CASTLE BIOSCIENCES INC 10-Q

Item 1. Financial Statements. CASTLE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS (in thousands, except share and per share data) March 31, 2021 December 31, 2020 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 406,981 $ 409,852 Accounts receivable, net 14,292 12,759 Inventory 2,310 2,217 Prepaid expenses and other current assets 3,087 4,766 Total current assets 426,670 429,594 Long-term accounts receivable, net 1,121 1,096 Property and equipment, net 7,780 7,102 Other assets – long-term 1,761 1,536 Total assets $ 437,332 $ 439,328 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 2,172 $ 2,098 Accrued compensation 5,208 9,108 Medicare advance payment 8,178 6,615 Other accrued liabilities 2,020 3,055 Total current liabilities 17,578 20,876 Noncurrent portion of Medicare advance payment 172 1,735 Deferred rent and other liabilities 995 1,026 Total liabilities 18,745 23,637 Commitments and Contingencies (Note 8) Stockholders’ Equity Preferred stock, $ 0.001 par value; 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 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. 25 25 Additional paid-in capital 485,338 478,162 Accumulated deficit ( 66,776 ) ( 62,496 ) Total stockholders’ equity 418,587 415,691 Total liabilities and stockholders’ equity $ 437,332 $ 439,328 The accompanying notes are an integral part of these unaudited condensed financial statements. 1 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED) (in thousands, except per share data) Three Months Ended March 31, 2021 2020 NET REVENUES $ 22,813 $ 17,418 COST OF SALES 3,028 2,391 Gross margin 19,785 15,027 OPERATING EXPENSES Research and development 5,908 2,913 Selling, general and administrative 18,161 11,078 Total operating expenses 24,069 13,991 Operating (loss) income ( 4,284 ) 1,036 Interest income 4 298 Interest expense — ( 764 ) (Loss) income before income taxes ( 4,280 ) 570 Income tax expense — — Net (loss) income and comprehensive (loss) income $ ( 4,280 ) $ 570 (Loss) earnings per share: Basic $ ( 0.17 ) $ 0.03 Diluted $ ( 0.17 ) $ 0.03 Weighted-average shares outstanding: Basic 24,912 17,372 Diluted 24,912 18,734 The accompanying notes are an integral part of these unaudited condensed financial statements. 2 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share data) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity 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 Exercise of common stock options — — 32,602 — 71 — 71 Issuance of common stock under the employee stock purchase plan — — 39,987 — 603 — 603 Net loss — — — — — 570 570 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 Stock compensation expense — — — — 4,913 — 4,913 Exercise of common stock options — — 171,315 — 991 — 991 Issuance of common stock under the employee stock purchase plan — — 70,711 — 1,233 — 1,233 Public offering of common stock, adjustment to offering costs — — — — 39 — 39 Net loss — — — — — ( 4,280 ) ( 4,280 ) BALANCE, MARCH 31, 2021 — $ — 25,054,513 $ 25 $ 485,338 $ ( 66,776 ) $ 418,587 The accompanying notes are an integral part of these unaudited condensed financial statements. 3 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended March 31, 2021 2020 OPERATING ACTIVITIES Net (loss) income $ ( 4,280 ) $ 570 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 debt discounts and issuance costs — 224 Other 33 — Change in operating assets and liabilities: Accounts receivable ( 1,558 ) 161 Prepaid expenses and other current assets 1,679 ( 129 ) Inventory ( 93 ) 19 Other assets ( 225 ) ( 77 ) Accounts payable ( 40 ) 56 Accrued compensation ( 3,899 ) ( 2,645 ) Other accrued liabilities ( 330 ) ( 96 ) Deferred rent and other liabilities ( 64 ) ( 2 ) Net cash used in operating activities ( 3,631 ) ( 251 ) INVESTING ACTIVITIES Purchases of property and equipment ( 750 ) ( 500 ) Net cash used in investing activities ( 750 ) ( 500 ) FINANCING ACTIVITIES Payment of common stock offering costs ( 336 ) — Proceeds from exercise of common stock options 991 71 Proceeds from contributions to the employee stock purchase plan 855 488 Net cash provided by financing activities 1,510 559 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 2,871 ) ( 192 ) Beginning of period 409,852 98,845 End of period $ 406,981 $ 98,653 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 220 $ 270 The accompanying notes are an integral part of these unaudited condensed financial statements. 4 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Description of Business Castle Biosciences, Inc. (the ‘‘Company’’, “we”, “us”, or “our”) was incorporated in the state of Delaware on September 12, 2007. We are a commercial-stage 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 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. 2. Summary of Significant Accounting Policies Basis of Presentation Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). We have no subsidiaries and all operations are conducted by us. Unaudited Interim Financial Information 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 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 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. 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. 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. 5 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Cash and Cash Equivalents including Concentrations of Credit Risk Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Our cash equivalents consist of money market funds, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”), that are primarily invested in short-term U.S. government obligations. Cash deposits at financial institutions may exceed the amount of insurance provided by the FDIC. Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the institutions in which deposits are held. We have not experienced any losses on our cash or cash equivalents. Revenue Recognition Revenue is recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 606, Revenue from Contracts with Customers (‘‘ASC 606’’). In accordance with ASC 606, we follow a five-step process to recognize revenues: (1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenues when the performance obligations are satisfied. We have determined that we have a contract with the patient when the treating clinician orders the test. Our contracts generally contain a single performance obligation, which is the delivery of the test report, and we satisfy our performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point we can bill for the report. The amount of revenue recognized reflects the amount of consideration to which we expect to be entitled, or the transaction price, and considers the effects of variable consideration. See Note 3 for further details. Accounts Receivable and Allowance for Doubtful Accounts 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. 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, 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. Accrued Compensation We accrue for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by our board of directors, compensation levels of eligible individuals, and target bonus percentage levels. The board of directors reviews and evaluates the performance against these objectives and ultimately determines what discretionary payments are made. We also accrue for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets. As of March 31, 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. 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. Our comprehensive (loss) income was the same as our reported net (loss) income for all periods presented. 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, 6 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. For companies that are not emerging growth companies (‘‘EGCs’’), ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019. However, in November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019-10”), which included a one-year deferral of the effective date of ASU 2016-02 for certain entities. In June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities , which further defers the effective date for certain entities. As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. 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. 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. 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. 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. 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. 3. Revenue 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. 7 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 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, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions. Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606. The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties. Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. Variable consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor. 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. 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 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. 8 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) DecisionDx-Melanoma Claims Consolidation In June 2017, we submitted to the Office of Medicare Hearings and Appeals (‘‘OMHA’’) a formal request to participate in a program that OMHA developed with the intent of providing appellants a means to have large volumes of claim disputes adjudicated at an accelerated rate. The program consolidates outstanding claims at the ALJ level and uses a statistical-sampling approach where five ALJs will determine reimbursement results for a sample of claims which are then extrapolated to the universe of claims. The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017. Hearings were held in April 2019 with a supplemental hearing in May 2019. On March 12, 2020, OMHA issued a decision denying payment on all claims in the consolidation. We have filed an appeal to the decision, although no ruling on such appeal has been issued to date. In accordance with ASC 606 and consistent with prior periods, we have not recognized (fully constrained the variable consideration) any revenues attributable to these claims in our 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 (current) 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 % 4. (Loss) Earnings Per Share 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. 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”). 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. 9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 March 31, 2021 2020 Numerator: Net (loss) income $ ( 4,280 ) $ 570 Denominator: Weighted-average common shares outstanding, basic 24,912 17,372 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: Basic $ ( 0.17 ) $ 0.03 Diluted $ ( 0.17 ) $ 0.03 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 March 31, 2021 2020 Stock options and restricted stock units (“RSUs”) 3,464 955 Employee stock purchase plan 76 14 Total 3,540 969 5. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): March 31, 2021 December 31, 2020 Leasehold improvements $ 4,419 $ 1,388 Lab equipment 2,136 2,037 Computer equipment 1,809 1,305 Furniture and fixtures 946 436 Construction in progress 357 3,590 Total 9,667 8,756 Less accumulated depreciation ( 1,887 ) ( 1,654 ) Property and equipment, net $ 7,780 $ 7,102 10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Depreciation expense was recorded in the statements of operations and comprehensive (loss) income as follows (in thousands): Three Months Ended March 31, 2021 2020 Cost of sales $ 102 $ 66 Research and development 44 2 Selling, general and administrative 87 23 Total $ 233 $ 91 6. Other Accrued Liabilities Other accrued liabilities consisted of the following (in thousands) : March 31, 2021 December 31, 2020 Accrued service fees $ 1,368 $ 1,891 Deferred employer payroll tax liability 276 276 Employee stock purchase plan contributions 158 536 Accrued royalties 97 151 Accrued state income taxes 62 62 Other 59 139 Total $ 2,020 $ 3,055 7. Fair Value Measurements The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 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 (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 406,422 $ — $ — $ 406,422 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 (1) Classified as “Cash and cash equivalents” in the condensed balance sheets. 11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 8. 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. 9. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans 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 Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of December 31, 2020 3,369,502 $ 28.11 Granted 53,908 $ 75.44 Exercised ( 170,484 ) $ 5.67 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) 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 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 Vested — — 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. 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. 12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Determining Fair Value - Summary of Assumptions We use the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or any other measurement date. The following table sets forth the assumptions used to determine the fair value of stock options: Three Months Ended March 31, 2021 2020 Average expected term (years) 6 6 Expected stock price volatility 59.87 % - 67.68 % 59.57 % - 60.58 % Risk-free interest rate 0.43 % - 1.71 % 0.80 % - 1.66 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Three Months Ended March 31, 2021 2020 Average expected term (years) 1.3 1.2 Expected stock price volatility 68.43 % - 86.50 % 56.80 % - 63.65 % Risk-free interest rate 0.07 % - 0.13 % 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, RSUs and the ESPP is included in the statements of operations and comprehensive (loss) income as follows (in thousands): Three Months Ended March 31, 2021 2020 Cost of sales $ 510 $ 206 Research and development 1,058 234 Selling, general and administrative 3,345 1,137 Total stock-based compensation expense $ 4,913 $ 1,577 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. 13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 10. 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. 14 Table of Contents