CASTLE BIOSCIENCES INC 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of 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 There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 96 Table of Contents PART III 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. Item 10. Directors, Executive Officers and Corporate Governance. 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. If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website or in a Current Report on Form 8-K. Item 11. Executive Compensation. The information required by this item is to be included in our Proxy Statement under the section entitled “Executive Compensation” and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item 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. Item 13. Certain Relationships and Related Transactions, and Director Independence. 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. Item 14. Principal Accountant Fees and Services. Our independent registered public accounting firm is KPMG LLP , San Diego, CA , Audit Firm ID: 185 . 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. 97 Table of Contents PART IV Item 15. Exhibit and Financial Statement Schedules. (a)(1) Financial Statements. 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 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 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. 3.2 Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019. 4.1 Description of securities registered under Section 12 of the Exchange Act, incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K filed with the SEC on March 10, 2020. 4.2 Form of Common Stock Certificate of the Registrant, incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 4.3 Sixth Amended and Restated Investors’ Rights Agreement, dated July 12, 2019, by and among the Registrant and certain of its stockholders, incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.1+ Form of Indemnity Agreement by and between the Registrant and its directors and officers, incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.2+ Castle Biosciences, Inc. 2008 Stock Plan, incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.3+ Forms of Stock Option Agreement, Exercise Notice and Investment Representation Statement under the 2008 Stock Plan, incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.4+ Castle Biosciences, Inc. 2018 Equity Incentive Plan, as amended, incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.5+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.6+ Castle Biosciences, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 99.3 of the Registrant’s Registration Statement on Form S- 8 (File No. 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. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020. 98 Table of Contents Exhibit Number Description of document 10.9+ Castle Biosciences, Inc. 2019 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.10+ Form of Director Agreement by and between the Registrant and certain of its directors, incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.11+* Non-Employee Director Compensation Policy, as amended effective January 28, 2022. 10.12+ Amended and Restated Executive Employment Agreement, dated September 20, 2012, as amended, by and between the Registrant and Derek J. Maetzold, incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.13+ Offer Letter Agreement, dated March 2, 2016, by and between the Registrant and Bernhard Spiess, incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.14+ Offer Letter Agreement, dated November 9, 2017, by and between the Registrant and Frank Stokes, incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.15+ 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. Monzon, M.D., incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2020. 10.21+ Master Services Agreement dated May 29, 2020, by and between the Registrant and Genomic Path LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 2, 2020. 10.22 Standard Office Lease, dated as of October 5, 2015, by and between the Registrant and Merced Restart Phoenix Investors II, LLC, incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.23 First Amendment to Lease, dated December 4, 2018, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.15 of the Registrant's Annual Report on Form 10-K, filed with the SEC on March 10, 2020. 10.24 Office Building Lease, dated as of March 11, 2015, by and between the Registrant and RMG Leasing (a/k/a Cedarwood Professional Building), as amended, incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.25 Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete, II, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.26 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. 99 Table of Contents 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. 10.31 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. 31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 32.1** Certification of 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. 101.INS* Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema. 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase. 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase. 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase. 104* Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101). _____________________________________ * Filed herewith ** Furnished herewith. + Indicates management contract or compensatory plan. # Certain portions of this exhibit (indicated by “[***]”) have been omitted as we have determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to us if publicly disclosed. † 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. Item 16. Form 10-K Summary. None. 100 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASTLE BIOSCIENCES, INC. Date: February 28, 2022 By: /s/ Derek J. Maetzold Derek J. Maetzold President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. SIGNATURE TITLE DATE /s/ Derek J. Maetzold President, Chief Executive Officer and Director February 28, 2022 (Derek J. Maetzold) ( Principal Executive Officer ) /s/ Frank Stokes Chief Financial Officer February 28, 2022 (Frank Stokes) ( Principal Financial and Accounting Officer ) /s/ Daniel M. Bradbury Chairman of the Board of Directors February 28, 2022 (Daniel M. Bradbury) /s/ Mara G. Aspinall Member of the Board of Directors February 28, 2022 (Mara G. Aspinall) /s/ Kimberlee S. Caple Member of the Board of Directors February 28, 2022 (Kimberlee S. Caple) /s/ G. Bradley Cole Member of the Board of Directors February 28, 2022 (G. Bradley Cole) /s/ Ellen Goldberg Member of the Board of Directors February 28, 2022 (Ellen Goldberg) /s/ Miles D. Harrison Member of the Board of Directors February 28, 2022 (Miles D. Harrison) /s/ Tiffany P. Olson Member of the Board of Directors February 28, 2022 (Tiffany P. Olson) 101 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report s of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F- 5 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2021 and 2020 F- 6 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 F- 8 Notes to the Consolidated Financial Statements F- 10 F-1 Table of Contents Report of Independent Registered Public Accounting Firm 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. /s/ KPMG LLP San Diego, California February 28, 2022 F-2 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Castle Biosciences, Inc.: 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 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 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. F-3 Table of Contents 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. /s/ KPMG LLP We have served as the Company’s auditor since 2018. San Diego, California February 28, 2022 F-4 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2021 2020 ASSETS Current Assets Cash and cash equivalents $ 329,633 $ 409,852 Accounts receivable, net 17,282 12,759 Inventory 2,021 2,217 Prepaid expenses and other current assets 4,807 4,766 Total current assets 353,743 429,594 Long-term accounts receivable, net 1,308 1,096 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 Total assets $ 462,572 $ 439,328 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 2,546 $ 2,098 Accrued compensation 15,483 9,108 Medicare advance payment — 6,615 Operating lease liabilities 1,179 — Other accrued and current liabilities 5,678 3,055 Total current liabilities 24,886 20,876 Contingent consideration 18,287 — Noncurrent operating lease liabilities 6,900 — Noncurrent portion of Medicare advance payment — 1,735 Deferred tax liability 635 — Other liabilities 124 1,026 Total liabilities 50,832 23,637 Commitments and Contingencies (Note 12) Stockholders’ Equity Preferred stock, $ 0.001 par value; 10,000,000 shares authorized as of December 31, 2021 and 2020; no shares issued and outstanding as of December 31, 2021 and 2020. — — Common stock, $ 0.001 par value; 200,000,000 authorized as of December 31, 2021 and 2020, respectively; 25,378,520 and 24,812,487 shares issued and outstanding as of December 31, 2021 and 2020, respectively. 25 25 Additional paid-in capital 505,482 478,162 Accumulated deficit ( 93,767 ) ( 62,496 ) Total stockholders’ equity 411,740 415,691 Total liabilities and stockholders’ equity $ 462,572 $ 439,328 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share data) Years Ended December 31, 2021 2020 NET REVENUES $ 94,085 $ 62,649 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 ( 40,079 ) ( 6,542 ) Interest income 68 373 Interest expense ( 1 ) ( 2,634 ) 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 ) Diluted $ ( 1.24 ) $ ( 0.54 ) Weighted-average shares outstanding: Basic 25,137 18,929 Diluted 25,137 18,929 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount BALANCE, JANUARY 1, 2020 — $ — 17,130,907 $ 17 $ 137,308 $ ( 52,212 ) $ 85,113 Stock-based compensation expense — — — — 8,309 — 8,309 Exercise of common stock options — — 459,074 1 1,592 — 1,593 Exercise of common stock warrants — — 241,052 — — — — 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 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 Net loss — — — — — ( 31,292 ) ( 31,292 ) BALANCE, DECEMBER 31, 2021 — $ — 25,378,520 $ 25 $ 505,482 $ ( 93,767 ) $ 411,740 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2021 2020 OPERATING ACTIVITIES 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 debt discounts and issuance costs — 839 Deferred income taxes ( 8,736 ) — Loss on extinguishment of debt — 1,397 Other — ( 16 ) Change in operating assets and liabilities: Accounts receivable ( 4,631 ) 1,663 Prepaid expenses and other current assets 617 ( 2,815 ) 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 Medicare advance payment ( 8,350 ) 8,350 Other accrued liabilities 2,286 561 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 Net cash used in investing activities ( 66,657 ) ( 4,748 ) FINANCING ACTIVITIES Proceeds from public offerings of common stock, net of underwriting discounts, commissions and offering costs — 330,041 Payment of common stock offering costs ( 336 ) — Repayment of term debt — ( 27,359 ) 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 F-8 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (in thousands) Years Ended December 31, 2021 2020 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 80,219 ) 311,007 Beginning of year 409,852 98,845 End of year $ 329,633 $ 409,852 SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest $ 1 $ 1,978 Income taxes $ 16 $ 102 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 33 $ 58 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 Cashless exercise of common stock warrants $ — $ 250 The accompanying notes are an integral part of these consolidated financial statements. F-9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Castle Biosciences, Inc. (the ‘‘Company’’, “we”, “us”, or “our”) was incorporated in the state of Delaware on September 12, 2007. We are a commercial-stage 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 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. 2. Summary of Significant Accounting Policies Basis of Presentation 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. GAAP’’). 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 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. 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 Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. All revenues are attributable to U.S.-based operations and all assets are held in the United States. F-10 Table of Contents 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. Our cash equivalents consist of money market funds, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”), that are primarily invested in short-term U.S. government obligations. Cash deposits at financial institutions may exceed the amount of insurance provided by the FDIC. Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the institutions in which deposits are held. We have not experienced any losses on our cash or cash equivalents. Revenue Recognition Revenue is recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 606, Revenue from Contracts with Customers (‘‘ASC 606’’). In accordance with ASC 606, we follow a five-step process to recognize revenues: (1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenues when the performance obligations are satisfied. We have determined that we have a contract with the patient when the treating clinician orders the test. Our contracts generally contain a single performance obligation, which is the delivery of the test report, and we satisfy our performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point we can bill for the report. The amount of revenue recognized reflects the amount of consideration to which we expect to be entitled, or the transaction price, and considers the effects of variable consideration. See Note 3 for further details. Accounts Receivable and Allowance for 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. 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. 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 credit losses. Inventory 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 Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between five and ten years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. 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 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 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 F-11 Table of Contents 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. Acquisitions 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, 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 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, 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. Leases 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. F-12 Table of Contents 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 Research and development costs are charged to operations as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on behalf of 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. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses are attributable to sales, marketing, executive, finance and accounting, legal and human resources functions. These expenses consist of personnel costs (including salaries, employee benefit costs, bonuses and 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 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 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, 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. Income Taxes 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in 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. F-13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-Based Compensation Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards. The fair value of employee stock options and offerings under the 2019 Employee Stock Purchase Plan (the “ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing valuation model. For restricted stock units (“RSUs”), the fair value is equal to the closing price of 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 ). For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date. Forfeitures are accounted for as they occur. Comprehensive Loss 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% 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 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 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 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. 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. F-14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the existing guidance. The adoption of ASU 2019-12 effective January 1, 2021 had no impact on our consolidated financial statements. 3. Revenue 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. Medicare claims that were either submitted to Medicare prior to the LCD coverage commencement date or are not covered by the terms of the LCD but meet the definition of being medically reasonable and necessary pursuant to the controlling Section 1862(a)(1)(A) of the Social Security Act are generally appealed and may ultimately be paid at the first (termed ‘‘redetermination’’), second (termed ‘‘reconsideration’’) or third level of appeal (de novo hearing with an Administrative Law Judge (“ALJ”)). A successful appeal at any of these levels results in payment. In the absence of LCD coverage or contractually established reimbursements rates, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions. Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606. The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties. Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. Variable consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor. 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. 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. F-15 Table of Contents CASTLE BIOSCIENCES, INC. 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 program consolidates outstanding claims at the ALJ level and uses a statistical-sampling approach where five ALJs will determine reimbursement results for a sample of claims which are then extrapolated to the universe of claims. The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017. Hearings were held in April 2019 with a supplemental hearing in May 2019. On March 12, 2020, OMHA issued a decision denying payment on all claims in the consolidation. We have filed an appeal to the decision, although no ruling on such appeal has been issued to date. In accordance with ASC 606 and consistent with prior periods, we have not recognized (fully constrained the variable consideration) any revenues attributable to these claims in our 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, 2021 2020 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 (current) 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 % F-16 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. 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, 2021 2020 Stock options and restricted stock units 3,459 2,789 Common stock warrants — 35 Employee stock purchase plan 62 100 Total 3,521 2,924 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. 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. 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. F-17 Table of Contents 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. 6. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): As of December 31, 2021 2020 Leasehold improvements $ 5,044 $ 1,388 Lab equipment (1) 3,727 2,037 Computer equipment 2,457 1,305 Furniture and fixtures 1,288 436 Construction-in-progress 27 3,590 Total 12,543 8,756 Less accumulated depreciation (1) ( 3,042 ) ( 1,654 ) Property and equipment, net $ 9,501 $ 7,102 (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, 2021 2020 Cost of sales (exclusive of amortization of acquired intangible assets) $ 478 $ 341 Research and development 248 31 Selling, general and administrative 722 100 Total $ 1,448 $ 472 F-18 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. 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, 2022 $ 6,681 2023 6,681 2024 6,700 2025 6,681 2026 6,672 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. 8. Other Accrued and Current Liabilities Other accrued liabilities consisted of the following (in thousands) : As of December 31, 2021 2020 Accrued service fees $ 1,905 $ 1,543 Clinical studies 1,655 348 Employee stock purchase plan contributions 760 536 Payroll tax liabilities 695 276 Accrued payor refunds 386 — Other 277 352 Total $ 5,678 $ 3,055 9. Leases 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. F-19 Table of Contents CASTLE BIOSCIENCES, INC. 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 Lease Assets Operating Operating lease assets $ 7,383 Finance Property and equipment, net $ 229 Lease Liabilities Current Operating Operating lease liabilities $ 1,179 Finance Other accrued and current liabilities $ 105 Noncurrent 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) $ 1,450 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. F-20 Table of Contents CASTLE BIOSCIENCES, INC. 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 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 2025 1,218 — 2026 689 — Thereafter 4,609 — Total lease payments 10,363 242 Less: 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. F-21 Table of Contents 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, 2021 $ 1,164 2022 1,148 2023 1,142 2024 1,154 2025 1,119 Thereafter 1,037 $ 6,764 Rent expense was $ 548,000 for the year ended December 31, 2020. 10. 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 . 11. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows: Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring 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. 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 us or holders of the instruments could realize in a current market exchange. F-22 Table of Contents CASTLE BIOSCIENCES, INC. 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 Quoted Prices in Active Markets for Identical Items (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 327,721 $ — $ — $ 327,721 Liabilities: Contingent consideration $ — $ — $ 18,287 $ 18,287 As of December 31, 2020 Quoted Prices in Active Markets for Identical Items (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 409,480 $ — $ — $ 409,480 (1) Classified as “Cash and cash equivalents” in the 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): Year Ended December 31, 2021 Balance at beginning of period $ — Acquisition of Cernostics 18,287 Change in fair value — Balance at end of period $ 18,287 12. Commitments and Contingencies From time to time, we may be involved in legal proceedings arising in the ordinary course of business. We believe there is no threatened litigation or litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows. F-23 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Stockholders’ Equity Capital Stock The Company’s Amended and Restated Certificate of Incorporation, dated July 29, 2019, authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The Company is also authorized to issue up to 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 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 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, 2021 or 2020. The common stock warrants were classified as stockholders’ equity and no adjustments were recorded for changes in fair value. 14. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans 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. Options under the plans may be granted as incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”). 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 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. F-24 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock Options Stock option activity under our stock plans for the years ended December 31, 2021 and 2020 is set forth below: Weighted-Average Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2020 2,637,966 $ 13.30 Granted 1,286,065 $ 49.63 Exercised ( 460,207 ) $ 3.53 Forfeited/Cancelled ( 94,322 ) $ 27.51 Balance as of December 31, 2020 3,369,502 $ 28.11 Granted 841,336 $ 48.97 Exercised ( 414,890 ) $ 10.13 Forfeited/Cancelled ( 209,260 ) $ 33.97 Balance as of December 31, 2021 3,586,688 $ 34.75 8.3 $ 45,970 Exercisable at December 31, 2021 (1) 1,332,487 $ 23.31 7.5 $ 28,845 (1) Vested and exercisable options. Additionally, outstanding unvested options to purchase an aggregate of 10,255 shares of common stock with a weighted-average exercise price of $ 2.39 per share may be exercised prior to vesting as of December 31, 2021 under early-exercise provisions. In the event of such exercise, the shares obtained upon exercise would be restricted and subject to forfeiture prior to vesting. No such early exercises have occurred as of December 31, 2021. Restricted Stock Units 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 Vested — $ — Forfeited/Cancelled — $ — Balance as of December 31, 2020 161,477 $ 59.16 Granted 958,361 $ 43.05 Vested (1) ( 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. Because F-25 Table of Contents 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. 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. 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, 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 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, 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 . 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 . 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 . 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. F-26 Table of Contents 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: Years Ended December 31, 2021 2020 Average expected term (years) 6.1 6 Expected stock price volatility 66.50 % - 68.83 % 59.57 % - 67.02 % Risk-free interest rate 0.51 % - 1.48 % 0.28 % - 1.76 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Years Ended December 31, 2021 2020 Average expected term (years) 1.2 1.2 Expected stock price volatility 61.13 % - 86.50 % 56.80 % - 100.49 % Risk-free interest rate 0.06 % - 0.20 % 0.12 % - 0.95 % Dividend yield — % — % 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 consolidated statements of operations and comprehensive loss as follows (in thousands): Years Ended December 31, 2021 2020 Cost of sales (exclusive of amortization of acquired intangible assets) $ 2,058 $ 1,049 Research and development 4,522 1,492 Selling, general and administrative 15,160 5,768 Total stock-based compensation expense $ 21,740 $ 8,309 For the years ended December 31, 2021 and 2020, the weighted-average grant date fair value of stock options was $ 29.89 and $ 28.95 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 27.60 and $ 17.43 per share, respectively. As of December 31, 2021, the total unrecognized stock-based compensation cost related to outstanding awards was $ 99,251,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3.3 years. The total unrecognized compensation cost will be adjusted for forfeitures in future periods as they occur. 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 $ 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. F-27 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. Income Taxes The components of income tax expense (benefit) are as follows (in thousands): Years Ended December 31, 2021 2020 Current tax expense U.S. Federal $ — $ — State and local 16 84 Total current 16 84 Deferred tax (benefit) expense U.S. Federal ( 8,726 ) — State and local ( 10 ) — Total deferred ( 8,736 ) — 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 (benefit) are summarized as follows (in thousands): Years Ended December 31, 2021 2020 Pre-tax loss $ ( 40,012 ) $ ( 10,200 ) U.S. federal taxes at statutory rate ( 8,402 ) ( 2,142 ) State income taxes ( 1,764 ) ( 311 ) Non-deductible meals — 235 Research and development (“R&D”) tax credit ( 1,658 ) ( 703 ) Change in valuation allowance 2,570 2,784 Stock-based compensation ( 880 ) ( 781 ) Non-deductible officers’ compensation 1,571 963 Other ( 157 ) 39 Total income tax (benefit) expense $ ( 8,720 ) $ 84 F-28 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant components of deferred tax assets and liabilities are as follows (in thousands): As of December 31, 2021 2020 Deferred tax assets: Net operating loss (“NOL”) carryforwards $ 24,316 $ 13,720 Accrued liabilities 4,168 2,730 Lease liabilities 2,114 — Intangible assets — 46 Stock-based compensation 2,202 761 R&D tax credit 3,670 1,777 Other 240 — Total deferred tax assets 36,710 19,034 Less valuation allowance ( 17,774 ) ( 15,204 ) Deferred tax assets, net $ 18,936 $ 3,830 Deferred tax liabilities: 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 ) Total deferred tax liabilities ( 19,571 ) ( 3,830 ) Net deferred tax asset (liability) $ ( 635 ) $ — 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, 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). 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 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. 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 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. F-29