CASTLE BIOSCIENCES INC 10-Q

Item 1. Financial Statements. CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) March 31, 2022 December 31, 2021 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 309,017 $ 329,633 Accounts receivable, net 19,910 17,282 Inventory 2,350 2,021 Prepaid expenses and other current assets 5,164 4,807 Total current assets 336,441 353,743 Long-term accounts receivable, net 1,406 1,308 Property and equipment, net 9,385 9,501 Operating lease assets 7,219 7,383 Intangible assets, net 87,275 88,922 Other assets – long-term 2,699 1,715 Total assets $ 444,425 $ 462,572 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 3,314 $ 2,546 Accrued compensation 8,566 15,483 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 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 Commitments and Contingencies (Note 10) Stockholders’ Equity 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 25 25 Additional paid-in capital 515,701 505,482 Accumulated deficit ( 118,390 ) ( 93,767 ) Total stockholders’ equity 397,336 411,740 Total liabilities and stockholders’ equity $ 444,425 $ 462,572 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (in thousands, except per share data) Three Months Ended March 31, 2022 2021 NET REVENUES $ 26,852 $ 22,813 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 assets 1,648 — Change in fair value of contingent consideration 2,562 — Total operating expenses 51,368 27,097 Operating loss ( 24,516 ) ( 4,284 ) Interest income 30 4 Interest expense ( 3 ) — Loss before income taxes ( 24,489 ) ( 4,280 ) Income tax expense 134 — Net loss and comprehensive loss $ ( 24,623 ) $ ( 4,280 ) 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. 2 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share data) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount BALANCE, JANUARY 1, 2021 — $ — 24,812,487 $ 25 $ 478,162 $ ( 62,496 ) $ 415,691 Adoption of ASU No. 2016-02 — — — — — 21 21 Stock compensation expense — — — — 4,913 — 4,913 Exercise of common stock options — — 171,315 — 991 — 991 Issuance of common stock under the employee stock purchase plan — — 70,711 — 1,233 — 1,233 Public offering of common stock, adjustment to offering costs — — — — 39 — 39 Net loss — — — — — ( 4,280 ) ( 4,280 ) BALANCE, MARCH 31, 2021 — $ — 25,054,513 $ 25 $ 485,338 $ ( 66,755 ) $ 418,608 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 Net loss — — — — — ( 24,623 ) ( 24,623 ) 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. 3 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended March 31, 2022 2021 OPERATING ACTIVITIES Net loss $ ( 24,623 ) $ ( 4,280 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,151 233 Stock-based compensation expense 8,419 4,913 Change in fair value of contingent consideration 2,562 — Deferred income taxes 123 — Other 12 33 Change in operating assets and liabilities: Accounts receivable ( 2,725 ) ( 1,558 ) Prepaid expenses and other current assets ( 357 ) 1,679 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 ) Other accrued liabilities 29 ( 330 ) Net cash used in operating activities ( 21,430 ) ( 3,631 ) INVESTING ACTIVITIES Purchases of property and equipment ( 402 ) ( 750 ) Net cash used in investing activities ( 402 ) ( 750 ) FINANCING ACTIVITIES Payment of common stock offering costs — ( 336 ) 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 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 20,616 ) ( 2,871 ) Beginning of period 329,633 409,852 End of period $ 309,017 $ 406,981 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 32 $ 220 Deferred acquisition costs $ 1,026 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Description of Business Castle Biosciences, Inc. (the ‘‘Company,’’ “we,” “us” or “our”) was incorporated in the state of Delaware on September 12, 2007. We are a commercial-stage 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 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 unaudited condensed 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 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 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 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, 2021 filed with the Securities and Exchange Commission on February 28, 2022. 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 5 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 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 March 31, 2022, and December 31, 2021. 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. 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 We accrue for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by our board of directors, compensation levels of eligible individuals, and target bonus percentage levels. The board of directors reviews and evaluates the performance against these objectives and ultimately determines what discretionary payments are made. We also accrue for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets. As of March 31, 2022 and December 31, 2021, we accrued $ 4,380,000 and $ 12,071,000 , respectively, for liabilities associated with these bonus plans. 6 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 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. 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, 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. 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”) 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, 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. 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 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 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. 7 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 solely of accounts receivable (both current and noncurrent) at March 31, 2022 and 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): Three Months Ended March 31, 2022 2021 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. Our significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows: Percentage of Revenues Three Months Ended March 31, Percentage of Accounts Receivable (current) Percentage of Accounts Receivable (non-current) 2022 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Medicare 53 % 57 % 27 % 24 % — % — % Medicare Advantage plans 33 % 24 % 40 % 40 % — % — % BlueCross BlueShield plans 7 % 6 % 19 % 22 % 59 % 58 % 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. 8 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 March 31, 2022 2021 Stock options and restricted stock units (“RSUs”) 4,681 3,464 Employee stock purchase plan 91 76 Total 4,772 3,540 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. 5. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): March 31, 2022 December 31, 2021 Leasehold improvements $ 4,930 $ 5,044 Lab equipment (1) 3,774 3,727 Computer equipment 2,659 2,457 Furniture and fixtures 1,263 1,288 Construction in progress 48 27 Total 12,674 12,543 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 March 31, 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 169 $ 102 Research and development 90 44 Selling, general and administrative 244 87 Total $ 503 $ 233 9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 6. 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 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, 2022 (remainder of year) $ 5,034 2023 6,681 2024 6,700 2025 6,681 2026 6,672 Thereafter 55,507 Total $ 87,275 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. 7. Other Accrued and Current Liabilities Other accrued liabilities consisted of the following (in thousands): March 31, 2022 December 31, 2021 Accrued service fees $ 2,589 $ 1,905 Clinical studies 2,173 1,655 Payroll tax liabilities 260 695 Employee stock purchase plan contributions 201 760 Other 370 663 Total $ 5,593 $ 5,678 10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 8. Leases 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. 11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 9. Fair Value Measurements The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of March 31, 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 (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 306,926 $ — $ — $ 306,926 Liabilities Contingent consideration $ — $ — $ 20,849 $ 20,849 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 (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 12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 10. 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. 11. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans 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 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 three months ended March 31, 2022 is set forth below: Weighted-Average Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of December 31, 2021 3,586,688 $ 34.75 Granted 27,605 $ 36.69 Exercised ( 62,102 ) $ 6.42 Forfeited/Cancelled ( 58,143 ) $ 40.28 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 Restricted Stock Units 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 Balance as of December 31, 2021 1,050,174 $ 44.31 Granted 150,845 $ 37.43 Vested ( 3,767 ) $ 75.37 Forfeited/Cancelled ( 17,037 ) $ 48.06 Balance as of March 31, 2022 1,180,215 $ 43.28 Employee Stock Purchase Plan The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 253,785 shares becoming available under the ESPP effective January 1, 2022. 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. 13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Determining Fair Value - Summary of Assumptions We use the Black-Scholes option pricing model to estimate the fair value of each option grant on the date of grant or any other measurement date. The following table sets forth the assumptions used to determine the fair value of stock options: Three Months Ended March 31, 2022 2021 Average expected term (years) 6.1 6 Expected stock price volatility 68.34 % - 68.44 % 59.87 % - 67.68 % Risk-free interest rate 1.63 % - 1.64 % 0.43 % - 1.71 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Three Months Ended March 31, 2022 2021 Average expected term (years) 1.3 1.3 Expected stock price volatility 62.98 % - 66.75 % 68.43 % - 86.50 % Risk-free interest rate 0.60 % - 1.30 % 0.07 % - 0.13 % Dividend yield — % — % The fair value of our common stock is also an assumption used to determine the fair value of stock options and purchase rights under the ESPP. The fair value of our common stock is the closing selling price per share of as reported on the Nasdaq Global Market on the date of grant or other relevant determination date. 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. We use the closing price of our common stock on the date of grant to determine the fair value of RSUs. Stock-Based Compensation Expense Stock-based compensation expense related to stock options, RSUs and the ESPP is included in the statements of operations and comprehensive loss as follows (in thousands): Three Months Ended March 31, 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 853 $ 510 Research and development 1,828 1,058 Selling, general and administrative 5,738 3,345 Total stock-based compensation expense $ 8,419 $ 4,913 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. 14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 12. 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. Derek J. 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: Mr. Bradbury; Mr. Maetzold; Thomas Sullivan, John Maetzold and Peter Maetzold, immediate family members of Mr. Maetzold; 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. Oelschlager. 15 Table of Content s