17,130,907 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

200,000,000 shares authorized as of March 31, 2021 and December 31, 2020;

25,054,513 and 24,812,487 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.

Additional paid-in capital 485,338 478,162

7 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

NET REVENUES $ 22,813 $ 17,418

1 unchanged sentence

Gross margin 19,785 15,027

OPERATING EXPENSES AND OTHER OPERATING LOSS

OPERATING EXPENSES

Research and development 5,908 2,913

Selling, general and administrative 18,161 11,078

Other operating loss 1,882 — — —

Total operating expenses 24,069 13,991

2 unchanged sentences

Interest expense — ( 764 )

Gain on extinguishment of debt (Note 6) — 5,213 — 5,213

Other expense, net — ( 2,711 ) — ( 2,933 )

(Loss) income before income taxes ( 4,280 ) 570

1 unchanged sentence

Net (loss) income and comprehensive (loss) income $ ( 4,280 ) $ 570

Convertible preferred stock cumulative dividends — 289 — 2,156

Accretion of redeemable convertible preferred stock to redemption value

Net (loss) income and comprehensive (loss) income attributable to common stockholders $ ( 4,589 ) $ 5,543 $ ( 5,395 ) $ 936

(Loss) earnings per share attributable to common stockholders:

(Loss) earnings per share:

$ ( 0.17 ) $ 0.03

5 unchanged sentences

CASTLE BIOSCIENCES, INC.

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

(in thousands, except share data)

Stock Series C

Preferred Stock

Series A, B, D, E-1,

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

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

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

Stock compensation expense — — — — — — — — 229 — 229

Exercise of common stock options — — — — — — 411,283 — 747 — 747

Accretion of redeemable convertible preferred stock to redemption value:

Series E-3 — — — 1 — — — — ( 1 ) — ( 1 )

Series F — — — 16 — — — — ( 16 ) — ( 16 )

Exercise of redeemable convertible preferred stock warrants:

Series E-1 — — 12,999 107 — — — — — — —

Series F — — 1,054 10 — — — — — — —

Extinguishment of beneficial conversion feature on convertible promissory notes — — — — — — — — ( 15,265 ) — ( 15,265 )

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 2 26,576 — 26,578

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 for common stock in connection with initial public offering — — — — — — 27,207 — 1,745 — 1,745

Net income — — — — — — — — — 5,849 5,849

BALANCE, SEPTEMBER 30, 2019 — $ — — $ — — $ — 17,074,049 $ 17 $ 136,586 $ ( 54,267 ) $ 82,336

CASTLE BIOSCIENCES, INC.

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

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Stock Series C

Preferred Stock

Series A, B, D, E-1,

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

Preferred Stock Common Stock Additional

2 unchanged sentences

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

BALANCE, JULY 1, 2020 — $ — — $ — — $ — 19,373,869 $ 19 $ 210,621 $ ( 53,018 ) $ 157,622

Shares Amount Shares Amount

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

Stock compensation expense — — — — 1,577 — 1,577

2 unchanged sentences

— — 39,987 — 603 — 603

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

— — — — — — 300,000 — 10,423 — 10,423

Net loss — — — — — 570 570

BALANCE, SEPTEMBER 30, 2020 — $ — — $ — — $ — 19,844,426 $ 20 $ 224,146 $ ( 57,607 ) $ 166,559

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

CASTLE BIOSCIENCES, INC.

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

(in thousands, except share data)

Stock Series C

Preferred Stock

Series A, B, D, E-1,

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

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

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

Stock compensation expense — — — — — — — — 536 — 536

Exercise of common stock options — — — — — — 687,520 — 1,164 — 1,164

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 )

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 2 26,576 — 26,578

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 — 1,745 — 1,745

Net income — — — — — — — — — 3,222 3,222

BALANCE, SEPTEMBER 30, 2019 — $ — — $ — — $ — 17,074,049 $ 17 $ 136,586 $ ( 54,267 ) $ 82,336

CASTLE BIOSCIENCES, INC.

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

(in thousands, except share data)

Stock Series C

Preferred Stock

Series A, B, D, E-1,

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

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Equity (Deficit)

Shares Amount Shares Amount Shares Amount Shares Amount

BALANCE, MARCH 31, 2020 — $ — 17,203,496 $ 17 $ 139,559 $ ( 51,642 ) $ 87,934

BALANCE, JANUARY 1, 2021 — $ — 24,812,487 $ 25 $ 478,162 $ ( 62,496 ) $ 415,691

3 unchanged sentences

— — 70,711 — 1,233 — 1,233

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

— — — — — — 2,300,000 2 79,502 — 79,504

Public offering of common stock, adjustment to offering costs — — — — 39 — 39

Net loss — — — — — ( 4,280 ) ( 4,280 )

BALANCE, SEPTEMBER 30, 2020 — $ — — $ — — $ — 19,844,426 $ 20 $ 224,146 $ ( 57,607 ) $ 166,559

BALANCE, MARCH 31, 2021 — $ — 25,054,513 $ 25 $ 485,338 $ ( 66,776 ) $ 418,587

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

2 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

Net (loss) income $ ( 4,280 ) $ 570

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

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

Depreciation 233 91

Stock compensation expense 4,913 1,577

Amortization of intangibles — 4

Amortization of debt discounts and issuance costs — 224

Other non-cash interest — 442

Gain on extinguishment of debt — ( 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

Change in operating assets and liabilities:

5 unchanged sentences

Accrued compensation ( 3,899 ) ( 2,645 )

Medicare advance payment 8,350 —

Other accrued liabilities ( 330 ) ( 96 )

Deferred rent and other liabilities ( 64 ) ( 2 )

Net cash provided by operating activities 10,295 2,522

Net cash used in operating activities ( 3,631 ) ( 251 )

INVESTING ACTIVITIES

Purchases of property and equipment ( 750 ) ( 500 )

Proceeds from sale of property and equipment 2 —

Net cash used in investing activities ( 750 ) ( 500 )

FINANCING ACTIVITIES

Proceeds from public offerings of common stock, net of underwriting discounts, commissions and offering costs 79,504 65,935

Proceeds from issuance of preferred stock and preferred stock warrants (including exercised warrants) — 49

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

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

Repayments on term debt ( 3,333 ) —

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

Nine Months Ended

September 30,

Repayments on line of credit — ( 1,791 )

Payment of common stock offering costs ( 336 ) —

Proceeds from exercise of common stock options 991 71

6 unchanged sentences

Accrued purchases of property and equipment $ 220 $ 270

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

Common stock and debt issuance costs incurred but not paid $ — $ 4

Issuance of common stock upon conversion of convertible preferred stock

Conversion of preferred stock warrants to common stock warrants $ — $ 1,745

Issuance of common stock upon conversion of convertible promissory notes $ — $ 26,578

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

3 unchanged sentences

Castle Biosciences, Inc.

(the ‘‘Company’’) was incorporated in the state of Delaware on September 12, 2007.

The Company is a commercial-stage dermatological cancer company focused on providing physicians and their patients with personalized, clinically actionable genomic information to make more accurate treatment decisions.

The Company is based in Friendswood, Texas (a suburb of Houston, Texas) and its laboratory operations are conducted at the Company’s facility located in Phoenix, Arizona.

(the ‘‘Company’’, “we”, “us”, or “our”) was incorporated in the state of Delaware on September 12, 2007.

We are 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.

We are based in Friendswood, Texas (a suburb of Houston, Texas) and our laboratory operations are conducted at our 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.

Since then, COVID-19 has spread to multiple countries, including the United States.

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

To date, the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of test reports.

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

The Company experienced a decline in total test report volume in the second quarter of 2020 compared to the second quarter of 2019, which it believes was linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19.

While the Company experienced improvements in total test report volume in the third quarter of 2020 compared to the third quarter of 2019, 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 $ 183.1 million at September 30, 2020, and collections from test report sales.

Since the COVID-19 pandemic began in March 2020, we have maintained uninterrupted business operations with normal turnaround times for delivery of test reports, but have experienced declines in test report volume, which we believe is linked to delays and/or cancellations in patient visits in response to COVID-19, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma.

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

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.

The Company has no subsidiaries and all operations are conducted by the Company.

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S.

We have no subsidiaries and all operations are conducted by us.

Unaudited Interim Financial Information

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

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

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

The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2020 and the results of its operations and its cash flows for the three and nine months ended September 30, 2020 and 2019.

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

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

The accompanying condensed balance sheet as of March 31, 2021;

the condensed statements of operations and comprehensive (loss) income, the condensed statements of stockholders’ equity for the three months ended March 31, 2021 and 2020;

and the condensed statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited.

The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our financial position as of March 31, 2021 and the results of our operations and our cash flows for the three months ended March 31, 2021 and 2020.

The financial data and other information disclosed in these notes related to the three months ended March 31, 2021 and 2020 are also unaudited.

The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period.

The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date.

Certain disclosures have been condensed or omitted from the interim financial statements.

These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 10, 2020.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

These financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 11, 2021.

Use of Estimates

2 unchanged sentences

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.

We base these estimates on historical and anticipated results, trends, and various other assumptions that we believe 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.

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.

We have considered the potential impact of the COVID-19 pandemic on our estimates and assumptions.

The extent to which the COVID-19 pandemic may impact our estimates in future periods is uncertain and subject to change.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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.

Our cash equivalents consist of money market funds, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”), that are primarily invested in short-term U.S.

government obligations.

Cash deposits at financial institutions may exceed the amount of insurance provided by the FDIC.

Management believes that 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.

Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the institutions in which deposits are held.

We have not experienced any losses on our cash or cash equivalents.

Revenue Recognition

Revenue is recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 606, Revenue from Contracts with Customers (‘‘ASC 606’’).

In accordance with ASC 606, the Company follows a five-step process to recognize revenues:

In accordance with ASC 606, we follow a five-step process to recognize revenues:

(1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenues when the performance obligations are satisfied.

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 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 physician, at which point the Company can bill for the report.

The amount of revenue recognized reflects the amount of consideration to which the Company expects to be entitled (the ‘‘transaction price’’) and considers the effects of variable consideration, which is discussed further below.

Once the Company satisfies its performance obligations and bills for the service, the timing of the collection of payments may vary based on the payment practices of the third-party payor and the existence of contractually established reimbursement rates.

Most of the payments for the Company’s services are made by third-party payors, including Medicare and commercial health insurance carriers.

Certain contracts contain a contractual commitment of a reimbursement rate that differs from the Company’s list prices.

However, absent a contractually committed reimbursement rate with a commercial carrier or governmental program, the Company’s diagnostic tests may or may not be covered by these entities’ existing reimbursement policies.

In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse the Company.

The Company may pursue, on a case-by-case basis,

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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 reimbursements rates, the Company has concluded that its contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than the Company’s standard rates or not paid at all, with such differences considered implicit price concessions.

Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606.

The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of the Company’s past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence, such as the judgment and actions of third parties.

Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved.

Variable consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor.

Variable consideration for Medicare claims that are not covered by an LCD, including those claims subject to approval by an ALJ at an appeal hearing, is deemed to be fully constrained due to factors outside the Company’s influence (i.e., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues.

Included in revenues for the three months ended September 30, 2020 and 2019 were $ 1,450,000 and $ 3,203,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the nine months ended September 30, 2020 and 2019 were revenue increases of $ 223,000 and $ 2,394,000 , respectively.

These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.

Because the Company’s contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606 to not disclose information about its remaining performance obligations.

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

Contract balances consisted of accounts receivable (both current and noncurrent) and the Medicare advance payment (discussed further below) as of September 30, 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 current liability on its balance sheet as of September 30, 2020.

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

Originally, CMS was to recoup the Advance Payment from August 2020 through November 2020.

However, the enactment on October 1, 2020 of the Continuing Appropriations Act, 2021 and Other Extensions Act (the “Appropriations Act”) modified the repayment terms such that recoupment will now 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 the Advance Payment on the Company’s balance sheet at September 30, 2020 does not consider the effect of

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

the Appropriations Act.

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

DecisionDx-Melanoma Claims Consolidation

In June 2017, the Company submitted to the Office of Medicare Hearings and Appeals (‘‘OMHA’’) a formal request to participate in a program that OMHA developed with the intent of providing appellants a means to have large volumes of claim disputes adjudicated at an accelerated rate.

The program consolidates outstanding claims at the ALJ level and uses a statistical-sampling approach where five ALJs will determine reimbursement results for a sample of claims which are then extrapolated to the universe of claims.

The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017.

Hearings were held in April 2019 with a supplemental hearing in May 2019.

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

The Company has filed an appeal to the decision, although no ruling on such appeal has been issued to date.

In accordance with ASC 606 and consistent with prior periods, the Company has not recognized (fully constrained the variable consideration) any revenues attributable to these claims in its financial statements pending the outcome of this matter.

Payor Concentration

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

The Company’s significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows:

Percentage of Revenues

Nine Months Ended

September 30, Percentage of

Accounts Receivable

Percentage of

Accounts Receivable

(non-current)

2020 2019 September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019

Medicare 54 % 47 % 11 % 7 % — % — %

Medicare Advantage plans 28 % 28 % 41 % 41 % 18 % 18 %

United Healthcare 2 % 7 % 1 % 9 % — % — %

BlueCross BlueShield plans 8 % 6 % 27 % 25 % 47 % 46 %

We have determined that we have a contract with the patient when the treating clinician orders the test.

Our contracts generally contain a single performance obligation, which is the delivery of the test report, and we satisfy our performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point we can bill for the report.

The amount of revenue recognized reflects the amount of consideration to which we expect to be entitled, or the transaction price, and considers the effects of variable consideration.

See Note 3 for further details.

Accounts Receivable and Allowance for 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.

We classify 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.

We accrue an allowance for doubtful accounts against our 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.

We generally do not perform evaluations of customers’ financial condition and generally do 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 September 30, 2020 and December 31, 2019.

Historically, our bad debt expense has not been significant.

The allowance for doubtful accounts was zero as of March 31, 2021, and December 31, 2020.

Adjustments for implicit price concessions attributable to variable consideration, as discussed above, are incorporated into the measurement of the accounts receivable balances and are not part of the allowance for doubtful accounts.

Other Operating Loss

On April 10, 2020, the Company recei ved 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

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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 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.

As of September 30, 2020, the provider relief funds are reflected on the balance sheet as other accrued liabilities.

On October 22, 2020, HHS again revised the methodology for calculating lost revenues, which is now calculated as a negative change, if any, in calendar year 2020 revenues compared to calendar year 2019 revenues.

Fair Value of Financial Instruments

The carrying amount of the Company’s long-term debt approximates fair value due to its variable market interest rate and management’s opinion that current rates and terms that would be available to the Company with the same maturity and security structure would be essentially equivalent to that of the Company’s long-term debt.

This estimated fair value is a ‘‘Level 3’’ fair value measurement, as defined in Note 8.

Accrued Compensation

The Company accrues for liabilities under discretionary employee and executive bonus plans.

These estimated compensation liabilities are based on progress against corporate objectives approved by the Company’s board of directors, compensation levels of eligible individuals, and target bonus percentage levels.

We accrue for liabilities under discretionary employee and executive bonus plans.

These estimated compensation liabilities are based on progress against corporate objectives approved by our board of directors, compensation levels of eligible individuals, and target bonus percentage levels.

The board of directors reviews and evaluates the performance against these objectives and ultimately determines what discretionary payments are made.

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 September 30, 2020 and December 31, 2019, the Company accrued $ 4,611,000 and $ 4,785,000 , respectively, for liabilities associated with these bonus plans.

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

As of March 31, 2021 and December 31, 2020, we accrued $ 2,664,000 and $ 7,175,000 , respectively, for liabilities associated with these bonus plans.

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

CARES Act Payroll Tax Deferral

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

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

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

As of September 30, 2020, the Company had deferred payment of $ 378,000 of such taxes, which are classified as noncurrent liabilities in the balance sheet.

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) income for all periods presented.

Our comprehensive (loss) income was the same as our reported net (loss) income for all periods presented.

Accounting Pronouncements Yet to be Adopted

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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.

The new standard requires lessees to apply a dual approach,

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.

This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases.

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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

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

2016-02 for certain entities.

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.

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

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

The Company anticipates that the adoption will not have a material impact on its statements of operations and comprehensive (loss) 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.

If we maintain EGC status, we will adopt the new standard in the fourth quarter of 2022 using the modified retrospective method, under which we 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.

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

In June 2016, the FASB issued ASU No.

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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.

We do not currently believe the adoption of this standard will have a significant impact on our financial statements, given our history of minimal bad debt expense relating to trade accounts receivable.

In December 2019, the FASB issued ASU No.

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Early adoption is permitted.

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

We are currently evaluating the impact of ASU 2019-12 on our financial statements.

If the market value of our common stock held by non-affiliates exceeds $700.0 million as of June 30, 2021, we will cease to be an emerging growth company effective December 31, 2021.

If that occurs, we 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.

All of our revenues from contracts with customers are associated with the provision of diagnostic and prognostic cancer testing services.

Most of our revenues are attributable to DecisionDx®-Melanoma for cutaneous melanoma.

We also provide a test for uveal melanoma, DecisionDx®-UM.

We launched a test for patients with 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 our significant third-party payors is included under Payor Concentration below.

Once we satisfy our performance obligations and bill for the service, the timing of the collection of payments may vary based on the payment practices of the third-party payor and the existence of contractually established reimbursement rates.

Most of the payments for our services are made by third-party payors, including Medicare and commercial health insurance carriers.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Certain contracts contain a contractual commitment of a reimbursement rate that differs from our list prices.

However, absent a positive coverage policy, with or without a contractually committed reimbursement rate, with a commercial carrier or governmental program, our diagnostic tests may or may not be paid by these entities.

In addition, patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse us.

We may pursue, on a case-by-case basis, reimbursement from such patients in the form of co-payments and co-insurance, in accordance with the contractual obligations that we have with the insurance carrier or health plan.

These situations may result in a delay in the collection of payments.

The Medicare claims that are covered by policy under a Local Coverage Determination (‘‘LCD’’) are generally paid at the established rate by our Medicare contractor within 30 days from receipt.

A successful appeal at any of these levels results in payment.

In the absence of LCD coverage or contractually established reimbursements rates, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions.

Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606.

The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties.

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 our influence (i.e., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues.

Included in revenues for the three months ended March 31, 2021 and 2020 were $ 5,335,000 and $ 3,160,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Because our contracts with customers have an expected duration of one year or less, we have elected the practical expedient in ASC 606 to not disclose information about our remaining performance obligations.

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

Contract balances consisted of accounts receivable (both current and noncurrent) and the Medicare advance payment (discussed further below) as of March 31, 2021 and December 31, 2020.

Medicare Advance Payment

On April 16, 2020, we 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.

We have recorded the Advance Payment as a liability, consisting of both a current and noncurrent portion, on our balance sheet as of March 31, 2021.

Recoupment will commence in April 2021 during which the first eleven months CMS will apply 25% of the Medicare payments otherwise owed to us 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 us for an additional six months.

If the Advance Payment is not fully recovered by CMS after this recoupment period, we will be required to repay any remaining balance.

As of March 31, 2021, no revenue has been recognized related to any portion of the Advance Payment.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

DecisionDx-Melanoma Claims Consolidation

In June 2017, we submitted to the Office of Medicare Hearings and Appeals (‘‘OMHA’’) a formal request to participate in a program that OMHA developed with the intent of providing appellants a means to have large volumes of claim disputes adjudicated at an accelerated rate.

The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017.

Hearings were held in April 2019 with a supplemental hearing in May 2019.

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

We have filed an appeal to the decision, although no ruling on such appeal has been issued to date.

In accordance with ASC 606 and consistent with prior periods, we have not recognized (fully constrained the variable consideration) any revenues attributable to these claims in our financial statements pending the outcome of this matter.

Payor Concentration

We rely upon reimbursements from third-party government payors (primarily Medicare) and private-payor insurance companies to collect accounts receivable related to sales of our diagnostic tests.

Our significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows:

Percentage of Revenues

Three Months Ended

March 31, Percentage of

Accounts Receivable

Percentage of

Accounts Receivable

(non-current)

2021 2020 March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

Medicare 57 % 57 % 22 % 15 % — % — %

Medicare Advantage plans 24 % 30 % 35 % 40 % 18 % 25 %

BlueCross BlueShield plans 6 % 6 % 24 % 26 % 48 % 44 %

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

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

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

On June 29, 2020 and July 2, 2020, the Company issued and sold 2,000,000 and 300,000 shares, respectively, of common stock in a follow-on public offering, as discussed further in Note 10.

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

Diluted (loss) earnings per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or purchases under the 2019 Employee Stock Purchase Plan (“ESPP”), as well as from the possible conversion of the Company’s convertible preferred stock, convertible promissory notes and exercise of outstanding warrants.

The treasury stock and if-converted methods are used to calculate the potential dilutive effect of these common stock equivalents.

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

The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents.

However, potentially dilutive shares are excluded from the computation of diluted (loss) earnings per share when their effect is antidilutive.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

The following table shows the computation of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share data):

The following table shows the computation of basic and diluted (loss) earnings per share for the three months ended March 31, 2021 and 2020 (in thousands, except per share data):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Net (loss) income attributable to common stockholders $ ( 4,589 ) $ 5,543 $ ( 5,395 ) $ 936

Assumed conversion of convertible promissory notes (1) :

Extinguishment gain — ( 5,213 ) — ( 5,213 )

Interest expense and change in fair value of embedded derivative — 420 — 420

Numerator for diluted (loss) earnings per share $ ( 4,589 ) $ 750 $ ( 5,395 ) $ ( 3,857 )

Net (loss) income $ ( 4,280 ) $ 570

Weighted-average common shares outstanding, basic 24,912 17,372

Assumed conversion of convertible promissory notes (1)

Assumed exercise of common stock warrants — 27

Assumed exercise of stock options — 1,310

Assumed issuance of shares under the ESPP — 25

Weighted-average common shares outstanding, diluted 24,912 18,734

(Loss) earnings per share attributable to common stockholders:

(Loss) earnings per share:

Basic $ ( 0.17 ) $ 0.03

Diluted $ ( 0.17 ) $ 0.03

(1) For both the three and nine months ended September 30, 2019, these figures reflect 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.

Accordingly, the associated numerator adjustments for the nine months ended September 30, 2019 exclude activity from the first two quarters of 2019.

The July 2019 Note (as defined in Note 6), was excluded from the computation of diluted (loss) earnings per share prior to its conversion on July 29, 2019 in connection with the IPO, as disclosed below.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Due to the Company reporting a net loss attributable to common stockholders for the three and nine months ended September 30, 2020, all potentially dilutive securities are antidilutive and are excluded from the computations of diluted loss per share for such periods.

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

Due to reporting a net loss for the three months ended March 31, 2021, all potentially dilutive securities are antidilutive and are excluded from the computation of diluted loss per share for such period.

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted (loss) earnings per share for the three months ended March 31, 2021 and 2020 because to do so would be antidilutive (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Convertible preferred stock — 2,489 — 6,256

Convertible promissory note (1)

Stock options 2,767 139 2,732 1,778

Common stock warrants 35 — 35 30

Preferred stock warrants — 40 — 107

Stock options and restricted stock units (“RSUs”) 3,464 955

Employee stock purchase plan 76 14

Total 3,540 969

(1) Associated with the July 2019 Note.

Property and Equipment, Net

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Leasehold improvements $ 4,419 $ 1,388

Lab equipment 2,136 2,037

Computer equipment 1,809 1,305

Leasehold improvements 1,392 635

Furniture and fixtures 946 436

3 unchanged sentences

Property and equipment, net $ 7,780 $ 7,102

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Cost of sales $ 102 $ 66

2 unchanged sentences

Total $ 233 $ 91

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Other Accrued Liabilities

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

September 30, 2020 December 31, 2019

Provider relief funds $ 1,882 $ —

March 31, 2021 December 31, 2020

Accrued service fees $ 1,368 $ 1,891

Accrued interest 154 184

Deferred employer payroll tax liability 276 276

Employee stock purchase plan contributions 158 536

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Total $ 2,020 $ 3,055

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.

The entire amount of the outstanding principal amount plus accrued interest on the Q1 2019 Notes converted into 954,074 shares of common stock in connection with the IPO on July 29, 2019.

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

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

No hedge accounting treatment was applied.

The Company also determined the Q1 2019 Notes contained a beneficial conversion feature under ASC Subtopic 470-20, Debt with Conversion and Other Options, related to the optional conversion of the Q1 2019 Notes into Series F redeemable convertible preferred stock at maturity.

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

Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $ 245,000 for the three months ended September 30, 2019 and $ 1,216,000 for the nine months ended September 30, 2019 and were included in interest expense.

The conversion of the Q1 2019 Notes was considered an extinguishment for accounting purposes.

The Company recognized an extinguishment gain of $ 5,213,000 during the three and nine months ended September 30, 2019.

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

(Loss) Recognized in Net Income

Statement of Operations and Comprehensive (Loss) Income Location Three Months Ended

September 30, 2019 Nine Months Ended

September 30, 2019

Derivatives Not Classified as Hedging Instruments

Embedded derivative in convertible promissory notes Other expense, net $ ( 101 ) $ ( 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

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

outstanding principal amount plus accrued interest converted into 707,032 shares of common stock in connection with the 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 Company elected to account for the July 2019 Note under the fair value option in accordance with ASC Topic 825, Financial Instruments .

Under the fair value option, changes in fair value were recorded in the condensed statements of operations and comprehensive (loss) income each period as “other expense, net.” For the three and nine months ended September 30, 2019, the company recorded $ 2,077,000 of negative fair value adjustments through the settlement date in the statements of operations and comprehensive (loss) income.

Long-Term Debt

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

September 30, 2020 December 31, 2019

Term debt $ 23,354 $ 26,688

Unamortized discount and issuance costs ( 899 ) ( 1,566 )

Total long-term debt 22,455 25,122

Current portion of long-term debt ( 10,000 ) ( 5,833 )

Total long-term debt, less current portion $ 12,455 $ 19,289

The Company has a Loan and Security Agreement (the ‘‘2018 LSA’’) with Oxford Finance LLC (‘‘Oxford’’), as collateral agent, and Oxford and Silicon Valley Bank (‘‘SVB’’) as equal syndicated lenders (collectively, the ‘‘Lenders’’).

The 2018 LSA currently consists of a $ 25.0 million secured term loan credit facility (the ‘‘Term Loan’’).

The Company’s obligations under the 2018 LSA are secured by substantially all of its assets, excluding intellectual property and subject to certain other exceptions and limitations.

The Company has the right to prepay the Term Loan in whole or in part at any time, subject to a prepayment fee of 1.50 % prior to November 30, 2020 and 0.75 % thereafter.

Upon prepayment, the Company is also obligated to pay a non-refundable early termination fee of $ 497,000 .

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

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

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

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

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

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

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

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

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

As of September 30, 2020, the Company was in compliance with the covenant.

The Company’s liquidity ratio was 7.76 to 1.00 as of September 30, 2020.

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

Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the 2018 LSA.

The Second Amendment included a waiver, by the Lenders, of an event of default of the Company attributable to maintaining a balance in a certain third-party deposit account, beyond the maximum level permitted, without obtaining a control agreement for such deposit account in favor of the collateral agent, Oxford.

In addition to the waiver, the Second Amendment also provided a

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

modification to increase the maximum balance permitted for this deposit account.

The Company is currently in compliance with this provision of the 2018 LSA.

The Company’s ability to further amend the terms of the 2018 LSA is subject to the approval of Oxford and SVB.

Accordingly, should the Company seek to amend the 2018 LSA, there can be no assurance that an amendment would be available on terms acceptable to the Company or at all.

The Term Loan bears interest at a floating rate equal to the greater of (1) 8.55 % and (2) the 30-day U.S.

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

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

Interest on the Term Loan is payable monthly in arrears.

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

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

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

The Company is also obligated to make an additional final payment of 6.75 % of the aggregate original principal amount, or $ 1,687,500 , upon any prepayment or on the Term Loan Maturity Date.

The final payment amount is being amortized as additional interest expense using the effective interest method over the term of the debt.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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

As of September 30, 2020

The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 (in thousands):

As of March 31, 2021

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

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

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.

Stockholders’ Equity

Common Stock Offering

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.

Common Stock Warrants

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

Expiration date Number of shares Exercise price

July 12, 2026 209,243 $ 0.001

March 31, 2027 26,428 $ 7.10

November 30, 2028 8,809 $ 7.10

Total 244,480

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Commitments and Contingencies

From time to time, we may be involved in legal proceedings arising in the ordinary course of business.

We believe there is no threatened litigation or litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.

Stock Incentive Plans and Stock-Based Compensation

Stock Incentive Plans

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

Effective January 1, 2021, an additional 1,240,624 shares became available under our 2019 Equity Incentive Plan (the “2019 Plan”) pursuant to an automatic annual increase.

As of March 31, 2021, 1,615,096 shares remained available for grant under the 2019 Plan.

Stock Options

Stock option activity under our stock plans for the three months ended March 31, 2021 is set forth below:

Weighted-Average

Available for

Stock Options

1 unchanged sentence

Balance as of December 31, 2020 3,369,502 $ 28.11

Additional options authorized 856,545 — —

Granted 53,908 $ 75.44

Exercised ( 170,484 ) $ 5.67

Forfeited/Canceled 84,322 ( 84,322 ) $ 27.02

Balance as of September 30, 2020 1,226,874 2,798,699 $ 19.50 8.57 $ 89,406

Exercisable at September 30, 2020 (1)

Forfeited/Cancelled ( 74,584 ) $ 24.69

Balance as of March 31, 2021 3,178,342 $ 30.20 8.56 $ 122,017

Exercisable at March 31, 2021 (1)

836,184 $ 13.48 7.54 $ 45,970

(1) Vested and exercisable options.

Additionally, outstanding unvested options to purchase an aggregate of 82,624 shares of common stock with a weighted-average exercise price of $ 2.39 per share may be exercised prior to vesting as of September 30, 2020 under early-exercise provisions.

(1) In addition, 53,676 unvested options outstanding at March 31, 2021 may be exercised prior to vesting under an early exercise provision in the stock option award agreement.

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 September 30, 2020.

No such exercises have occurred to date.

Restricted Stock Units

The following table summarizes the Company’s RSU activity for the three months ended March 31, 2021:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

Balance as of December 31, 2020

161,477 $ 59.16

Granted 15,266 75.33

Forfeited/Cancelled ( 2,624 ) 65.10

Balance as of March 31, 2021

174,119 $ 60.49

Employee Stock Purchase Plan

The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 248,124 shares becoming available under the ESPP effective January 1, 2021.

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 September 30, 2020, 501,790 shares remained available for issuance under the ESPP.

During the three months ended March 31, 2021, we issued 70,711 of common stock pursuant to scheduled purchases under the ESPP.

As of March 31, 2021, 679,203 shares remained available for issuance under the ESPP.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Determining Fair Value - Summary of Assumptions

The Company uses the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or any other measurement date.

We use the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or any other measurement date.

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

Nine Months Ended

September 30,

Three Months Ended

Average expected term (years) 6 6

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The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP:

Nine Months Ended

September 30,

Average expected term (years) 1.2 Not applicable

Three Months Ended

Average expected term (years) 1.3 1.2

Expected stock price volatility

68.43 % - 86.50 %

Not applicable

56.80 % - 63.65 %

Risk-free interest rate 0.07 % - 0.13 %

Not applicable

Dividend yield — % Not applicable

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

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

Prior to the IPO, our common stock was not publicly traded, therefore the Company estimated the fair value of its common stock.

Following the IPO, the fair value of the Company’s common stock is the closing selling price per share of its common stock as reported on the Nasdaq Global Market on the date of grant or other relevant determination date.

0.84 % - 0.95 %

Dividend yield — % — %

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

The fair value of our common stock is the closing selling price per share of as reported on the Nasdaq Global Market on the date of grant or other relevant determination date.

We use the closing price of our common stock on the date of grant to determine the fair value of RSUs.

Stock-Based Compensation Expense

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

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Cost of sales $ 510 $ 206

2 unchanged sentences

Total stock-based compensation expense $ 4,913 $ 1,577

For the nine months ended September 30, 2020 and 2019, the weighted-average grant date fair value of options granted was $ 22.07 and $ 3.77 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 17.43 and nil per share, respectively.

As of September 30, 2020, the total unrecognized compensation cost related to stock options and the ESPP was $ 25,118,000 and $ 965,000 , respectively, which is expected to be recognized on a straight-line basis over a weighted-average period of 2.9 years and 1.2 years, respectively.

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

For the three months ended March 31, 2021 and 2020, the weighted-average grant date fair value of options granted was $ 44.83 and $ 17.32 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 39.26 and $ 12.70 per share, respectively.

As of March 31, 2021, the total unrecognized compensation cost related to outstanding awards was $ 55,441,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3.3 years.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Subsequent Event

On April 26, 2021, we signed a definitive agreement to acquire all of the equity of Myriad myPath, LLC (“Myriad myPath Laboratory”) from Myriad Genetics for $ 32.5 million.

Myriad myPath Laboratory is a Clinical Laboratory Improvement Amendments of 1988, or CLIA-certified laboratory in Salt Lake City, Utah, where the myPath Melanoma 23-gene expression profile test was developed and is currently offered.

We will finance the acquisition with cash and cash equivalents on hand.

The transaction is expected to close in late May 2021, subject to customary conditions.

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

What changed 10-Q

Item 1. Financial Statements