What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-09 compared with 2021-11-08 · 214 added, 249 removed, 283 unchanged (62% of the section changed)

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(in thousands, except share and per share data)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

ASSETS (unaudited)

7 unchanged sentences

Property and equipment, net 9,385 9,501

Intangible asset, net 32,104 —

Operating lease assets 7,219 7,383

Intangible assets, net 87,275 88,922

Other assets – long-term 2,699 1,715

4 unchanged sentences

Accrued compensation 8,566 15,483

Medicare advance payment 2,999 6,615

Other accrued liabilities 3,108 3,055

Contingent consideration 20,849 —

Operating lease liabilities 1,199 1,179

Other accrued and current liabilities 5,593 5,678

Total current liabilities 39,521 24,886

Noncurrent portion of Medicare advance payment — 1,735

Deferred rent and other liabilities 986 1,026

Noncurrent portion of contingent consideration — 18,287

Noncurrent operating lease liabilities 6,711 6,900

Deferred tax liability 757 635

Other liabilities 100 124

Total liabilities 47,089 50,832

1 unchanged sentence

Stockholders’ Equity

Preferred stock, $ 0.001 par value;

10,000,000 shares authorized as of September 30, 2021 and December 31, 2020;

no shares issued and outstanding as of September 30, 2021 and December 31, 2020.

Common stock, $ 0.001 par value;

200,000,000 shares authorized as of September 30, 2021 and December 31, 2020;

25,286,546 and 24,812,487 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively.

Preferred stock, $ 0.001 par value per share;

10,000,000 shares authorized as of March 31, 2022 and December 31, 2021;

no shares issued and outstanding as of March 31, 2022 and December 31, 2021

Common stock, $ 0.001 par value per share;

200,000,000 shares authorized as of March 31, 2022 and December 31, 2021;

25,485,420 and 25,378,520 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 515,701 505,482

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Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

NET REVENUES $ 26,852 $ 22,813

OPERATING EXPENSES AND OTHER OPERATING LOSS

Cost of sales (exclusive of amortization of acquired intangible asset) 4,500 2,475 11,225 7,012

OPERATING EXPENSES

Cost of sales (exclusive of amortization of acquired intangible assets) 5,944 3,028

Research and development 10,761 5,908

Selling, general and administrative 30,453 18,161

Amortization of acquired intangible asset 694 — 950 —

Other operating loss — 1,882 — —

Amortization of acquired intangible assets 1,648 —

Change in fair value of contingent consideration 2,562 —

Total operating expenses 51,368 27,097

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Net loss and comprehensive loss $ ( 24,623 ) $ ( 4,280 )

Loss per share:

$ ( 0.47 ) $ ( 0.23 ) $ ( 0.99 ) $ ( 0.29 )

Diluted $ ( 0.47 ) $ ( 0.23 ) $ ( 0.99 ) $ ( 0.29 )

Weighted-average shares outstanding:

Basic 25,287 19,936 25,072 18,290

Diluted 25,287 19,936 25,072 18,290

Loss per share, basic and diluted $ ( 0.97 ) $ ( 0.17 )

Weighted-average shares outstanding, basic and diluted 25,424 24,912

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

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

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

Exercise of common stock options — — 32,602 — 71 — 71

Issuance of common stock under the employee stock purchase plan

Adoption of ASU No.

2016-02 — — — — — 21 21

Net income — — — — — 570 570

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

Stock compensation expense — — — — 4,913 — 4,913

Exercise of common stock options — — 171,315 — 991 — 991

Public offering of common stock, net of underwriting discounts, commissions and offering costs — — 2,000,000 2 69,079 — 69,081

Net loss — — — — — ( 1,376 ) ( 1,376 )

BALANCE, JUNE 30, 2020 — $ — 19,373,869 $ 19 $ 210,621 $ ( 53,018 ) $ 157,622

Stock compensation expense — — — — 2,118 — 2,118

Exercise of common stock options — — 129,090 1 291 — 292

Issuance of common stock under the employee stock purchase plan — — 70,711 — 1,233 — 1,233

Public offering of common stock, net of underwriting discounts, commissions and offering costs — — 300,000 — 10,423 — 10,423

Net loss — — — — — ( 4,589 ) ( 4,589 )

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Total

Stockholders’

Shares Amount Shares Amount

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

Stock compensation expense — — — — 4,913 — 4,913

Exercise of common stock options — — 171,315 — 991 — 991

Issuance of common stock under the employee stock purchase plan

— — 70,711 — 1,233 — 1,233

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

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BALANCE, MARCH 31, 2021 — $ — 25,054,513 $ 25 $ 485,338 $ ( 66,755 ) $ 418,608

Stock compensation expense — — — — 4,766 — 4,766

Exercise of common stock options — — 109,540 — 1,354 — 1,354

Net loss — — — — — ( 8,791 ) ( 8,791 )

BALANCE, JUNE 30, 2021 — $ — 25,164,053 $ 25 $ 491,458 $ ( 75,567 ) $ 415,916

BALANCE, JANUARY 1, 2022 — $ — 25,378,520 $ 25 $ 505,482 $ ( 93,767 ) $ 411,740

Stock compensation expense — — — — 8,419 — 8,419

Exercise of common stock options — — 62,102 — 399 — 399

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 2,466 — ( 56 ) — ( 56 )

Issuance of common stock under the employee stock purchase plan — — 42,332 — 1,457 — 1,457

— — 39,737 — 855 — 855

Net loss — — — — — ( 24,623 ) ( 24,623 )

BALANCE, SEPTEMBER 30, 2021 — $ — 25,286,546 $ 25 $ 499,046 $ ( 87,358 ) $ 411,713

BALANCE, MARCH 31, 2022 — $ — 25,485,420 $ 25 $ 515,701 $ ( 118,390 ) $ 397,336

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

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(in thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

Net loss $ ( 24,623 ) $ ( 4,280 )

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

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 2,151 233

Stock compensation expense 14,889 5,348

Amortization of debt discounts and issuance costs — 666

Other ( 99 ) 3

Stock-based compensation expense 8,419 4,913

Change in fair value of contingent consideration 2,562 —

Deferred income taxes 123 —

Change in operating assets and liabilities:

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Inventory ( 329 ) ( 93 )

Operating lease assets 222 231

Other assets 42 ( 225 )

Accounts payable 187 ( 40 )

Operating lease liabilities ( 226 ) ( 295 )

Accrued compensation ( 6,917 ) ( 3,899 )

Medicare advance payment ( 5,351 ) 8,350

Other accrued liabilities 29 ( 330 )

Deferred rent and other liabilities 3 373

Net cash (used in) provided by operating activities ( 16,202 ) 10,295

Net cash used in operating activities ( 21,430 ) ( 3,631 )

INVESTING ACTIVITIES

Purchases of property and equipment ( 402 ) ( 750 )

Asset acquisition ( 33,184 ) —

Proceeds from sale of property and equipment 6 2

Net cash used in investing activities ( 402 ) ( 750 )

FINANCING ACTIVITIES

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

Payment of common stock offering costs — ( 336 )

Repayments on term debt — ( 3,333 )

Proceeds from exercise of common stock options 399 991

Payment of employees’ taxes on vested restricted stock units ( 56 ) —

Proceeds from contributions to the employee stock purchase plan 897 855

Repayment of principal portion of finance lease liabilities ( 24 ) —

Net cash provided by financing activities 1,216 1,510

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Accrued purchases of property and equipment $ 32 $ 220

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

Deferred acquisition costs $ 1,026 $ —

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

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

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

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

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

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

Impact of COVID-19 Pandemic

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Our unaudited condensed consolidated financial statements include the accounts of Castle Biosciences, Inc.

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

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

All intercompany accounts and transactions have been eliminated in consolidation .

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

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

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 of the condensed consolidated statements of operations and comprehensive loss.

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

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of September 30, 2021;

the condensed consolidated statements of operations and comprehensive loss, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020;

and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited.

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of September 30, 2021 and the results of our consolidated operations and our consolidated cash flows for the three and nine months ended September 30, 2021 and 2020.

The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2021 and 2020 are also unaudited.

The results for the three and nine months ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period.

The accompanying condensed consolidated balance sheet as of March 31, 2022;

the condensed consolidated statements of operations and comprehensive loss, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of March 31, 2022 and the results of our consolidated operations and our consolidated cash flows for the three months ended March 31, 2022 and 2021.

The financial data and other information disclosed in these notes related to the three months ended March 31, 2022 and 2021 are also unaudited.

The results for the three months ended March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period.

The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date.

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

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

These consolidated financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 28, 2022.

Use of Estimates

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

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

Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

exposure and the realization of deferred tax assets, the useful lives and recoverability of long-lived assets, the valuation of acquired intangible assets and contingent liabilities.

We base these estimates on historical and anticipated results, trends, and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.

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.

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See Note 3 for further details.

Accounts Receivable and Allowance for Doubtful Accounts

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

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

We 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.

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

Historically, our bad debt expense has not been significant.

The allowance for doubtful accounts was zero as of September 30, 2021, and December 31, 2020.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Operating Loss

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.

Intangible Asset

Our intangible asset consists of acquired developed technology.

The intangible asset is considered to be finite-lived and is being amortized on a straight-line basis over its estimated useful life.

Historically, our credit losses have not been significant.

The allowance for credit losses was zero as of March 31, 2022, and December 31, 2021.

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 a 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 Note 9.

Accrued Compensation

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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 September 30, 2021 and December 31, 2020, we accrued $ 8,999,000 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.

As of March 31, 2022 and December 31, 2021, we accrued $ 4,380,000 and $ 12,071,000 , respectively, for liabilities associated with these bonus plans.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Comprehensive Loss

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

Accounting Pronouncements Yet to be Adopted

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

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

As such, upon our loss of status as an EGC, we will no longer be permitted to delay the adoption of new or revised accounting pronouncements, including the accounting pronouncements discussed below.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes FASB ASC Topic 840, Leases, and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.

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

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

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification.

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

For companies that are not EGCs’, ASU 2016-02 was effective for fiscal years beginning after December 15, 2018.

For EGCs, the effective date of the ASU has been deferred to fiscal years beginning after December 15, 2021, and interim periods within fiscal years

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

beginning after December 15, 2022.

However, because we will no longer be an EGC effective December 31, 2021, we will adopt the new standard in the fourth quarter of 2021 using the modified retrospective method, under which we will apply Topic 842 to existing and new leases as of January 1, 2021, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods.

We do not expect the adoption of this standard to have a material impact on our consolidated statements of operations and comprehensive loss or our consolidated statements of cash flows, but we expect to recognize right-of-use assets and liabilities for lease obligations associated with our operating leases.

In June 2016, the FASB issued ASU No.

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

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

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

For EGCs, the effective date of the ASU has been deferred to fiscal years beginning after December 15, 2022, including interim periods in those fiscal years.

However, because we will no longer be an EGC effective December 31, 2021, we will adopt the new standard in the fourth quarter of 2021 under the modified retrospective method.

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

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

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

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

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

Early adoption is permitted.

However, because we will no longer be an EGC effective December 31, 2021, we will adopt the standard in the fourth quarter of 2021.

We do not expect the adoption of ASU 2019-12 to have a material impact to our consolidated financial statements.

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

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.

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

We also provide a test for uveal melanoma, DecisionDx®-UM, a test for patients with cutaneous squamous cell carcinoma, DecisionDx®-SCC and a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma.

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 test for patients with Barrett’s esophagus 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.

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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”)).

The Medicare claims that are covered by policy under a Local Coverage Determination (“LCD”) or otherwise are generally paid at a rate established on Medicare’s Clinical Laboratory Fee Schedule or by the respective Medicare contractor within 30 days from receipt.

Medicare claims that were either submitted to Medicare prior to the LCD or other coverage commencement date or are not covered 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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

less than our standard rates or not paid at all, with such differences considered implicit price concessions.

In the absence of LCD coverage, contractually established reimbursements rates or other coverage, 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.

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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 for Medicare claims that are not covered by an LCD or otherwise, including those claims undergoing appeal, is deemed to be fully constrained due to factors outside our influence (i.e., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

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

Included in revenues for the three months ended September 30, 2021 and 2020 were $( 92,000 ) and $ 1,450,000 , respectively, of net (negative) positive revenue adjustments associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the nine months ended September 30, 2021 and 2020 were $ 4,130,000 and $ 223,000 , respectively.

Included in revenues for the three months ended March 31, 2022 and 2021 were $ 602,000 and $ 5,335,000 , 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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED 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) and the Medicare advance payment (discussed further below) as of September 30, 2021 and December 31, 2020.

Medicare Advance Payment

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

Recoupment of the Advance Payment commenced in April 2021.

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

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

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

The remaining balance of the Advance Payment is recorded as a current liability on our consolidated balance sheet as of September 30, 2021.

Through September 30, 2021, $ 5,351,000 has been applied against the balance of the Advance Payment.

Contract balances consisted solely of accounts receivable (both current and noncurrent) at March 31, 2022 and December 31, 2021.

DecisionDx-Melanoma Claims Consolidation

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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):

Three Months Ended

Dermatologic $ 24,339 $ 20,910

Other 2,513 1,903

Total net revenues $ 26,852 $ 22,813

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Nine Months Ended

September 30, Percentage of

Three Months Ended

March 31, Percentage of

Accounts Receivable

2 unchanged sentences

(non-current)

2021 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020

2022 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021

Medicare 53 % 57 % 27 % 24 % — % — %

7 unchanged sentences

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 earnings per share for the three and nine months ended September 30, 2021 and 2020 because to do so would be antidilutive (in thousands):

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss earnings per share for the three months ended March 31, 2022 and 2021 because to do so would be antidilutive (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Stock options and restricted stock units (“RSUs”) 4,681 3,464

Common stock warrants — 35 — 35

Employee stock purchase plan 91 76

Total 4,772 3,540

Asset Acquisition

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, Business Combinations , 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 rather than a business combination.

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.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 9.

Property and Equipment, Net

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Leasehold improvements $ 4,930 $ 5,044

5 unchanged sentences

Less accumulated depreciation (1)

( 3,289 ) ( 3,042 )

Property and equipment, net $ 9,385 $ 9,501

(1) Includes lab equipment under a finance lease of $ 237 thousand and accumulated depreciation of $ 34 thousand.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Cost of sales (exclusive of amortization of acquired intangible asset) $ 120 $ 85 $ 333 $ 225

Cost of sales (exclusive of amortization of acquired intangible assets) $ 169 $ 102

Research and development 90 44

1 unchanged sentence

Total $ 503 $ 233

Intangible Asset, Net

Our intangible asset, net consists of the following (in thousands) :

September 30, 2021 December 31, 2020

Gross carrying value Accumulated amortization Net Gross carrying value Accumulated amortization Net

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Intangible Assets, Net

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

March 31, 2022

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

Developed technology $ 90,318 $ ( 3,569 ) $ 86,749 12.9

The remaining useful life of the intangible asset was 11.7 years as of September 30, 2021.

The estimated future aggregate amortization expense as of September 30, 2021 is as follows (in thousands):

Assembled workforce 563 ( 37 ) 526 4.7

Total intangible assets, net $ 90,881 $ ( 3,606 ) $ 87,275

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

The estimated future aggregate amortization expense as of March 31, 2022 is as follows (in thousands):

Years Ending December 31,

2 unchanged sentences

Total $ 87,275

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Accrued Liabilities

Amortization expense of intangible assets was $ 1.6 million for the three months ended March 31, 2022.

No amortization expense was recorded for the three months ended March 31, 2021.

Other Accrued and Current Liabilities

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Accrued service fees $ 2,589 $ 1,905

Payroll tax liabilities 617 276

Clinical studies 2,173 1,655

Payroll tax liabilities 260 695

Employee stock purchase plan contributions 201 760

Accrued royalties 116 151

Accrued state income taxes 10 62

Other 370 663

Total $ 5,593 $ 5,678

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Adoption of ASC 842

In the fourth quarter of 2021, we adopted Accounting Standards Update No.

2016-02, Leases (Topic 842), and Accounting Standards Codification Topic 842, Leases (“ASC 842”) using the modified retrospective approach with an effective date of January 1, 2021.

The adoption had no effect on the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021.

Net cash (used in) provided by operating activities, investing activities or financing activities for the three months ended March 31, 2021 were also unchanged, but the presentation of certain prior period amounts within the operating activities section of the condensed consolidated statements of cash flows has been retrospectively adjusted to give effect to the adoption of ASC 842.

The changes are set forth in the table below (in thousands):

Three Months Ended

March 31, 2021

Before Adoption of ASC 842 Effect of Adoption After Adoption of ASC 842

Effect on Condensed Consolidated Statements of Cash Flows

OPERATING ACTIVITIES

Adjustments to reconcile net loss to net cash used in operating activities:

Operating lease assets $ — $ 231 $ 231

Operating lease liabilities $ — $ ( 295 ) $ ( 295 )

Other liabilities $ ( 64 ) $ 64 $ —

Additionally, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2021 has been retrospectively adjusted to reflect a credit to accumulated deficit of $ 21,000 in connection with the adoption of ASC 842 effective January 1, 2021.

Lease Amendment

On March 11, 2022, we amended one of our operating leases to expand rentable space in Phoenix, Arizona.

We intend to use the additional space for general office and laboratory use.

The term of the amended lease will begin upon the completion of certain leasehold improvements by the Phoenix landlord (the “Phoenix Commencement Date”) and continue for an initial term of 10.3 years from the Phoenix Commencement Date.

Total undiscounted future minimum payment obligations as of March 31, 2022 associated with the lease amendment totaled approximately $ 1.4 million.

As of March 31, 2022, we have not recorded the lease amendment on our condensed consolidated balance sheet because we do not have possession or control of the underlying asset.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):

As of September 30, 2021

The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):

As of March 31, 2022

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

3 unchanged sentences

$ 306,926 $ — $ — $ 306,926

Contingent consideration $ — $ — $ 20,849 $ 20,849

As of December 31, 2021

4 unchanged sentences

$ 327,721 $ — $ — $ 327,721

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

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

Contingent Consideration

In connection with our acquisition of Cernostics, we have recorded a contingent consideration liability for the additional consideration of up to $ 50.0 million that may become payable based on the achievement of certain commercial milestones relating to the year ending December 31, 2022 (“Earnout Payments”).

The Earnout Payments may be settled in cash or shares of our common stock, at our sole discretion.

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.

If the settlement were to occur as of March 31, 2022, we would make no Earnout Payments based on the achievement of the performance conditions to date.

The contingent consideration 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 25.0 % and 16.2 %, respectively, as of March 31, 2022, and 20.0 % and 16.1 %, respectively, as of December 31, 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 condensed consolidated statement of operations and comprehensive loss.

The following table discloses the summary of changes in the contingent consideration liability measured at fair value using Level 3 inputs as of March 31, 2022 (in thousands):

Balance, December 31, 2021 $ 18,287

Change in fair value 2,562

Balance, March 31, 2022 $ 20,849

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Commitments and Contingencies

1 unchanged sentence

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.

Common Stock Offerings

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Stock Incentive Plans and Stock-Based Compensation

1 unchanged sentence

Effective January 1, 2022, an additional 1,268,926 shares became available under our 2019 Equity Incentive Plan (the “2019 Plan”) pursuant to an automatic annual increase.

As of September 30, 2021, 1,441,394 shares remained available for grant under the 2019 Plan.

As of March 31, 2022, 1,213,698 shares remained available for grant under the 2019 Plan.

Stock Options

Stock option activity under our stock plans for the nine months ended September 30, 2021 is set forth below:

Stock option activity under our stock plans for the three months ended March 31, 2022 is set forth below:

Weighted-Average

Stock Options

Outstanding Exercise

Price Remaining

Term (Years) Aggregate

(in thousands)

3 unchanged sentences

Forfeited/Cancelled ( 58,143 ) $ 40.28

Balance as of September 30, 2021 3,110,731 $ 33.11 8.20 $ 104,585

Exercisable at September 30, 2021 (1)

Balance as of March 31, 2022 3,494,048 $ 35.17 8.1 $ 48,222

Exercisable at March 31, 2022

1,457,846 $ 25.22 7.4 $ 31,983

(1) In addition, 24,729 unvested options outstanding at September 30, 2021 may be exercised prior to vesting under an early exercise provision in the stock option award agreement.

In the event of such exercise, the shares obtained upon exercise would be restricted and subject to forfeiture prior to vesting.

No such exercises have occurred to date.

Restricted Stock Units

The following table summarizes our RSU activity for the nine months ended September 30, 2021:

The following table summarizes our RSU activity for the three months ended March 31, 2022:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

2 unchanged sentences

Granted 150,845 $ 37.43

Vested ( 3,767 ) $ 75.37

Forfeited/Cancelled ( 17,037 ) $ 48.06

Balance as of September 30, 2021

Balance as of March 31, 2022

1,180,215 $ 43.28

1 unchanged sentence

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.

During the nine months ended September 30, 2021, we issued 110,448 of common stock pursuant to scheduled purchases under the ESPP.

As of September 30, 2021, 639,466 shares remained available for issuance under the ESPP.

During the three months ended March 31, 2022, we issued 42,332 of common stock pursuant to scheduled purchases under the ESPP.

As of March 31, 2022, 850,919 shares remained available for issuance under the ESPP.

CASTLE BIOSCIENCES, INC.

3 unchanged sentences

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

Nine Months Ended

September 30,

Three Months Ended

Average expected term (years) 6.1 6

5 unchanged sentences

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

Nine Months Ended

September 30,

Three Months Ended

Average expected term (years) 1.3 1.3

13 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

Cost of sales (exclusive of amortization of acquired intangible asset) $ 555 $ 268 $ 1,480 $ 674

Cost of sales (exclusive of amortization of acquired intangible assets) $ 853 $ 510

Research and development 1,828 1,058

1 unchanged sentence

Total stock-based compensation expense $ 8,419 $ 4,913

For the nine months ended September 30, 2021 and 2020, the weighted-average grant date fair value of options granted was $ 40.76 and $ 22.07 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 28.23 and $ 17.43 per share, respectively.

As of September 30, 2021, the total unrecognized compensation cost related to outstanding awards was $ 56,308,000 , which is expected to be recognized on a straight-line basis over a weighted-

For the three months ended March 31, 2022 and 2021, the weighted-average grant date fair value of options granted was $ 22.76 and $ 44.83 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 19.91 and $ 39.26 per share, respectively.

As of March 31, 2022, the total unrecognized compensation cost related to outstanding awards was $ 97,147,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3.1 years.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

average period of 2.9 years.

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

Subsequent Event

On October 18, 2021, we signed a definitive agreement to acquire Cernostics, Inc (“Cernostics”).

Under the terms of the definitive agreement, Cernostics will become our wholly owned subsidiary.

At closing, we will pay upfront consideration of approximately $ 30 million, which may consist entirely of cash or a combination of $ 20 million in cash and $ 10 million in shares of our common stock, at our sole discretion.

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

If we choose to pay the $ 10 million in our common stock, the number of shares issued at the closing will be based on a price per share equal to $ 65.03 .

The upfront cash portion of the consideration is subject to a customary post-closing purchase price adjustment mechanism for, among other things, cash, unpaid indebtedness, unpaid transaction expenses and working capital.

Under the definitive agreement, we have also agreed to pay up to an additional $ 50 million in cash or our common stock, at our sole discretion, based on the achievement of certain commercial milestones relating to the year ending December 31, 2022.

The closing is subject to delivery of certain financial statements to us by Cernostics, the continued of employment of certain Cernostics personnel and satisfaction of other customary conditions.

Among other termination provisions, we and Cernostics each have the right to terminate the definitive agreement, subject to certain conditions and limitations, if the closing has not occurred prior to November 30, 2021, which may be extended for up to 60 days if necessary for Cernostics to provide certain financial statements and/or if more than 5 % of the aggregate number of shares of Cernostics capital stock have not waived their appraisal rights.

Subsequent Events

On April 1, 2022, we entered into a lease agreement (the “Pittsburgh Lease”) for the lease of certain office space in Pittsburgh, Pennsylvania.

We intend to use such space for general office and laboratory use.

The term of the Pittsburgh Lease will begin upon the completion of certain leasehold improvements by the Pittsburgh landlord (the “Pittsburgh Commencement Date”) and continue for an initial period of 10.5 years from the Pittsburgh Commencement Date.

During the first six months of the lease term, we are required to remit base rent of $ 37,800 for the period.

Beginning with month seven, the base rent will be $ 0.6 million per year with annual increases ultimately to $ 1.5 million per year.

The Pittsburgh Lease provides us with an option to extend the term of the Pittsburgh Lease for one additional five-year period.

If we elect to extend the term of the Pittsburgh Lease, then the base rent for the additional five-year period will be the then-fair market rent of the leased premises, subject to a specified minimum amount.

The Pittsburgh Landlord has agreed to contribute up to $ 2.5 million towards the cost of the leasehold improvements and we shall be responsible for any costs exceeding this amount.

The Pittsburgh Lease also provides us a one-time option that would terminate the lease effective at the end of the 90 th month following the Commencement Date, subject to certain conditions.

If exercised, we would pay an early termination fee of $ 2.3 million, subject to adjustment in the event the Pittsburgh Lease is amended to adjust the base rent.

The Pittsburgh Lease also provides us a right of first refusal with respect to the lease of certain additional space in the same building.

On April 26, 2022, we completed the acquisition of AltheaDx.

AltheaDx is a commercial-stage molecular diagnostics company specializing in the field of pharmacogenomics (“PGx”) testing services that are focused on mental health.

IDgenetix is its PGx test for depression, anxiety and other mental health conditions.

Under the terms of the definitive agreement dated April 4, 2022 (the “Merger Agreement”), AltheaDx became a wholly owned subsidiary of Castle and we paid $ 65.0 million in initial consideration to AltheaDx security holders, which consisted of approximately $ 32.5 million in cash, subject to adjustments for cash, debt, transaction expenses and working capital and approximately $ 32.5 million in common stock of ours.

We issued 763,887 shares of our common stock at closing, based on a price per share equal to the volume-weighted-average price of our common stock for the 20 trading days immediately preceding the date of the merger agreement governing the acquisition .

Further, up to an additional $ 75.0 million in cash and common stock may become payable in connection with the achievement of certain milestones based on 2022, 2023 and 2024 performance and expanded Medicare coverage for the IDgenetix test.

Upon achievement of each relevant milestone event, each milestone will be paid 50 % in cash and 50 % in shares of our common stock based on a price per share equal to the volume-weighted-average price of our common stock for the 20 trading days as of the applicable milestone determination date.

The maximum number of shares of our common stock issuable to AltheaDx security holders may not exceed 1,271,718 shares, and therefore, a maximum of 507,831 additional shares of our common stock remain issuable with respect to the milestone payments.

In the event a number of shares in excess of the 1,271,718 limit would otherwise be issuable as consideration in the Merger, each AltheaDx security holder will receive a pro rata reduction of their portion of the milestone stock consideration and a corresponding increase in their portion of the milestone cash consideration.

Our entry into the Merger Agreement was approved by our board of directors based upon the unanimous recommendation of a special transaction committee comprised solely of independent and disinterested directors.

Maetzold, our President and Chief Executive Officer, and a member of our board of directors, and Daniel M.

Bradbury, the chairperson of our board of directors, each served on the board of directors of AltheaDx.

Further, each of the following individuals was a direct or indirect beneficial owner of AltheaDx securities and received consideration in the transaction:

Thomas Sullivan, John Maetzold and Peter Maetzold, immediate family members of Mr.

Frank Stokes, the Company’s Chief Financial Officer;

Tobin Juvenal, our Chief Commercial Officer;

Kristen Oelschlager, our Chief Operating Officer;

and Joshua Albers and Allysa Topel, immediate family members of Ms.

Table of Content s

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

What changed 10-Q

Item 1. Financial Statements