What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-02-28 compared with 2021-03-11 · 638 added, 653 removed, 454 unchanged (74% of the section changed)

7 unchanged sentences

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f).

Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

As of December 31, 2021, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework) .

Based on this assessment, our management concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on those criteria.

Under guidelines established by the SEC, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company.

Accordingly, our assessment of internal controls excluded our acquisition of Cernostics, completed on December 3, 2021.

See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information on our acquisition of Cernostics.

Operations from this acquisition represented approximately 13% of our total assets and 0% of our total revenue as of and for the year ended December 31, 2021.

Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2021, as stated in its report contained in Item 15 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

1 unchanged sentence

Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2022 Annual Meeting of Stockholders (“the Proxy Statement”) pursuant to Regulation 14A of the Exchange Act, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference.

Directors, Executive Officers and Corporate Governance.

The information required by this item and not set forth below will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2021 Annual Meeting of Stockholders, or the Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2020, and is incorporated herein by reference.

We have adopted a written Code of Business Conduct and Ethics, or Ethics Code, that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

The information required by this item is to be included in the Proxy Statement as follows:

• The information relating to our executive officers is to be included in the section entitled “Executive Officers,”

• The information relating to our directors and nominees for director is to be included in the section entitled “Proposal 1:

Election of Directors,”

• The information relating to our audit committee and audit committee financial expert is to be included in the section entitled “Information Regarding the Board of Directors and Corporate Governance,” and

• If required, the information regarding compliance with Section 16(a) of the Exchange Act is to be included in the section entitled “Delinquent Section 16(a) Reports.”

Such information will be included in the Proxy Statement and is incorporated herein by reference.

We have adopted a written Code of Business Conduct and Ethics (“Ethics Code”) that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

The Ethics Code is available on our website at www.CastleBiosciences.com.

1 unchanged sentence

Executive Compensation.

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

The information required by this item is to be included in our Proxy Statement under the section entitled “Executive Compensation” and is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

The information required by this item with respect to equity compensation plans is to be included in our Proxy Statement under the section entitled “Equity Compensation Plan Information” and the information required by this item with respect to security ownership of certain beneficial owners and management is to be included in our Proxy Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and in each case is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

The information required by this item is to be included in our Proxy Statement under the sections entitled “Transactions with Related Persons and Indemnifications—Related Person Transactions Policy and Procedures” and is incorporated herein by reference.

Principal Accountant Fees and Services.

The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.

Exhibits, Financial Statement Schedules.

Our independent registered public accounting firm is KPMG LLP , San Diego, CA , Audit Firm ID:

The information required by this item is to be included in our Proxy Statement under the section entitled “Proposal 2:

Ratification of Selection of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

Exhibit and Financial Statement Schedules.

(a)(1) Financial Statements.

The financial statements and supplementary data required by this item are included after the Signature page of this Annual Report on Form 10-K beginning on page F-1 .

The consolidated financial statements and supplementary data required by this item are included after the Signature page of this Annual Report on Form 10-K beginning on page F-1 .

(a)(2) Financial Statement Schedules.

All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes thereto.

All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto.

(a)(3) Exhibits.

The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report.

The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report on Form 10-K.

Exhibit Index

Exhibit Number Description of document

2.1†^ Agreement and Plan of Merger, dated October 18, 2021, by and among the Company, Space Merger Sub, Inc., Cernostics, Inc., and Shareholder Representative Services LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, as amended, originally filed with the SEC on December 6, 2021.

3.1 Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019.

19 unchanged sentences

2019 Equity Incentive Plan, incorporated by reference to Exhibit 99.3 of the Registrant’s Registration Statement on Form S- 8 (File No.

333-232369), as amended, originally filed with the SEC on June 26, 2019.

333- 232884 ), originally filed with the SEC on Ju ly 2 9 , 2019.

10.7+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-1 (File No.

1 unchanged sentence

10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020.

Exhibit Number Description of document

10.9+ Castle Biosciences, Inc.

1 unchanged sentence

333-232369), as amended, originally filed with the SEC on June 26, 2019.

Exhibit Number Description of document

10.10+ Form of Director Agreement by and between the Registrant and certain of its directors, incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (File No.

8 unchanged sentences

333-232369), as amended, originally filed with the SEC on June 26, 2019.

10.15+ Employment Separation Agreement dated December 29, 2021, by and between Castle Biosciences, Inc.

and Bernhard E.

Spiess, incorporate d by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 5, 2022.

10.16+# Master Services Agreement dated December 29, 2021, by and between Castle Biosciences, Inc.

and Bernhard E.

Spiess, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 5, 2022.

10.17+ Executive Employment Agreement, dated September 15, 2008, as amended, by and between the Registrant and Kristen Oelschlager, incorporated by reference to Exhibit 10.

2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021.

10.18+ Executive Employment Agreement, dated October 1, 2008, as amended, by and between the Registrant and Tobin Juvenal, incorporated by reference to Exhibit 10.

3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021.

10.19+ Consulting Agreement, dated May 7, 2021, by and among the Registrant and Joseph C.

Cook III, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9 , 2021.

10.20+ Separation Agreement dated May 29, 2020, by and between the Registrant and Federico A.

8 unchanged sentences

10.26 Second Amendment to Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019.

10.27 First Amendment to Standard Office Lease, dated February 16, 2021, by and between the Registrant and Alturas Siete III, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021.

Exhibit Number Description of document

10.28 Second Amendment to Standard Office Lease, dated November 29, 2021, by and between the Company and Alturas Siete, II, LLC , incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 3, 2021.

10.29 Third Amendment to Standard Office Lease, dated November 29, 2021, by and between the Company and Alturas Siete, I, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 3, 2021.

10.30 Commercial Lease, dated December 17, 2019, by and between the Registrant and Tannos Land Holding III, LLC, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019.

10.23* First Amendment to Commercial Lease, dated November 13, 2020, by and between the Registrant and Tannos Land Holdings III, LLC.

10.31 First Amendment to Commercial Lease, dated November 13, 2020, by and between the Registrant and Tannos Land Holdings III, LLC , incorporated by reference to Exhibit 10.23 of the Registrant's Annual Report on Form 10-K filed with the SEC on March 11, 2021.

10.32# Exclusive License Agreement, dated as of November 14, 2009, by and between the Registrant and The Washington University, incorporated by reference to Exhibit 10.17 of the Registrant’s Registration Statement on Form S-1 (File No.

333-232369), as amended, originally filed with the SEC on June 26, 2019.

21.1* Subsidiaries of the Registrant.

23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm.

1 unchanged sentence

31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.

32.1** Certification of Principa l Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C.

Section 1350.

32.2** Certification of Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C.

32.1** Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C.

Section 1350.

2 unchanged sentences

101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase.

Exhibit Number Description of document

101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase.

7 unchanged sentences

# Certain portions of this exhibit (indicated by “[***]”) have been omitted as we have determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to us if publicly disclosed.

† Schedules and exhibits to the Agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K.

A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.

^ Pursuant to Item 601(b)(10) of Regulation S-K, certain portions of this exhibit have been omitted (indicated by “[***]”) because the Company has determined that the information is not material and is the type that the Company treats as private or confidential.

Form 10-K Summary.

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CASTLE BIOSCIENCES, INC.

March 11, 2021 By:

February 28, 2022 By:

President and Chief Executive Officer

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SIGNATURE TITLE DATE

Maetzold President, Chief Executive Officer and Director March 11, 2021

Maetzold President, Chief Executive Officer and Director February 28, 2022

Maetzold) ( Principal Executive Officer )

/s/ Frank Stokes Chief Financial Officer

March 11, 2021

February 28, 2022

(Frank Stokes) ( Principal Financial and Accounting Officer )

1 unchanged sentence

Bradbury Chairman of the Board of Directors

March 11, 2021

Aspinall Member of the Board of Directors March 11, 2021

Bradley Cole Member of the Board of Directors March 11, 2021

February 28, 2022

Aspinall Member of the Board of Directors February 28, 2022

/s/ Kimberlee S.

Caple Member of the Board of Directors February 28, 2022

(Kimberlee S.

Bradley Cole Member of the Board of Directors February 28, 2022

Bradley Cole)

/s/ Joseph C.

Cook III Member of the Board of Directors March 11, 2021

Harrison Member of the Board of Directors March 11, 2021

/s/ David Kabakoff, Ph.D.

Member of the Board of Directors March 11, 2021

(David Kabakoff, Ph.D.)

INDEX TO FINANCIAL STATEMENTS

/s/ Ellen Goldberg Member of the Board of Directors February 28, 2022

(Ellen Goldberg)

Harrison Member of the Board of Directors February 28, 2022

/s/ Tiffany P.

Olson Member of the Board of Directors February 28, 2022

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report s of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

Notes to the Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2020 and 2019

Statements of Operations and Comprehensive (Loss) Income for the Years Ended December 31, 2020 and 2019

Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020 and 2019

Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

Notes to Financial Statements

To the Stockholders and Board of Directors

Castle Biosciences, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Castle Biosciences, Inc.

and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and December 31, 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2022 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired Cernostics, Inc.

during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Cernostics, Inc.’s internal control over financial reporting associated with 13% of total assets and 0% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021.

Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Cernostics, Inc.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

San Diego, California

February 28, 2022

Report of Independent Registered Public Accounting Firm

1 unchanged sentence

Castle Biosciences, Inc.:

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Castle Biosciences, Inc.

(the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive (loss) income, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with U.S.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Castle Biosciences, Inc.

and subsidiaries (the Company) as of December 31, 2021 and December 31, 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2021 due to the adoption of ASC 842, Leases .

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Measurement of Test Revenue

As discussed in Notes 2 and 3 of the consolidated financial statements, test revenue is recognized when the performance obligation is satisfied, upon delivery of the test report.

The amount of revenue recognized reflects the amount of consideration to which the Company expects to be entitled and considers the effects of variable consideration.

The measurement of test revenue is determined by contractually established rates as well as 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.

The Company reported net revenues of $94,085 thousand for the year ended December 31, 2021, a portion of which related to test revenue.

We identified the evaluation of the measurement of test revenue as a critical audit matter.

Evaluating the measurement of test revenue, specifically the estimation of the amount of test revenue expected to be collectible related to commercial payors and certain others, required especially complex and subjective auditor judgment.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the estimation of the expected collectible test revenue related to commercial payors and certain others.

This included controls related to management’s review of the assumptions and inputs used in the determination of test revenue expected to be collectible from commercial payors and certain others.

For a selection of tests, we evaluated certain historical data inputs that are used in management’s model to estimate test revenue expected to be collectible by comparing the data from the model to physician test requisition forms, proof of delivery, and cash collection activity.

These data inputs included collection activity, amounts of historical claims, insurance payor categories, test dates, test types, claim aging categories, and revenue recognition dates.

In addition, we inquired of the individuals who are responsible for monitoring and tracking the status of anticipated collections to understand the progress of these activities and any impact to management’s estimates.

We have served as the Company’s auditor since 2018.

San Diego, California

March 11, 2021

February 28, 2022

CASTLE BIOSCIENCES, INC.

BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

7 unchanged sentences

Property and equipment, net 9,501 7,102

Operating lease assets 7,383 —

Intangible assets, net 88,922 —

Other assets – long-term 1,715 1,536

5 unchanged sentences

Medicare advance payment — 6,615

Other accrued liabilities 3,055 1,812

Current portion of long-term debt — 5,833

Operating lease liabilities 1,179 —

Other accrued and current liabilities 5,678 3,055

Total current liabilities 24,886 20,876

Long-term debt — 19,289

Contingent consideration 18,287 —

Noncurrent operating lease liabilities 6,900 —

Noncurrent portion of Medicare advance payment — 1,735

Deferred rent and other liabilities 1,026 55

Deferred tax liability 635 —

Other liabilities 124 1,026

Total liabilities 50,832 23,637

11 unchanged sentences

Total liabilities and stockholders’ equity $ 462,572 $ 439,328

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

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

CASTLE BIOSCIENCES, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

1 unchanged sentence

NET REVENUES $ 94,085 $ 62,649

COST OF SALES 9,685 7,310

Gross margin 52,964 44,555

OPERATING EXPENSES AND OTHER OPERATING INCOME

Cost of sales (exclusive of amortization of acquired intangible assets) 15,822 9,685

Research and development 29,646 13,256

Selling, general and administrative 86,738 48,132

Amortization of acquired intangible assets 1,958 —

Other operating income — ( 1,882 )

Total operating expenses, net 134,164 69,191

Operating (loss) income ( 6,542 ) 7,328

Operating loss ( 40,079 ) ( 6,542 )

Interest income 68 373

Interest expense ( 1 ) ( 2,634 )

(Loss) gain on extinguishments of debt ( 1,397 ) 5,213

Other expense, net — ( 2,933 )

(Loss) income before income taxes ( 10,200 ) 5,349

Income tax expense 84 72

Net (loss) income and comprehensive (loss) income ( 10,284 ) 5,277

Convertible preferred stock cumulative dividends — 2,156

Accretion of redeemable convertible preferred stock to redemption value — 130

Net (loss) income and comprehensive (loss) income attributable to common stockholders $ ( 10,284 ) $ 2,991

(Loss) earnings per share attributable to common stockholders:

Loss on extinguishment of debt — ( 1,397 )

Loss before income taxes ( 40,012 ) ( 10,200 )

Income tax (benefit) expense ( 8,720 ) 84

Net loss and comprehensive loss $ ( 31,292 ) $ ( 10,284 )

Loss per share attributable to common stockholders:

Basic $ ( 1.24 ) $ ( 0.54 )

3 unchanged sentences

Diluted 25,137 18,929

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

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

CASTLE BIOSCIENCES, INC.

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

CONSOLIDATED 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

Shares Amount Shares Amount

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

2 unchanged sentences

Exercise of common stock warrants — — 241,052 — — — —

Accretion of redeemable convertible preferred stock to redemption value:

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

Series E-3 — — — 7 — — — — ( 7 ) — ( 7 )

Series F — — — 121 — — — — ( 121 ) — ( 121 )

Exercise of redeemable convertible preferred stock warrants:

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

Series F — — 1,054 10 — — — — — — —

Recognition of beneficial conversion feature on convertible promissory notes — — — — — — — — 8,378 — 8,378

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

Initial public offering of common stock, net of underwriting discounts, commissions and offering costs — — — — — — 4,600,000 5 65,926 — 65,931

Conversion of convertible promissory notes — — — — — — 1,661,106 1 26,576 — 26,577

Conversion of convertible preferred stock ( 503,056 ) ( 1,501 ) ( 9,470,828 ) ( 45,242 ) — — 8,181,992 8 46,735 — 46,743

Reclassification of preferred stock warrant liability and net exercise of certain warrants in connection with initial public offering — — — — — — 27,207 — 1,744 — 1,744

Net income — — — — — — — — — 5,277 5,277

Public offerings of common stock, net of underwriting discounts, commissions and offering costs — — 6,900,000 7 329,657 — 329,664

Issuance of common stock under the employee stock purchase plan — — 81,454 — 1,296 — 1,296

Net loss — — — — — ( 10,284 ) ( 10,284 )

BALANCE, DECEMBER 31, 2020 — $ — 24,812,487 $ 25 $ 478,162 $ ( 62,496 ) $ 415,691

Adoption of ASU No.

2016-02 — — — — — 21 21

Stock-based compensation expense — — — — 21,740 — 21,740

Exercise of common stock options — — 416,037 — 4,234 — 4,234

Exercise of common stock warrants — — — — — — 241,052 — — — —

CASTLE BIOSCIENCES, INC.

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

Public offerings of common stock, net of underwriting discounts, commissions and offering costs — — — — — — 6,900,000 7 329,657 — 329,664

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 39,548 — ( 781 ) — ( 781 )

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

Issuance of common stock under the employee stock purchase plan — — 110,448 — 2,088 — 2,088

1 unchanged sentence

BALANCE, DECEMBER 31, 2021 — $ — 25,378,520 $ 25 $ 505,482 $ ( 93,767 ) $ 411,740

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

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

CASTLE BIOSCIENCES, INC.

STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

1 unchanged sentence

OPERATING ACTIVITIES

Net (loss) income $ ( 10,284 ) $ 5,277

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

Depreciation 472 354

Net loss $ ( 31,292 ) $ ( 10,284 )

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

Depreciation and amortization 3,407 472

Stock-based compensation expense 21,740 8,309

Amortization of intangibles — 4

Amortization of debt discounts and issuance costs — 839

Other non-cash interest — 442

Loss (gain) on extinguishments of debt 1,397 ( 5,213 )

Change in fair value of preferred stock warrant liability — 619

Change in fair value of embedded derivative — 237

Change in fair value of convertible promissory note accounted for under the fair value option — 2,077

Deferred income taxes ( 8,736 ) —

Loss on extinguishment of debt — 1,397

Other — ( 16 )

3 unchanged sentences

Inventory 327 ( 980 )

Operating lease assets 931 —

Other assets ( 180 ) ( 1,401 )

Accounts payable ( 182 ) 169

Operating lease liabilities ( 852 ) —

Accrued compensation 6,208 3,329

1 unchanged sentence

Other accrued liabilities 2,286 561

Deferred rent and other liabilities 272 12

Net cash provided by operating activities 9,865 7,015

Other liabilities ( 276 ) 272

Net cash (used in) provided by operating activities ( 18,983 ) 9,865

INVESTING ACTIVITIES

Purchases of property and equipment ( 3,483 ) ( 4,751 )

Asset acquisitions, net of cash and cash equivalents acquired ( 63,184 ) —

Proceeds from sale of property and equipment 10 3

2 unchanged sentences

Proceeds from public offerings of common stock, net of underwriting discounts, commissions and offering costs — 330,041

Proceeds from exercise of preferred stock warrants — 49

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

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

Payment of common stock offering costs ( 336 ) —

Repayment of term debt — ( 27,359 )

Repayments on line of credit — ( 1,791 )

Proceeds from exercise of common stock options 4,234 1,593

Payment of employees’ taxes on vested restricted stock units ( 781 ) —

Proceeds from contributions to the employee stock purchase plan 2,312 1,615

Repayment of principal portion of finance lease liabilities ( 8 ) —

Net cash provided by financing activities 5,421 305,890

CASTLE BIOSCIENCES, INC.

STATEMENTS OF CASH FLOWS (Continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

Years Ended December 31,

Proceeds from contributions to the employee stock purchase plan 1,615 218

Net cash provided by financing activities 305,890 88,288

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 80,219 ) 311,007

1 unchanged sentence

End of year $ 329,633 $ 409,852

SUPPLEMENTAL DISCLOSURE OF CASH PAID (REFUNDED) FOR:

SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:

Interest $ 1 $ 1,978

3 unchanged sentences

Property and equipment acquired with tenant improvement allowance $ 54 $ 714

Asset acquisition, receivable for purchase price adjustment $ 519 $ —

Asset acquisition, liability for contingent consideration $ 18,287 $ —

Common stock offering costs incurred but not paid $ — $ 377

Issuance of common stock upon conversion of convertible preferred stock $ — $ 46,743

Conversion of preferred stock warrants to common stock warrants $ — $ 1,744

Issuance of common stock upon conversion of convertible promissory notes $ — $ 26,577

Cashless exercise of common stock warrants $ — $ 250

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Organization and Description of Business

Castle Biosciences, Inc.

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

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

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

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

We are a commercial-stage diagnostics company focused on providing physicians and their patients with personalized, clinically actionable information to clinicians and their patients to inform treatment decisions and improve health outcomes.

We are based in Friendswood, Texas (a suburb of Houston, Texas) and laboratory operations are conducted at our facilities located in Phoenix, Arizona and in Pittsburgh, Pennsylvania.

Impact of COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China.

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

Since then, COVID-19 has caused significant disruptions and adverse economic impacts across multiple countries, including the United States.

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

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

During the second and fourth quarters of 2020, the Company experienced year-over-year declines in test report volume, which it believes is linked to delays and/or cancellations in patient visits in response to COVID-19, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma.

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

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

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

The Company intends to fund planned operations for the next 12 months using a portion of its cash and cash equivalents on hand, which totaled $ 409.9 million at December 31, 2020, and collections from test report sales.

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 in certain periods, 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, consolidated results of operations, consolidated financial condition and consolidated 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 consolidated financial statements include the accounts of Castle Biosciences, Inc.

and our wholly owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S.

All intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain prior year amounts in our consolidated statements of operations and comprehensive loss have been reclassified to conform to the current year presentation.

Specifically, we no longer present gross margin on our statements of operations and comprehensive loss and therefore the cost of sales line is now presented within the operating expenses section.

This reclassification had no impact on operating loss, loss before income taxes, net loss, comprehensive loss or loss per share.

Use of Estimates

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax exposure and the realization of deferred tax assets, the useful lives and recoverability of property and equipment, and contingent liabilities.

The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events.

The preparation of consolidated 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 consolidated 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 long-lived assets, the valuation of acquired intangible assets, the valuation of contingent consideration and other 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.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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.

Operating Segments

2 unchanged sentences

All revenues are attributable to U.S.-based operations and all assets are held in the United States.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED 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 cutaneous squamous cell carcinoma, DecisionDx®-SCC in August 2020 and launched a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma in November 2020.

Information on the disaggregation of revenues by the Company’s significant third-party payors is included under Payor Concentration below.

The Company has determined that it has a contract with the patient when the treating clinician orders the test.

The Company’s contracts generally contain a single performance obligation, which is the delivery of the test report, and the Company satisfies its performance obligation at a point in time upon the delivery of the test report to the treating clinician, at which point the Company can bill for the report.

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

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

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

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

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

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

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

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

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

Medicare claims that were either submitted to Medicare prior to the LCD coverage commencement date or are not covered by the terms of the LCD but meet the definition of being medically reasonable and necessary pursuant to the controlling Section 1862(a)(1)(A) of the Social Security Act are generally appealed and may ultimately be paid at the first (termed ‘‘redetermination’’), second (termed ‘‘reconsideration’’) or third level of appeal (de novo hearing with an Administrative Law Judge (“ALJ”)).

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

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

under ASC 606.

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

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

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

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

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

Included in revenues for the years ended December 31, 2020 and 2019 were $ 176,000 and $ 2,493,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

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

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

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

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

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

Medicare Advance Payment

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

The Company has recorded the Advance Payment as a liability, consisting of both a current and noncurrent portion, on its balance sheet as of December 31, 2020.

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

Under the Continuing Appropriations Act, 2021 and Other Extensions Act, enacted on October 1, 2020, the recoupment of the Advance Payment will commence in April 2021.

For the first eleven months of recoupment, CMS will apply 25% of the Medicare payments otherwise owed to the Company against the balance of the Advance Payment.

After that eleven-month period, CMS will recoup at a rate of 50% of the Medicare payments otherwise owed to the Company for an additional six months.

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

The classification of Advance Payment between current and noncurrent liabilities is based on management’s estimated timing of recoupment.

As of December 31, 2020, no revenue has been recognized related to any portion of the Advance Payment.

DecisionDx-Melanoma Claims Consolidation

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

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

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

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

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

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

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

Payor Concentration

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

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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

Percentage of Revenues Percentage of

Accounts Receivable

Percentage of

Accounts Receivable

(non-current)

Year Ended December 31, As of December 31, As of December 31,

2020 2019 2020 2019 2020 2019

Medicare 58 % 49 % 15 % 7 % — % — %

Medicare Advantage plans 29 % 29 % 40 % 41 % 25 % 18 %

BlueCross BlueShield plans 6 % 6 % 26 % 25 % 44 % 46 %

Accounts Receivable and Allowance for Doubtful Accounts

The Company classifies accounts receivable balances that are expected to be paid more than one year from the balance sheet date as non-current assets.

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 Credit Losses

We classify accounts receivable balances that are expected to be paid more than one year from the consolidated balance sheet date as non-current assets.

The estimated timing of payment utilized as a basis for classification as non-current is determined by analyses of historical payor-specific payment experience, adjusted for known factors that are expected to change the timing of future payments.

The Company accrues an allowance for doubtful accounts against its accounts receivable when it is probable that an account is not collectible, based on write off history, credit risk of specific accounts, aging analysis and other information available on specific accounts.

The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral.

Accounts receivable are written off when all efforts to collect the balance have been exhausted.

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

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

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

The Company carries an inventory of test supplies in the Phoenix, Arizona laboratory.

The inventory is carried at the lower of weighted average cost and net realizable value and expensed through cost of sales as the supplies are used.

We accrue an allowance for credit losses against our accounts receivable based on management’s current estimate of amounts that will not be collected.

Management’s estimates are typically based on historical loss information adjusted for current conditions.

We generally do not perform evaluations of customers’ financial condition and generally do not require collateral.

Historically, our credit losses have not been significant.

The allowance for credit losses was zero as of December 31, 2021 and 2020.

We carry inventories of test supplies in our laboratory facilities.

The inventories are carried at the lower of weighted average cost and net realizable value and expensed through cost of sales as the supplies are used.

Property and Equipment

2 unchanged sentences

Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease.

The Company’s leasehold improvements primarily relate to its office and laboratory facilities in Phoenix, Arizona, and are generally being amortized through the end of the lease terms of July 2027 and March 2028.

Our leasehold improvements primarily relate to our office and laboratory facilities in Friendswood, Texas and Phoenix, Arizona, and are generally being amortized through the end of the lease terms in 2025 and 2033, respectively.

Maintenance and repairs are charged to expense as incurred, and material improvements are capitalized.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations and comprehensive (loss) income in the period realized.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations and comprehensive loss in the period realized.

Intangible Assets

Our intangible assets, which are comprised primarily of acquired developed technology, are considered to be finite-lived and are amortized on a straight-line basis over their estimated useful lives.

Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than the carrying amount.

Impairment, if any, would be calculated based on the excess of the carrying amount of the long-lived asset over the long-lived asset’s fair value.

Impairment, if

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

any, would be calculated based on the excess of the carrying amount of the long-lived asset over the long-lived asset’s fair value.

There were no impairment charges recognized for the years ended December 31, 2021 and 2020.

We assess acquisitions under ASC 805, Business Combinations, to determine whether a transaction represents the acquisition of assets or a business combination.

Under this guidance, we apply a two-step model.

The first step involves a screening test where we evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar assets.

If the screening test is met, we account for the set as an asset acquisition.

If the screening test is not met, we apply the second step of the model to determine if the set meets the definition of a business based on the guidance in ASC 805.

If so, the transaction is treated as a business combination.

Otherwise, it is treated as an asset acquisition.

Asset acquisitions are accounted for by allocating the cost of the acquisition, including transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis without recognition of goodwill.

Business combinations are accounted for using the acquisition method.

Under the acquisition method, goodwill is measured as a residual amount equal to the fair value of the consideration transferred less the net recognized fair value of the identifiable assets acquired and the liabilities assumed, as of the acquisition date, and transaction costs are expensed as incurred.

Contingent Consideration

Under the terms of business combinations or asset acquisitions, we may be required to pay additional consideration if specified future events occur or if certain conditions are met.

With respect to the additional consideration that may be payable in connection with the Cernostics, Inc.

(“Cernostics”) asset acquisition, we account for the contingent consideration as liability in accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), under the guidance for obligations that must or may be settled by issuance of a variable number of shares.

In accordance with ASC 480, we record the contingent consideration initially and subsequently at fair value with changes in fair value recorded in the statements of operations and comprehensive loss each period.

For additional information on the contingent consideration, see Notes 5 and 11.

Other Operating Income

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

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

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

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

In the second quarter of 2020, based on guidance issued by HHS at

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

the time that stated any reasonable method could be used to calculate lost revenues attributable to COVID-19, the Company concluded it would qualify to retain the relief funds and recognized the funds received as other operating income during the three months ended June 30, 2020.

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, we concluded it would qualify to retain the relief funds and recognized the funds received as other operating income during the three months ended June 30, 2020.

On September 19, 2020, HHS issued a notice of reporting requirements that changed the methodology for determining lost revenues to be based on a patient care operating income metric, as defined by HHS.

Due to this change in methodology and uncertainty in its application, the Company determined that it was no longer reasonably assured of keeping the funds.

Therefore, in the three months ended September 30, 2020, the Company reversed the previously recognized income.

On October 22, 2020, HHS again revised the methodology for calculating lost revenues, with such changes defining lost revenues as a negative change, if any, in calendar year 2020 revenues compared to calendar year 2019 revenues.

Based on these developments, the Company issued a check to repay the funds in December 2020.

However, on December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 was signed into law, which among other things included a provision amending the provider relief funds lost revenue calculation to be consistent with HHS’s June 2020 guidance, including allowing lost revenues to be determined by comparing actual 2020 revenues to 2020 budgeted revenues, subject to certain conditions, which was incorporated into revised HHS reporting requirements issued in January 2021.

Given this development, subsequent to December 31, 2020, the Company notified HHS of its intention to keep the funds and canceled the repayment.

Based on the changes to the requirements enacted on December 27, 2020 the Company determined that it is reasonably assured of keeping the funds and therefore recognized the $ 1.9 million as other operating income during the three months ended December 31, 2020.

Fair Value of Financial Instruments

As of December 31, 2019, the carrying amount of the Company’s long-term debt approximated fair value due to its variable market interest rate and management’s opinion that then-current rates and terms that would have been available to the Company with the same maturity and security structure would have been essentially equivalent to that of the Company’s long-term debt.

This estimated fair value was a ‘‘Level 3’’ fair value measurement as defined in Note 9.

Deferred Rent

The Company has negotiated certain landlord/tenant incentives, rent holidays and escalations in the base price of rent payments under operating leases.

The Company recognizes these incentives, rent holidays and rent escalations on a straight-line basis over the lease term.

Deferred rent balances are classified as current or non-current in the accompanying balance sheets based upon the period when reversal of the liability is expected to occur.

Cost of Sales

Cost of sales is expensed as incurred and includes direct labor costs, equipment, supplies, materials and infrastructure expenses associated with testing tissue samples, third-party lab processing and service costs, third-party collection costs, and shipping charges to transport samples.

Due to this change in methodology and uncertainty in its application, we determined that it was no longer reasonably assured of keeping the funds.

Therefore, in the three months ended September 30, 2020, we reversed the previously recognized income.

However, in the fourth quarter of 2020, a legislative change was enacted affecting the program, under which we concluded it is reasonably assured we will qualify to retain the funds.

Accordingly, we recognized the income again in the fourth quarter of 2020.

Effective January 1, 2021, we account for leases in accordance with ASC 842, Leases.

We categorize leases at their commencement as either operating or finance leases based on the criteria in ASC 842.

Under ASC 842, we record right-of-use (“ROU”) assets and lease liabilities for each lease arrangement identified, except that we have elected the short-term lease exemption for all leases with a term of 12 months or less.

Lease liabilities are recorded at the present value of future lease payments discounted using our incremental borrowing rate for the lease established at the commencement date and ROU assets are measured at the amount of the lease liability plus any initial direct costs, less any lease incentives received before commencement.

For our operating leases, we recognize a single lease cost over the lease term on a straight-line basis.

We have elected the practical expedient of not separating nonlease components from lease components in all leases.

Periods prior to January 1, 2021 have not been restated for the adoption of ASC 842 and continue to reflect the accounting treatment of leases in accordance with the prior lease accounting guidance, ASC 840, Leases.

Under ASC 840, landlord/tenant incentives, rent holidays and escalations in the base price of rent payments under operating leases were recognized on a straight-line basis over the lease term.

Deferred rent balances were classified as current or non-current in the consolidated balance sheets based upon the period when reversal of the liability was expected to occur.

See Note 9 for details on our leases.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cost of Sales (exclusive of amortization of acquired intangible assets)

Cost of sales is expensed as incurred and includes material and service costs associated with testing samples, personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), electronic medical records, order and delivery systems, shipping charges to transport samples, third-party test fees, and allocated overhead including rent, information technology costs, equipment and facilities depreciation and utilities.

Research and Development

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Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Upfront and milestone payments due to third parties that perform research and development services on behalf of the Company will be expensed as services are rendered or when the milestone is achieved.

Upfront and milestone payments due to third parties that perform research and development services on behalf of us will be expensed as services are rendered or when the milestone is achieved.

Research and development costs include, but are not limited to, payroll and personnel-related expenses, stock-based compensation expense, materials, laboratory supplies, and consulting costs.

1 unchanged sentence

Selling, general and administrative (“SG&A”) expenses are attributable to sales, marketing, executive, finance and accounting, legal and human resources functions.

These expenses consist of personnel costs (including salaries, employee benefit costs, bonuses and equity-based compensation expenses), customer services expenses, direct marketing expenses, educational and promotional expenses, market research, audit and legal expenses, and consulting.

The Company expenses all SG&A costs as incurred.

These expenses consist of personnel costs (including salaries, employee benefit costs, bonuses and stock-based compensation expenses), customer services expenses, direct marketing expenses, educational and promotional expenses, market research, audit and legal expenses, and consulting.

We expense all SG&A costs as incurred.

Accrued Compensation

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

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

The board of directors reviews and evaluates the performance

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

against these objectives and ultimately determines what discretionary payments are made.

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

As of December 31, 2020 and 2019, the Company accrued approximately $ 7,175,000 and $ 4,785,000 , respectively, for liabilities associated with these bonus plans.

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 December 31, 2021 and 2020, we accrued approximately $ 12,071,000 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.

Retirement Plan

The Company has an Internal Revenue Code (“IRC”) Section 401(k) profit sharing plan (the “Plan”) for eligible employees.

We have an Internal Revenue Code (“IRC”) Section 401(k) profit sharing plan (the “Plan”) for eligible employees.

The Plan is funded by employee contributions and provides for discretionary contributions in the form of matching and/or profit-sharing contributions.

For the years ended December 31, 2020 and 2019, the Company provided a discretionary matching contribution of $ 789,000 and $ 434,000 , respectively.

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

For the years ended December 31, 2021 and 2020 , we provided a discretionary matching contribution of $ 2,036,000 and $ 789,000 , respectively.

The higher amount for the year ended December 31, 2021 reflects both an increase in the number of employees and a higher matching contribution rate compared to the year ended December 31, 2020.

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement.

A liability for unrecognized tax benefits is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense.

A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense.

No material amounts of tax-related interest or penalties were recorded during the years ended December 31, 2021 and 2020.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation

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The fair value of employee stock options and offerings under the 2019 Employee Stock Purchase Plan (the “ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing valuation model.

For restricted stock units (“RSUs”), the fair value is equal to the closing price of the Company’s common stock on the date of grant.

The Company recognizes compensation costs on a straight-line basis for all employee stock-based compensation awards over the requisite service period of the awards.

For restricted stock units (“RSUs”), the fair value is equal to the closing price of our common stock on the date of grant.

We recognize compensation costs on a straight-line basis for all employee stock-based compensation awards over the requisite service period of the awards.

For options and RSUs, the requisite service period is generally the awards’ vesting period (typically four years ).

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Forfeitures are accounted for as they occur.

Comprehensive (Loss) Income

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

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

Comprehensive Loss

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

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

CARES Act Payroll Tax Deferral

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

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

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

As of December 31, 2020, the Company had deferred payment of $ 551,000 of such taxes, which are allocated between current and noncurrent liabilities on the balance sheet.

Accounting Pronouncements Yet to be Adopted

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

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

Of the $ 551,000 originally deferred, 50% was repaid during the year ended December 31, 2021.

As of December 31, 2021, the remaining $ 276,000 of such taxes was classified as a current liability on the consolidated balance sheet.

Recently Adopted Accounting Pronouncements

We were previously an emerging growth company (“EGC”) within the meaning of the Jumpstart Our Business Startups Act, as amended, (the “JOBS Act”) and elected to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies, as permitted under the JOBS Act.

Because the market value of our common stock held by non-affiliates exceeded $700.0 million as of June 30, 2021, we ceased to be an EGC effective December 31, 2021.

Accordingly, we are no longer permitted to delay the adoption of new or revised accounting pronouncements and as such we adopted the pronouncements discussed below in the fourth quarter of 2021 effective as of the dates noted.

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.

2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes ASC 840, Leases.

ASU 2016-02 establishes ASC 842, Leases , and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.

The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.

This classification will determine whether lease expense is recognized based on an effective interest

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

method for finance leases or on a straight-line basis over the term of the lease for operating leases.

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

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

In June 2020, the FASB issued ASU No.

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

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

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

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

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

In June 2016, the FASB issued ASU No.

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

Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases.

We adopted ASU 2016-02 and ASC 842 using the modified retrospective approach with an effective date of January 1, 2021.

Periods prior to January 1, 2021 have not been restated for the adoption of ASC 842 and continue to reflect the accounting treatment of leases in accordance with ASC 840.

In connection with the adoption, we elected the package of practical expedients to not reassess prior conclusions about lease identification, lease classification and capitalized indirect costs.

We did not elect the use of hindsight practical expedient.

Upon adoption, effective January 1, 2021 we recognized operating lease right-of-use assets of $ 5,405,000 , operating lease liabilities of $ 6,076,000 , reductions to noncurrent liabilities of $ 751,000 , reductions to current assets of $ 59,000 and a credit to accumulated deficit of $ 21,000 .

See Note 9 for disclosures about our leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts.

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

In November 2018, the FASB issued ASU No.

2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses , which included an amendment of the effective date for nonpublic entities.

For non-EGCs, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.

For EGCs, the standard was to be effective for fiscal years beginning after December 15, 2021.

However, in November 2019, the FASB issued ASU 2019-10, which included a one-year deferral of the effective date of ASU 2016-13 for certain entities.

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

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

We adopted the standard effective January 1, 2021 using the modified retrospective approach.

The adoption of this standard had no impact on our consolidated financial statements.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In December 2019, the FASB issued ASU No.

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Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the existing guidance.

For non-EGCs, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

For EGCs, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Early adoption is permitted.

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

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

If that occurs, the Company will be required to apply the non-EGC effective dates in adopting accounting pronouncements that qualify for delayed adoption by EGCs, including the accounting pronouncements discussed above.

(Loss) Earnings Per Share

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

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

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

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

On June 29, 2020, July 2, 2020 and December 18, 2020, the Company issued and sold 2,000,000 shares, 300,000 shares and 4,600,000 , respectively, of common stock in follow-on public offerings, as discussed further in Note 12.

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

The adoption of ASU 2019-12 effective January 1, 2021 had no impact on our consolidated financial statements.

All of our revenues from contracts with customers are associated with the provision of diagnostic and prognostic 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 cutaneous squamous cell carcinoma, DecisionDx®-SCC in August 2020 and launched a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma in November 2020.

We began offering a test for difficult-to-diagnose melanocytic lesions, myPath Melanoma, following an asset acquisition completed in May 2021 and began offering the TissueCypher® Barrett’s Esophagus Assay for patients with BE following an asset acquisition completed in December 2021.

Information on the disaggregation of revenues is included 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.

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.

Accordingly, in such situations revenues are recognized on the basis of actual cash collections.

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 years ended December 31, 2021 and 2020 were $ 3,324,000 and $ 176,000 , respectively, of revenue increases associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Diluted (loss) earnings per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options, the vesting of RSUs or purchases under the ESPP, as well as from the assumed conversion/exercise of the Company’s convertible preferred stock, convertible promissory notes and outstanding warrants.

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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) as of December 31, 2021 and 2020 and the Medicare advance payment (discussed further below) as of 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.

CMS began recoupment of the Advance Payment in April 2021 by applying 25% of the Medicare payments otherwise owed to us against the balance of the Advance Payment.

Recoupment of the full amount of the Advance Payment was complete by December 31, 2021.

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 consolidated financial statements pending the outcome of this matter.

Disaggregation of revenues

The table below provides the disaggregation of revenue by type (in thousands):

Years Ended December 31,

Net (loss) income attributable to common stockholders $ ( 10,284 ) $ 2,991

Assumed conversion of convertible promissory notes (1) :

Extinguishment gain — ( 5,213 )

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

Numerator for diluted loss per share $ ( 10,284 ) $ ( 1,802 )

Weighted-average common shares outstanding, basic 18,929 8,584

Assumed conversion of convertible promissory notes (1)

Weighted-average common shares outstanding, diluted 18,929 8,658

(Loss) earnings per share attributable to common stockholders:

Basic $ ( 0.54 ) $ 0.35

Diluted $ ( 0.54 ) $ ( 0.21 )

(1) For the year ended December 31, 2019 , this figure reflects the assumed conversion of the Q1 2019 Notes (as defined in Note 6) into shares of common stock beginning July 1, 2019, in accordance with the requirements in ASC Topic 260, Earnings per Share , for contingently issuable shares due to the contingency not being met until the third quarter of 2019.

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

Due to the Company reporting a net loss attributable to common stockholders for the year ended December 31, 2020, all potentially dilutive securities are antidilutive and are excluded from the computations of diluted loss per share.

For the year ended December 31, 2019, the computation of diluted loss per share excludes the assumed conversions of the convertible preferred stock, assumed conversion of the July 2019 Note (in each case, for the time prior to their actual conversions), assumed exercise of all stock options, assumed issuance of shares under the ESPP and the assumed exercise of all common stock warrants because to include them would be antidilutive.

Dermatologic $ 85,753 $ 57,646

Other 8,332 5,003

Total net revenues $ 94,085 $ 62,649

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 Percentage of

Accounts Receivable

Percentage of

Accounts Receivable

(non-current)

Year Ended December 31, As of December 31, As of December 31,

2021 2020 2021 2020 2021 2020

Medicare 57 % 58 % 24 % 15 % — % — %

Medicare Advantage plans 28 % 29 % 40 % 40 % — % 25 %

BlueCross BlueShield plans 7 % 6 % 22 % 26 % 58 % 44 %

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loss Per Share

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

Diluted loss per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or purchases under the 2019 Employee Stock Purchase Plan (“ESPP”).

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 per share when their effect is antidilutive.

Due to us reporting a net loss for all periods presented, all potentially dilutive securities are antidilutive and are excluded from the computation 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 our calculation of diluted loss per share for the years ended December 31, 2021 and 2020 because to do so would be antidilutive (in thousands):

Years Ended December 31,

Convertible preferred stock — 4,679

Convertible promissory note (1)

Stock options and restricted stock units 3,459 2,789

Common stock warrants — 35

Preferred stock warrants — 80

Employee stock purchase plan 62 100

Total 3,521 2,924

(1) Associated with the July 2019 Note.

In addition, in connection with the acquisition of Cernostics, we may issue shares of our common stock to satisfy the contingent consideration obligation, pending the outcome of certain commercial milestones, as discussed in Note 5.

Asset Acquisitions

Myriad myPath, LLC

On May 28, 2021, we completed the acquisition of all of the equity of Myriad myPath, LLC, a laboratory in Salt Lake City where the myPath Melanoma test for difficult-to-diagnose melanocytic lesions was developed and offered, for a cash purchase price of $ 32,500,000 .

Following the completion of the acquisition, we became the sole provider of the myPath Melanoma test.

Based on the guidance in ASC 805, we concluded that substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset and therefore the transaction represents an asset acquisition.

We incurred $ 684,000 of direct transaction costs that were included in the cost of the acquisition.

The allocation of the acquisition to individual assets resulted in an intangible asset representing developed technology of $ 33,054,000 and inventory of $ 130,000 .

The intangible asset has an estimated useful life of 12 years and is being amortized on a straight-line basis.

Cernostics, Inc.

On December 3, 2021, we completed the acquisition of Cernostics, Inc., which offers the TissueCypher® Barrett’s Esophagus Assay for patients with BE.

We acquired Cernostics for an upfront cash purchase price of $ 30,732,000 , including $ 653,000 of direct transaction costs.

A portion of the upfront cash consideration is being held in escrow for a specified period following closing to secure post-closing adjustments and indemnification claims, if any.

Our consolidated balance sheet at December 31, 2021 reflects a receivable of $ 519,000 for the post-closing purchase price adjustment, representing the difference between actual and estimated cash and working capital at closing, among other things.

We have also agreed to pay up to an additional $ 50.0 million in cash or shares of our common stock, at our sole discretion, based on the achievement of certain commercial milestones relating to the year ending December 31, 2022 (“Earnout Payments”).

The portion of any Earnout Payments that may be settled in shares of our common stock is subject to certain limitations and the aggregate number of shares that may be issued for the Earnout Payments may not exceed 5,034,653 shares.

Any Earnout Payments in shares of our common stock will be based on the volume weighted-average price of our common stock for the 15 trading days ending December 30, 2022.

The Earnout Payments represent contingent consideration.

ASC 480, Distinguishing Liabilities from Equity, provides guidance on accounting for certain obligations that must or may be settled by issuance of a variable number of shares.

In accordance with that guidance, we recognized a liability of $ 18,287,000 , which represents the fair value of the obligation as of the acquisition date.

See Note 11 for additional information on the measurement of the contingent consideration.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The cost of the acquisition, which is comprised of the cash consideration, transaction costs and contingent consideration, was allocated to the assets acquired and the liabilities assumed as follows (in thousands):

December 3, 2021

Cash and cash equivalents $ 1,251

Accounts receivable 104

Prepaid expenses and other current assets 198

Property and equipment 455

Intangible assets 57,827

Accounts payable ( 655 )

Accrued compensation ( 167 )

Other accrued and current liabilities ( 386 )

Finance lease liabilities ( 237 )

Deferred tax liabilities ( 9,371 )

Total cost allocated $ 49,019

The intangible assets were comprised of developed technology of $ 57,264,000 with an estimated useful life of 15 years and a developed workforce of $ 563,000 , with an estimated useful life of five years , and each is being amortized on a straight-line basis.

Property and Equipment, Net

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As of December 31,

Leasehold improvements $ 5,044 $ 1,388

Lab equipment (1)

Computer equipment 2,457 1,305

Leasehold improvements 1,388 635

Furniture and fixtures 1,288 436

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Less accumulated depreciation (1)

( 3,042 ) ( 1,654 )

Property and equipment, net $ 9,501 $ 7,102

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

(1) Includes lab equipment under a finance lease of $ 237 thousand and accumulated depreciation of $ 8 thousand.

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

Years Ended December 31,

Cost of sales $ 341 $ 277

Cost of sales (exclusive of amortization of acquired intangible assets) $ 478 $ 341

Research and development 248 31

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CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Other Accrued Liabilities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intangible Assets, Net

Our intangible assets, net consist of the following (in thousands) :

December 31, 2021

Gross carrying value Accumulated amortization Net Weighted-Average Remaining Life (in years)

Developed technology $ 90,317 $ ( 1,949 ) $ 88,368 13.2

Assembled workforce 563 ( 9 ) 554 4.9

Total intangible assets, net $ 90,880 $ ( 1,958 ) $ 88,922

There were no intangible assets as of December 31, 2020.

The estimated future aggregate amortization expense as of December 31, 2021 is as follows (in thousands):

Years Ending December 31,

Thereafter 55,507

Total $ 88,922

Amortization expense of intangible assets was $ 2.0 million for the year ended December 31, 2021.

No amortization expense was recorded for the year ended December 31, 2020.

Other Accrued and Current Liabilities

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

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Accrued service fees $ 1,905 $ 1,543

Clinical studies 1,655 348

Employee stock purchase plan contributions 760 536

Deferred employer payroll tax liability 276 —

Accrued royalties 151 169

Accrued state taxes 62 79

Accrued interest — 184

Payroll tax liabilities 695 276

Accrued payor refunds 386 —

Other 277 352

Total $ 5,678 $ 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.

Such amendment was treated as a modification of the existing debt and therefore no extinguishment gain or loss was recognized in connection with the amendment.

Prior to the actual conversion of the Q1 2019 Notes on July 29, 2019 (discussed below), on or before the maturity date, the entire outstanding principal amount of and accrued interest on the Q1 2019 Notes (the “Conversion Amount”), was automatically convertible into shares of the Company’s equity securities issued and sold in a single or series of related transactions, with the principal purpose of raising capital, in which the Company sold shares of such equity securities for aggregate gross proceeds of at least $ 10.0 million (the “Next Equity Financing”).

The number of shares of such equity securities issuable in the Next Equity Financing was equal to the quotient of the Conversion Amount as of the closing date of the Next Equity Financing divided by a per share price that is equal to 80 % of the lowest per share purchase price of the equity securities sold in the Next Equity Financing.

If the Q1 2019 Notes had not been repaid or converted prior to the maturity date, then, at the request of the holders of a majority of the then-outstanding principal amount of and accrued interest on the Q1 2019 Notes, the Conversion Amount as of the maturity date would have converted into shares of the Company’s Series F redeemable convertible preferred stock, or any senior equity security issued by the Company after the first issuance of the Q1 2019 Notes, in each case at a conversion price equal to the price at which such security was last sold (which was $ 5.8208 for shares of the Company’s Series F redeemable convertible preferred stock).

If a change of control of the Company would have occurred while the Q1 2019 Notes were outstanding, the Company would have been required to repurchase each note from each holder at a repurchase price equal to two times the principal amount of such Note, plus any accrued and unpaid interest on such note as of the date of such repurchase.

The Company determined that the Q1 2019 Notes contained embedded derivatives that required bifurcation and separate accounting under ASC 815-15, Embedded Derivatives .

The Company determined that two such features in the Q1 2019 Notes were not considered clearly and closely related to the host debt instrument and therefore required separate accounting:

(i) the automatic conversion feature in connection with the Next Equity Financing and (ii) the acceleration upon a change of control feature.

Under ASC 815-15, these features are bundled together and accounted for as a single, compound embedded derivative.

The Company determined the fair value of the embedded derivative liability at the issuance date, creating a discount to the carrying value of the Q1 2019 Notes, which was being amortized over the life of the debt using the effective interest method.

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

No hedge accounting treatment was applied.

For details regarding the fair value measurement of the embedded derivative, see Note 9.

The Company also assessed the optional conversion feature into Series F redeemable convertible preferred stock at maturity and determined that this feature did not meet the definition of a derivative instrument because the settlement terms involved the gross delivery of the underlying shares, which were not readily convertible to cash.

The Company then assessed whether this

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

feature caused the Q1 2019 Notes to be subject to ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) , and determined that the beneficial conversion feature guidance was applicable to the Q1 2019 Notes.

At issuance, the Company concluded that the Q1 2019 Notes had a beneficial conversion feature because the fair value of the Series F preferred stock exceeded the conversion price of $ 5.8208 per share that would have been applicable under the optional conversion at maturity, assuming no other equity securities senior to Series F preferred stock were sold.

Under ASC 470-20, this beneficial conversion feature was measured at intrinsic value as of the issuance date of the Q1 2019 Notes and was recognized as additional paid-in capital, creating a discount to the carrying value of the Q1 2019 Notes that was being amortized over the life of the debt using the effective interest method.

The closing of the IPO on July 29, 2019 was considered to be the Next Equity Financing under the terms of the Q1 2019 Notes.

Accordingly, on July 29, 2019, the Conversion Amount of the Q1 2019 Notes as of such date converted into 954,074 shares of common stock based on a price of $ 12.80 per share, or 80 % of the IPO price of $ 16.00 per share.

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

The Company recognized an extinguishment gain of $ 5,213,000 in connection with the conversion with extinguishment consideration measured at $ 15,265,000 , which is calculated as the number of shares issued upon conversion multiplied by the IPO price of $ 16.00 per share.

All of this consideration was allocated to additional paid-in capital to redeem the beneficial conversion feature.

The following table summarizes the aggregate values recorded for the Q1 2019 Notes as of their original issuance dates.

As noted above, the Q1 2019 Notes were converted into shares of common stock in connection with the closing of the IPO on July 29, 2019 (in thousands) .

At Original Issuance (1)

Liability component:

Principal (including $ 4,756 with related parties)

Unamortized issuance costs ( 75 )

Unamortized discount from beneficial conversion feature ( 8,378 )

Unamortized discount from embedded derivative ( 2,816 )

Net carrying amount of the liability component $ 501

Embedded derivative liability $ 2,816

Equity Component:

Carrying value of beneficial conversion feature recorded in additional paid-in capital $ 8,378

(1) The Q1 2019 Notes were issued on January 31, 2019, February 12, 2019 and February 27, 2019.

Amortization of discounts and issuance costs on the Q1 2019 Notes totaled $ 1,216,000 for the year ended December 31, 2019, and were included in interest expense.

The amounts recognized in net income for the year ended December 31, 2019 for the embedded derivative liability are as follows (in thousands) :

(Loss) Recognized in Net Income

Statement of Operations and Comprehensive (Loss) Income Location Year Ended

December 31, 2019

Derivatives Not Classified as Hedging Instruments

Embedded derivative in convertible promissory notes Other expense, net $ ( 237 )

July 2019 Note

On July 12, 2019, the Company issued an unsecured convertible promissory note having a principal amount of $ 10,000,000 (the ‘‘July 2019 Note’’) to an investor.

The July 2019 Note bore simple interest at a rate of 8 % per annum and had an original maturity date of June 30, 2020.

The IPO triggered an automatic conversion feature of the July 2019 Note under which the outstanding principal amount plus accrued interest converted into 707,032 shares of common stock in connection with the

Operating Leases

We lease office space in Friendswood, Texas (the “Friendswood Lease”) for use as our corporate headquarters.

The Friendswood Lease commenced in late 2020 under a 60 -month term and a renewal option for one additional five-year term.

We lease two facilities in Phoenix, Arizona for laboratory and office space.

For both leases, the current term extends until April 2033 with options to renew for two additional five-year terms.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

closing of the IPO on July 29, 2019, based on a price derived from a valuation calculated pursuant to the terms of the July 2019 Note.

In connection with the July 2019 Note issuance, the Company issued the purchaser of the July 2019 Note a warrant to purchase up to 209,243 shares of common stock at an exercise price of approximately $ 0.001 per share (the “July 2019 Warrant”).

The Company elected to account for the July 2019 Note under the fair value option in accordance with ASC 825, Financial Instruments.

Absent the election of the fair value option, there were several embedded features of the July 2019 Note which would have required separate accounting as an embedded derivative.

Given the complexity of these features and the short time period the July 2019 Note was actually outstanding, the Company elected the fair value option to simplify the accounting for the July 2019 Note.

Under the fair value option, changes in fair value are recorded in the statements of operations and comprehensive (loss) income each period as “Other expense, net.”

The Company received $ 10,000,000 from the purchaser and incurred $ 764,000 in issuance costs, resulting in net proceeds of $ 9,236,000 .

The Company subsequently adjusted the fair value of the July 2019 Note to its conversion date fair value of $ 11,313,000 , which was calculated as the number of common shares into which the July 2019 Note became actually convertible in connection with the IPO multiplied by the IPO price of $ 16.00 per share.

No portion of the change in fair value was deemed to be associated with changes in instrument-specific credit risk, due to the short period of time the July 2019 Note was outstanding.

Interest expense and the issuance costs associated with the July 2019 Note were included as part of the change in fair value recorded in “Other expense, net.” Because the initial fair value of the July 2019 Note exceeded the proceeds received, the Company did not allocate any portion of the proceeds to the July 2019 Warrant.

Long-Term Debt

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

As of December 31,

Term debt $ — $ 26,688

Unamortized discount and issuance costs — ( 1,566 )

Total long-term debt — 25,122

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

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

On November 30, 2018, the Company entered into a Loan and Security Agreement (the ‘‘2018 LSA’’), with Oxford Finance LLC (‘‘Oxford’’), as collateral agent, and Oxford and Silicon Valley Bank as equal syndicated lenders.

The 2018 LSA provided for a $ 20.0 million secured term loan credit facility (the ‘‘Term Loan’’) and a credit line of up to $ 5.0 million, prior to amendment of the 2018 LSA on June 13, 2019, as discussed below.

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

In addition, the 2018 LSA contained customary conditions of borrowing, events of default and covenants.

On June 13, 2019, the Company entered into an amendment to the 2018 LSA (the “First Amendment”), which, among other things eliminated the $ 5.0 million revolving line and increased the Term Loan by $ 5.0 million and amended a financial covenant requiring the Company to achieve certain revenue targets.

The First Amendment was accounted for as a modification of the 2018 LSA, and therefore no extinguishment gain or loss was recognized.

The Term Loan bore interest, payable monthly in arrears, at a floating rate equal to the greater of (1) 8.55 % and (2) the 30-day U.S.

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

The applicable interest rate on the Term Loan was 8.55 % at December 31, 2019.

The Company was permitted to make interest-only payments on the Term Loan for the 18 months through May 31, 2020.

As required, the Company began to repay the term loan in 30 equal monthly installments beginning on June 1, 2020.

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

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

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

On December 21, 2020, the Company terminated the 2018 LSA and repaid in full all amounts due, which totaled $ 21.6 million, including the outstanding principal balance, the final payment amount, early termination and prepayment fees and accrued interest.

The Company recognized a loss of $ 1.4 million in connection with the extinguishment of the 2018 LSA, which was

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have not included the optional renewal periods in the measurement of the lease obligations because it is not reasonably certain that we will exercise these renewal options.

Our other operating leases primarily consist of office equipment.

Finance Lease

In connection with the December 2021 acquisition of Cernostics, we assumed a finance lease for laboratory equipment.

Discount Rates

We discount our lease obligations using our incremental borrowing rate at the commencement date.

The incremental borrowing rate is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

We primarily consider industry data, our credit rating and the lease term to determine our incremental borrowing rate.

Lease Balances and Costs

Lease balances reflected in the consolidated balance sheet were as follows (in thousands) :

Lease Balance Classification December 31, 2021

Operating Operating lease assets $ 7,383

Finance Property and equipment, net $ 229

Lease Liabilities

Operating Operating lease liabilities $ 1,179

Finance Other accrued and current liabilities $ 105

Operating Noncurrent operating lease liabilities $ 6,900

Finance Other liabilities $ 124

Costs associated with our leases were included in the consolidated statement of operations and comprehensive loss as follows (in thousands):

Lease Cost Year Ended December 31, 2021

Operating lease cost (1)

Finance lease cost

Amortization of lease assets 8

Interest on finance lease liabilities 1

Short-term lease cost 29

Total lease cost $ 1,488

(1) Includes variable lease cost of $ 187 thousand for the year ended December 31, 2021.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

attributable to the write off of the unamortized discount and issuance costs of $ 0.7 million, the early termination fee of $ 0.5 million and prepayment fees of $ 0.2 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Information

Supplemental cash flow information on leases is as follows (in thousands):

Year Ended December 31, 2021

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases $ 1,145

Operating cash flows from interest paid on finance leases $ 1

Financing cash flows from finance leases $ 8

During the year ended December 31, 2021, we recorded $ 2.9 million in lease liabilities arising from obtaining ROU assets.

Information regarding the weighted-average lease term and weighted-average discount rate is presented below:

December 31, 2021

Weighted-average remaining lease term (years)

Operating leases 9.1

In December 2019, the Company entered into an agreement to lease office space in Friendswood, Texas (the “Friendswood Lease”) to serve as its new headquarters.

The Friendswood Lease commenced in December 2020 and has a 60-month term, with an option to renew for one additional five-year period.

In addition, the Company leases another facility for office space in Friendswood, Texas on a month-to-month basis.

The Company leases two facilities for office and laboratory space in Phoenix, Arizona.

The Company took occupancy of the original facility in April 2016.

Pursuant to an amendment in December 2019, the lease term was extended to July 31, 2027.

Also in December 2019, the Company entered into a lease of the second facility for clinical and research laboratory purposes as well as general office use.

This lease commenced in September 2020 and extends through March 31, 2028.

Each of the leases provide the Company with an option to extend their respective term for two additional renewal periods of five years each.

Other leasing arrangements include office equipment and a corporate apartment.

All leases have been classified as operating leases.

Rent expense is recognized on a straight-line basis over the term of the leases.

Future non-cancellable commitments under all operating leases are as follows (in thousands):

Finance leases 2.3

Weighted-average discount rate

Operating leases 4.9 %

Finance leases 5.0 %

The following is a maturity analysis of our operating lease and finance lease liabilities as of December 31, 2021 (in thousands):

Operating leases Finance leases

Years Ending December 31,

2022 $ 1,258 $ 108

2023 1,287 108

2024 1,302 26

Thereafter 4,609 —

Rent expense was $ 548,000 and $ 395,000 for the years ended December 31, 2020 and 2019 , respectively.

Total lease payments 10,363 242

Interest component ( 2,284 ) ( 13 )

Present value of lease payments $ 8,079 $ 229

As of December 31, 2021, we have no material leases that have not yet commenced.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Disclosures Under ASC 840

Future non-cancellable commitments under all operating leases were as follows as of December 31, 2020 (in thousands):

Years Ending December 31,

Thereafter 1,037

Rent expense was $ 548,000 for the year ended December 31, 2020.

Long-Term Debt

We had a Loan and Security Agreement with Oxford Finance LLC (“Oxford”) as collateral agent, and Oxford and Silicon Valley Bank as equal syndicated lenders (the “2018 LSA”).

The 2018 LSA consisted of a $ 25.0 million secured term loan credit facility (the “Term Loan”).

The Term Loan bore 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 preceded the month in which the interest was to accrue, plus 6.48 %.

We were permitted to make interest-only payments on the Term Loan through May 31, 2020.

As required, we 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 were to be due at maturity on November 1, 2022.

However, o n December 21, 2020, we terminated the 2018 LSA and repaid in full all amounts due, which totaled $ 21.6 million as of such date, including the outstanding principal balance, the final payment amount, early termination and prepayment fees and accrued interest.

The termination of the 2018 LSA resulted in the recognition of an extinguishment loss of $ 1.4 million, which was reflected in our statement of operations and comprehensive loss for the year ended December 31, 2020 .

Fair Value Measurements

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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.

Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring us to develop our 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.

Our 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.

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

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

As of December 31, 2021

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$ 327,721 $ — $ — $ 327,721

Contingent consideration $ — $ — $ 18,287 $ 18,287

As of December 31, 2020

4 unchanged sentences

$ 409,480 $ — $ — $ 409,480

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

There were no Level 3 fair value measurements as of December 31, 2020 and 2019.

The following table discloses the summary of changes in the fair value of the Level 3 fair value measurements during the year ended December 31, 2019 (in thousands):

Preferred stock warrant liability Embedded derivative liability in the Q1 2019 Notes The

July 2019 Note

Balance, January 1, 2019 $ 1,194 $ — $ —

Issuance of convertible promissory notes — 2,816 9,236

Change in fair value included in net income 619 237 2,077

Extinguishment of convertible promissory notes and exercise of warrants ( 68 ) ( 3,053 ) ( 11,313 )

Reclassification of preferred stock warrant liability to stockholders’ equity ( 1,745 ) — —

Balance, December 31, 2019 $ — $ — $ —

The changes in fair value of the preferred stock warrant liability, the embedded derivative liability and the July 2019 Note were recorded as ‘‘Other expense, net’’ in the statements of operations and comprehensive (loss) income.

The fair value of the warrants to purchase shares of redeemable convertible preferred stock was estimated by management using the Black-Scholes option pricing model.

In connection with the IPO, all outstanding preferred stock warrants became exercisable for shares of common stock.

The Company recorded a final fair value adjustment on the preferred stock warrant liability as of immediately prior to the closing of the IPO based on the IPO price of $ 16.00 per share.

The preferred stock warrant liability was then reclassified to stockholders’ equity and no additional fair value adjustments were subsequently recorded.

Certain features of the Q1 2019 Notes were determined to be an embedded derivative requiring bifurcation and separate accounting, as discussed in Note 6.

The fair value of the embedded derivative was determined based on a probability-weighted income approach discounted at an interest rate that was consistent with the appropriate market interest rate (ranging from 8.93 % to 11.40 %) considering management’s estimates of the probability of the possible settlement outcomes.

At inception of the Q1 2019 Notes, management assessed the probability of the occurrence of the Next Equity Financing at 90 %.

The final fair value adjustment was based upon the actual settlement of the Q1 2019 Notes in connection with the IPO.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

The Company elected the fair value option for the July 2019 Note, as discussed in Note 6.

The change in fair value recorded for the July 2019 Note represents the difference between the net proceeds received and the fair value of the shares issued upon conversion of the July 2019 Note in connection with the IPO, valued at the IPO price of $ 16.00 per share.

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

Contingent Consideration

In connection with our acquisition of Cernostics, we have recorded a contingent consideration liability for the Earnout Payments.

This liability is classified as a Level 3 fair value measurement due to the use of significant unobservable inputs and a Monte Carlo simulation to determine its fair value.

The Monte Carlo simulation uses projections of the commercial milestones for the applicable period as well as the corresponding targets and approximate timing of payment based on the terms of the arrangement.

The analysis also uses assumptions for expected volatility of the financial metrics and a risk-adjusted discount rate, which were 20.0 % and 16.1 %, respectively, at initial measurement on December 3, 2021.

The contingent consideration liability is remeasured at fair value at each reporting period taking into account any updated assumptions or changes in circumstances.

Any change in the fair value is recorded as a gain or loss in our consolidated statement of operations and comprehensive loss.

There was no change in fair value from the initial recognition on December 3, 2021 through December 31, 2021.

The following table discloses the summary of changes in the contingent consideration liability measured at fair value using Level 3 inputs during the year ended December 31, 2021 (in thousands):

December 31, 2021

Balance at beginning of period $ —

Acquisition of Cernostics 18,287

Change in fair value —

Balance at end of period $ 18,287

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.

Convertible Preferred Stock and Preferred Stock Warrants

Convertible Preferred Stock

In connection with the IPO, on July 29, 2019, all outstanding shares of the Company’s convertible preferred stock automatically converted into shares of common stock at a rate of one common share for each 1.219 shares of convertible preferred stock.

The Company’s convertible preferred stock was classified outside of stockholders’ equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities.

The preferred stock was contingently redeemable upon events that are outside of the Company’s control including liquidation, sale, or transfer of control of the Company.

The Company had determined not to adjust the carrying values of the convertible preferred stock to liquidation preferences of such shares because of the uncertainty of whether or when such events would occur.

Further, except for Series C preferred stock, the preferred stock was redeemable upon the majority vote of specified holders of the preferred stock.

As a result of a 1-for-1.219 reverse stock split effected on July 11, 2019, the conversion price for each series of preferred stock was adjusted to be the original issue price multiplied by 1.219 .

Immediately prior to the closing of the IPO, 9,973,884 shares of outstanding convertible preferred stock were automatically converted into 8,181,992 shares of common stock.

In connection with the conversion, the Company derecognized the convertible preferred stock at their carrying values and allocated such amounts to common stock and additional paid-in capital effective July 29, 2019.

Any discount to the original issue price was being accreted with a charge to additional paid-in capital over the period through the earliest date the redeemable convertible preferred stock could become redeemable.

Any unpaid cumulative accruing dividends would have been payable upon a liquidation event or a deemed liquidation event, but were not recorded in the financial statements since such events did not become probable of occurring.

Preferred Stock Warrant Liabilities

The Company previously issued warrants to purchase shares of its convertible preferred stock.

The warrants provided the holder the option to purchase a specified number of shares of a particular series of the Company’s convertible preferred stock for a specified price.

The holder was permitted to exercise the warrant in cash or exercise pursuant to a cashless exercise whereby a calculated number of shares would be withheld upon exercise to satisfy the cost of the exercise.

In accordance with their terms, in connection with the IPO, all outstanding warrants to purchase shares of convertible preferred stock became exercisable for shares of common stock at a rate of one common stock warrant for every 1.219 preferred stock warrants.

Exercise prices of the warrants were also adjusted upon conversion by multiplying each of the exercise prices by 1.219 .

Immediately prior to the closing of the IPO, certain outstanding warrants to purchase shares of Series F convertible redeemable preferred stock were net exercised for an aggregate of 27,207 shares of common stock.

In accordance with ASC 480-10, Distinguishing Liabilities from Equity, the Company accounted for preferred stock warrants outstanding as a liability at fair value and adjusted the instruments to fair value at each reporting period.

This liability was subject to re-measurement at each balance sheet date until exercised, and any change in fair value was recognized in the Company’s statements of operations and comprehensive (loss) income as other income (expense), net.

In connection with the preferred stock warrants becoming exercisable for common stock, the Company reclassified the preferred stock warrant liability balance to additional paid-in capital effective July 29, 2019 due to meeting the criteria under U.S.

GAAP for classification in stockholders’ equity.

See Note 12 for additional information on common stock warrants.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stockholders’ Equity

1 unchanged sentence

The Company’s Amended and Restated Certificate of Incorporation, dated July 29, 2019, authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share.

The Company is also authorized to issue up to

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

10,000,000 shares of preferred stock with a par value of $ 0.001 per share.

The Company is also authorized to issue up to 10,000,000 shares of preferred stock with a par value of $ 0.001 per share.

No dividends were declared or paid during the years ended December 31, 2021 or 2020.

On July 11, 2019, the Company effected a 1-for-1.219 reverse stock split of its common stock.

The par value and the authorized number of shares of the common stock were not affected by the reverse stock split.

The reverse stock split resulted in an adjustment to the preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion.

The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split.

On July 29, 2019, the Company completed the initial public offering of its common stock.

In connection with the IPO, the Company issued and sold 4,600,000 shares of its common stock, including 600,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $ 16.00 per share.

The Company received approximately $ 65.9 million in net proceeds from the IPO, after deducting underwriting discounts and commissions and other offering expenses payable by the Company.

On June 29, 2020 and July 2, 2020, the Company issued and sold 2,000,000 and 300,000 shares, respectively, of its common stock in a follow-on public offering at a price of $ 37.00 per share.

The Company received $ 79.5 million in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs.

The shares issued and sold on July 2, 2020 reflect the underwriters’ exercise in full of their 30-day option to purchase additional shares at the public offering price, less underwriting discounts and commissions.

On December 18, 2020, the Company issued and sold 4,600,000 shares of its common stock in a follow-on public offering, including 600,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $ 58.00 per share.

The Company received $ 250.5 million in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs (excluding $ 0.4 million in offering costs that were incurred but not paid as of December 31, 2020).

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

We received $ 69,079,000 in net proceeds, after deducting underwriting discounts, commissions and offering costs.

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

On July 2, 2020, we issued and sold an additional 300,000 shares of common stock pursuant to the underwriters’ exercise in full of their option to purchase additional shares, which resulted in an additional net proceeds to us of $ 10,425,000 .

On December 18, 2020, we issued and sold 4,600,000 shares of our common stock in a follow-on public offering, including 600,000 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $ 58.00 per share.

We received $ 250,201,000 in aggregate net proceeds, after deducting underwriting discounts and commissions and offering costs.

Common Stock Warrants

The Company issued an aggregate of 51,238 shares, 209,238 shares and 31,814 shares of common stock on November 29, 2019, December 11, 2020 and December 29, 2020, respectively, pursuant to net exercises by the holders of common stock warrants outstanding.

The Company issued an aggregate of 209,238 shares and 31,814 shares of common stock December 11, 2020 and December 29, 2020, respectively, pursuant to net exercises by the holders of common stock warrants outstanding.

In accordance with the net exercise provisions of the warrants, shares of common stock were withheld to satisfy the cost of these exercises.

There were no common stock warrants outstanding as of December 31, 2020.

Information about common stock warrants outstanding as of December 31, 2019 is presented in the table below:

As of December 31, 2019

Expiration date Number of shares Exercise price

July 12, 2026 209,243 $ 0.001

March 31, 2027 26,428 $ 7.10

November 30, 2028 8,809 $ 7.10

Total 244,480

There were no common stock warrants outstanding as of December 31, 2021 or 2020.

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

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Stock Incentive Plans

The Company’s stock incentive plans provide for the granting of options to purchase common stock and other equity-based awards to employees, directors and consultants of the Company.

On September 6, 2008, the Company adopted the 2008 Stock Plan (the “2008 Plan”), on August 15, 2018, the Company adopted the 2018 Stock Plan (the “2018 Plan”) and on July 24, 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”).

Our stock incentive plans provide for the granting of options to purchase common stock and other equity-based awards to our employees, directors and consultants.

On September 6, 2008, we adopted the 2008 Stock Plan (the “2008 Plan”), on August 15, 2018, we adopted the 2018 Stock Plan (the “2018 Plan”) and on July 24, 2019, we adopted the 2019 Equity Incentive Plan (the “2019 Plan”).

Following the adoption of the 2018 Plan, no additional stock awards were granted under the 2008 Plan and following the adoption of the 2019 Plan, no additional stock awards were granted under the 2018 Plan.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Options under the plans may be granted as incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”).

ISOs may only be granted to Company employees (including directors who are also considered employees).

NSOs may be granted to Company employees, directors and consultants.

ISOs may only be granted our employees (including directors who are also considered employees).

NSOs may be granted our employees, directors and consultants.

Options may be granted for terms up to ten years from the date of grant, as determined by the Board of Directors;

provided, however, that with respect to an ISO granted to a person who owns stock representing more than 10 % of the voting power of all classes of stock of the Company, the terms shall be for no more than five years from the date of grant.

The exercise price of options granted must be no less than 100 % of the fair market value of the shares on the date of grant, provided, however, that with respect to an ISO granted to an employee who at the time of grant of such options owns stock representing more than 10 % of the voting power of all classes of stock of the Company, the exercise price shall not be less than 110 % of the fair market value of the shares on the date of grant.

Options generally vest over four years (generally 25 % after one year and monthly thereafter), subject to the option holder’s continued service with the Company.

The Company issues new shares to satisfy option exercises.

On July 11, 2019, the Company’s Board of Directors approved an increase of 144,878 in the number of shares authorized for issuance under the 2018 Plan.

On July 24, 2019, the 2019 Plan became effective.

The 2019 Plan authorized 1,931,020 new shares plus the number of shares (not to exceed 1,976,756 shares) that remained available under the 2018 Stock Plan at the time the 2019 Plan became effective and any shares underlying outstanding stock awards granted under the 2018 Plan and 2008 Stock Plan that expire or are repurchased, forfeited, cancelled or withheld.

The 2019 Plan provides for automatic annual increases in the number of shares of common stock reserved for issuance, which resulted in 856,545 additional shares becoming available effective January 1, 2020.

provided, however, that with respect to an ISO granted to a person who owns stock representing more than 10 % of the voting power of all classes of stock of ours, the terms shall be for no more than five years from the date of grant.

The exercise price of options granted must be no less than 100 % of the fair market value of the shares on the date of grant, provided, however, that with respect to an ISO granted to an employee who at the time of grant of such options owns stock representing more than 10 % of the voting power of all classes of stock of ours, the exercise price shall not be less than 110 % of the fair market value of the shares on the date of grant.

Options generally vest over four years (generally 25 % after one year and monthly thereafter), subject to the option holder’s continued service with us.

We issue new shares to satisfy option exercises.

As of December 31, 2021, 46,741 shares remained available for grant under the 2019 Plan.

On January 1, 2022, an additional 1,268,926 shares became available under the 2019 Plan pursuant to an automatic annual increase.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options

Stock option activity under the Company’s stock plans for the years ended December 31, 2020 and 2019 is set forth below:

Stock option activity under our stock plans for the years ended December 31, 2021 and 2020 is set forth below:

Weighted-Average

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No such early exercises have occurred as of December 31, 2021.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Restricted Stock Units

RSUs represent the right to receive shares of the Company’s common stock at a specified future date, subject to vesting.

The Company’s RSUs generally vest annually from the grant date in four equal installments subject to the holder’s continued service with the Company.

The Company issues new shares to satisfy RSUs upon vesting.

The following table summarizes the Company’s RSU activity for the year ended December 31, 2020:

RSUs represent the right to receive shares of our common stock at a specified future date, subject to vesting.

Our RSUs generally vest annually from the grant date in four equal installments subject to the holder’s continued service with us.

We issue new shares to satisfy RSUs upon vesting.

The following table summarizes our RSU activity for the years ended December 31, 2021 and December 31, 2020:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

Balance as of January 1, 2020 — $ —

Granted 161,477 $ 59.16

Forfeited/Cancelled — $ —

Balance as of December 31, 2020 161,477 $ 59.16

Granted 958,361 $ 43.05

( 56,002 ) $ 61.07

Forfeited/Cancelled ( 13,662 ) $ 62.80

Balance as of December 31, 2021 1,050,174 $ 44.31

(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 16,440 for the year ended December 31, 2021.

RSU Awards to Related Parties

On October 1, 2021, the Audit Committee of our Board of Directors approved, at the recommendation of our Compensation Committee, a one-time award of RSUs to three employees who are the children of our Chief Executive Officer (“CEO”) which we have determined to be outside the ordinary course of business.

Under the Internal Revenue Code (“IRC”), those owning more than a specified percentage of a company’s stock are not eligible to receive certain preferential tax benefits that are afforded to qualifying stock compensation arrangements.

In determining eligibility under the Code, when calculating the number of shares of common stock owned, an individual must attribute all shares owned by specified family members.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of the stock ownership of our CEO and this attribution requirement, the three children have not been eligible to participate in the ESPP and, at times, have not qualified to receive stock option grants on terms as favorable as those received by other similar employees.

Our Compensation Committee recommended, and our Audit Committee approved, a one-time grant of restricted stock units designed to compensate the three children for these differences.

The aggregate number of shares underlying the restricted stock units granted to the three children was 17,275 which are included in the table above.

The awards had an aggregate grant date fair value of $ 1,129,000 , vested immediately upon grant and was recognized as stock-based compensation expense, included in selling, general and administrative expenses, during the year ended December 31, 2021.

Employee Stock Purchase Plan

The ESPP became effective July 24, 2019.

The ESPP provides for automatic annual increases in the number of shares of common stock reserved for issuance, which resulted in 171,309 additional shares becoming available effective January 1, 2020.

On February 28, 2020 and August 31, 2020 the Company issued 39,987 and 41,467 shares, respectively, of its common stock pursuant to scheduled purchases under the ESPP.

As of December 31, 2020, 501,790 shares of common stock are reserved for future issuance under the ESPP.

On January 1, 2021, an additional 248,124 shares became available under the ESPP pursuant to an automatic annual increase.

The Company commenced a series of offerings under the ESPP on October 1, 2019.

The initial offering began October 1, 2019, ends on August 31, 2021 (unless terminated earlier, as described below) and consists of four purchase periods.

The purchase periods end on the last trading day of February and August 31 of each year.

Eligible employees who enroll in the initial offering or any subsequent offering will be able to purchase shares of the Company’s common stock at a discount through payroll deductions, subject to certain limitations.

Offerings under the ESPP are generally 24 months in length with four six-month purchase periods unless terminated earlier, as described below.

Eligible employees who enroll in an offering are able to purchase shares of our common stock at a discount through payroll deductions, subject to certain limitations.

The purchase price of the shares of common stock is the lesser of (i) 85 % of the fair market value of such shares on the offering date and (ii) 85 % of the fair market value of such shares on the purchase date.

Following the commencement of the initial offering, new 24-month offerings, each with four six-month purchase periods, automatically begin approximately every six months.

A new offering begins approximately every six months .

Offerings are concurrent, but in the event the fair market value of a share of common stock on the first day of any purchase period during an offering (the “New Offering”) is less than or equal to the fair market value of a share of common stock on the offering date for an ongoing offering (the “Ongoing Offering”), then the Ongoing Offering terminates immediately following the purchase of shares on the purchase date immediately preceding the New Offering and the participants in the terminated Ongoing Offering are automatically enrolled in the New Offering.

In such case, the Company would account for this event as a modification of the Ongoing Offering.

Notwithstanding the above, the Company’s Board of Directors (or an authorized committee thereof) may modify the terms of or suspend any future offerings prior to their commencement.

As of December 31, 2020, there were three offerings outstanding under the ESPP.

The Company issues new shares for purchases of stock made pursuant to the ESPP.

In such case, we account for this event as a modification of the Ongoing Offering.

Notwithstanding the above, our Board of Directors (or an authorized committee thereof) may modify the terms of or suspend any future offerings prior to their commencement.

As of December 31, 2021, 639,466 shares remained available for issuance under the ESPP.

The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 253,785 shares becoming available under the ESPP effective January 1, 2022.

We issue new shares to satisfy ESPP purchases.

Determining Fair Value - Summary of Assumptions

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and purchase rights granted under the ESPP at the date of grant, start of the offering or other relevant measurement date.

Following is a description of the significant assumptions used in the option pricing model:

We use the Black-Scholes option pricing model to estimate the fair value of stock options and purchase rights granted under the ESPP at the date of grant, start of the offering or other relevant measurement date.

Set forth below is a description of the significant assumptions used in the option pricing model:

• Expected term .

The expected term is the period of time that granted options are expected to be outstanding.

For stock options, the Company has set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate the expected term.

For stock options, we have set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as we have concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate the expected term.

For the ESPP, the expected term is the period of time from the offering date to the purchase date.

• Expected volatility .

Because of the limited period of time the Company’s stock has been traded in an active market, the Company calculates volatility by using the historical stock price volatility of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Previously, because of the limited period of time our stock had been traded in an active market, we calculated expected volatility by using the historical stock prices of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies.

In the third quarter of 2021, we adjusted this calculation to include our own stock price on a relative basis to the peer group in the calculation of expected volatility, as our common stock has now been traded in an active market for more than two years.

• Risk-free interest rate .

The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for the ESPP, provided from the Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

We base the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for the ESPP, provided from the Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

• Dividend yield .

The Company has not paid, and does not have plans to pay, cash dividends.

Therefore, the Company use an expected dividend yield of zero in the Black-Scholes option valuation model.

The fair value of the Company’s common stock is also an assumption used to determine the fair value of stock options.

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

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

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

We have not paid, and does not have plans to pay, cash dividends.

Therefore, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

The fair value of our common stock is also an assumption used to determine the fair value of stock options.

Prior to our initial public offering of common stock on July 29, 2019 (the “IPO”), our common stock was not publicly traded, therefore we estimated the fair value of our common stock.

Following the IPO, the fair value of our 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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:

15 unchanged sentences

Dividend yield — %

The Company uses the closing price of its common stock on the date of grant to determine the fair value of RSUs.

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 is included in the statements of operations and comprehensive (loss) income as follows (in thousands):

Stock-based compensation expense is included in the consolidated statements of operations and comprehensive loss as follows (in thousands):

Years Ended December 31,

Cost of sales $ 1,049 $ 170

Cost of sales (exclusive of amortization of acquired intangible assets) $ 2,058 $ 1,049

Research and development 4,522 1,492

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The aggregate intrinsic value of stock options exercised during the years ended December 31, 2021 and 2020 was $ 27,191,000 and $ 18,377,000 , respectively.

The aggregate intrinsic value of shares issued under the ESPP was $ 1,797,000

The aggregate intrinsic value of shares issued under the ESPP was $ 6,341,000 and $ 1,797,000 during the years ended December 31, 2021 and 2020, respectively.

The aggregate fair value of restricted stock units that vested during the year ended December 31, 2021 was $ 2,698,000 .

No tax benefits related to stock-based compensation were recorded in the consolidated statements of operations and comprehensive loss during the years ended December 31, 2021 and 2020 due to the valuation allowance on net deferred tax assets.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

during the year ended December 31, 2020.

There were no shares issued under the ESPP during the year ended December 31, 2019.

No tax benefits related to stock-based compensation were recorded in the statements of operations and comprehensive (loss) income during the years ended December 31, 2020 and 2019 due to the valuation allowance on net deferred tax assets.

The components of income tax expense are as follows (in thousands):

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of income tax expense (benefit) are as follows (in thousands):

Years Ended December 31,

3 unchanged sentences

Total current 16 84

Deferred tax expense

Deferred tax (benefit) expense

Federal ( 8,726 ) —

State and local ( 10 ) —

Total deferred ( 8,736 ) —

Total income tax expense $ 84 $ 72

Total income tax (benefit) expense $ ( 8,720 ) $ 84

The differences between income taxes expected at the U.S.

federal statutory rate (21%) and the reported income tax expense are summarized as follows (in thousands):

federal statutory rate (21%) and the reported income tax expense (benefit) are summarized as follows (in thousands):

Years Ended December 31,

Pre-tax (loss) income $ ( 10,200 ) $ 5,349

Pre-tax loss $ ( 40,012 ) $ ( 10,200 )

federal taxes at statutory rate ( 8,402 ) ( 2,142 )

State income taxes ( 1,764 ) ( 311 )

Mark-to-market losses — 566

Non-deductible meals — 235

Convertible debt interest — 95

Research and development (“R&D”) tax credit ( 1,658 ) ( 703 )

2 unchanged sentences

Non-deductible officers’ compensation 1,571 963

Total income tax expense $ 84 $ 72

Other ( 157 ) 39

Total income tax (benefit) expense $ ( 8,720 ) $ 84

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Significant components of deferred tax assets and liabilities are as follows (in thousands):

2 unchanged sentences

Net operating loss (“NOL”) carryforwards $ 24,316 $ 13,720

Accounts payable — 456

Accrued liabilities 4,168 2,730

R&D tax credit 1,777 993

Lease liabilities 2,114 —

Intangible assets — 46

Stock-based compensation 2,202 761

Charitable contributions — 2

R&D tax credit 3,670 1,777

Total deferred tax assets 36,710 19,034

2 unchanged sentences

Deferred tax liabilities:

Accounts receivable $ — $ ( 3,796 )

Prepaid expenses $ ( 330 ) $ ( 289 )

Property and equipment ( 2,285 ) ( 776 )

Intangible assets ( 12,913 ) —

ROU assets ( 2,166 ) —

Section 481(a) adjustment (cash to accrual) ( 1,877 ) ( 2,765 )

1 unchanged sentence

Net deferred tax asset (liability) $ ( 635 ) $ —

At December 31, 2020, the Company had NOL carryforwards for federal income tax purposes of approximately $ 55,851,000 of which $ 41,958,000 will begin to expire in 2033 if not utilized to offset taxable income, and $ 13,893,000 may be carried forward indefinitely.

At December 31, 2021, we had NOL carryforwards for federal income tax purposes of approximately $ 99,365,000 of which $ 43,513,000 will begin to expire in 2030 if not utilized to offset taxable income, and $ 55,852,000 may be carried forward indefinitely.

Future changes in ownership, as defined by Section 382 of the IRC, could limit the amount of NOL carryforwards used in any one year.

Also, as of December 31, 2020, the Company had state net operating loss carryforwards of approximately $ 41,551,000 , which begin to expire in 2028 if not utilized to offset state taxable income.

Also, as of December 31, 2021, we had state net operating loss carryforwards of approximately $ 67,453,000 , which begin to expire in 2028 if not utilized to offset state taxable income.

Our R&D tax credit carryforwards of $ 3,670,000 at December 31, 2021 will begin to expire in 2034 if not utilized to offset federal income tax.

In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax.

In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years).

The Company performed a Section 382 analysis from inception through the year ended December 31, 2020 and concluded the Company had experienced an ownership change in 2011, 2014 and 2020.

We performed a Section 382 analysis from inception through the year ended December 31, 2021 and concluded we had experienced an ownership change in 2011, 2014 and 2020.

These changes in ownership did not result in the expiration of any NOLs or R&D credits.

However, future changes in ownership may further limit the ability of the Company to utilize its NOL carryforwards and R&D tax credit carryforwards.

At December 31, 2020 and 2019, the Company placed a valuation allowance of $ 15,204,000 and $ 12,420,000 , respectively, against the entirety of its net deferred tax asset balance, as the Company has not determined that it is more likely than not to be realized.

The Company assessed whether it had any significant uncertain tax positions related to open tax years and concluded there were none.

However, future changes in ownership may further limit the ability of us to utilize our NOL carryforwards and R&D tax credit carryforwards.

During the year ended December 31, 2021, in connection with the acquisition of Cernostics, we recorded additional net deferred tax liabilities of $ 9,371,000 , primarily due to book-tax differences related to the acquired intangible assets.

As a result of these additional deferred tax liabilities, we determined that $ 8,726,000 of our existing valuation allowance should be reduced, which was reflected in our income tax benefit for the year ended December 31, 2021.

At December 31, 2021 and 2020, we placed a valuation allowance of $ 17,774,000 and $ 15,204,000 , respectively, against our net deferred tax asset balances, as we have determined that it is more likely than not that they will not be realized.

We assessed whether we had any significant uncertain tax positions related to open tax years and concluded there were none.

Accordingly, no reserve for uncertain tax positions has been recorded as of December 31, 2021 and 2020.

The Company is generally no longer subject to tax examinations for U.S.

We are generally no longer subject to tax examinations for U.S.

federal income tax purposes for fiscal years prior to 2018 and fiscal years prior to 2017 for multiple state jurisdictions.

However, since the Company has been in an NOL position since 2008, the Company’s 2008 to 2016 federal tax returns and its 2008 to 2014 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards.

CASTLE BIOSCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected unaudited quarterly financial data for the years ended December 31, 2020 and 2019 (in thousands, except per share data):

Year Ended December 31, 2020

First Quarter Second Quarter Third Quarter Fourth Quarter Total Year

Net revenues $ 17,418 $ 12,715 $ 15,217 $ 17,299 $ 62,649

Gross margin $ 15,027 $ 10,569 $ 12,742 $ 14,626 $ 52,964

Net income (loss) (1)

$ 570 $ ( 1,376 ) $ ( 4,589 ) $ ( 4,889 ) $ ( 10,284 )

Net income (loss) attributable to common stockholders (1)

$ 570 $ ( 1,376 ) $ ( 4,589 ) $ ( 4,889 ) $ ( 10,284 )

Earnings (loss) per share (3) :

Basic $ 0.03 $ ( 0.08 ) $ ( 0.23 ) $ ( 0.23 ) $ ( 0.54 )

Diluted $ 0.03 $ ( 0.08 ) $ ( 0.23 ) $ ( 0.23 ) $ ( 0.54 )

Year Ended December 31, 2019

First Quarter Second Quarter Third Quarter Fourth Quarter Total Year

Net revenues $ 8,717 $ 10,739 $ 14,774 $ 17,635 $ 51,865

Gross margin $ 7,119 $ 8,746 $ 13,066 $ 15,624 $ 44,555

Net (loss) income (2)

$ ( 1,358 ) $ ( 1,269 ) $ 5,849 $ 2,055 $ 5,277

Net (loss) income attributable to common stockholders (2)

$ ( 2,342 ) $ ( 2,265 ) $ 5,543 $ 2,055 $ 2,991

(Loss) Earnings per share (3) :

Basic $ ( 1.22 ) $ ( 1.05 ) $ 0.43 $ 0.12 $ 0.35

Diluted $ ( 1.22 ) $ ( 1.05 ) $ 0.05 $ 0.11 $ ( 0.21 )

(1) For the second, third and fourth quarters of 2020, includes other operating income (loss) of $ 1.9 million, ($ 1.9 million) and $ 1.9 million, respectively, associated with CARES Act provider relief funds, as discussed in Note 2 to the financial statements.

For the fourth quarter of 2020, includes a loss on extinguishment of debt of $ 1.4 million.

(2) For the third quarter of 2019, includes a gain on extinguishment of debt of $ 5.2 million.

(3) Basic and diluted (loss) earnings per share are computed independently for each quarterly and annual period presented.

Therefore, t he sum of the quarterly basic and diluted (loss) earnings per share amounts may not equal annual basic and diluted (loss) earnings per share.

However, since we have been in an NOL position since 2008, our 2008 to 2017 federal tax returns and our 2008 to 2016 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards.

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-K

Item 9A. Controls and Procedures