What changed in this filing

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Item 1. Financial Statements

2022-08-08 compared with 2022-05-09 · 273 added, 148 removed, 349 unchanged (55% of the section changed)

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(in thousands, except share and per share data)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

ASSETS (unaudited)

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Operating lease assets 7,004 7,383

Intangible assets, net 87,275 88,922

Goodwill and other intangible assets, net 132,671 88,922

Other assets – long-term 1,223 1,715

4 unchanged sentences

Accrued compensation 14,850 15,483

Contingent consideration 20,849 —

Operating lease liabilities 1,211 1,179

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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

10,000,000 shares authorized as of June 30, 2022 and December 31, 2021;

no shares issued and outstanding as of June 30, 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

200,000,000 shares authorized as of June 30, 2022 and December 31, 2021;

26,292,299 and 25,378,520 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 541,672 505,482

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

NET REVENUES $ 34,838 $ 22,758 $ 61,690 $ 45,571

OPERATING EXPENSES

OPERATING EXPENSES AND OTHER OPERATING INCOME

Cost of sales (exclusive of amortization of acquired intangible assets) 7,686 3,697 13,630 6,725

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Change in fair value of contingent consideration ( 20,398 ) — ( 17,836 ) —

Total operating expenses 51,368 27,097

Total operating expenses, net 38,809 31,568 90,177 58,665

Operating loss ( 3,971 ) ( 8,810 ) ( 28,487 ) ( 13,094 )

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Loss before income taxes ( 3,605 ) ( 8,786 ) ( 28,094 ) ( 13,066 )

Income tax expense 134 —

Income tax (benefit) expense ( 1,957 ) 5 ( 1,823 ) 5

Net loss and comprehensive loss $ ( 1,648 ) $ ( 8,791 ) $ ( 26,271 ) $ ( 13,071 )

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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 $ ( 75,546 ) $ 415,937

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

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

Stock compensation expense — — — — 8,783 — 8,783

Exercise of common stock options — — 36,634 — 110 — 110

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 6,358 — ( 32 ) — ( 32 )

Issuance of common stock in acquisition of business — — 763,887 1 17,110 — 17,111

Net loss — — — — — ( 1,648 ) ( 1,648 )

BALANCE, JUNE 30, 2022 — $ — 26,292,299 $ 26 $ 541,672 $ ( 120,038 ) $ 421,660

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

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

OPERATING ACTIVITIES

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Accrued compensation ( 1,013 ) ( 523 )

Medicare advance payment — ( 2,173 )

Other accrued liabilities 1,111 ( 306 )

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Purchases of property and equipment ( 1,807 ) ( 1,663 )

Asset acquisition 547 ( 33,184 )

Acquisition of business, net of cash and cash equivalents acquired ( 26,661 ) —

Proceeds from sale of property and equipment 8 2

Net cash used in investing activities ( 27,913 ) ( 34,845 )

9 unchanged sentences

End of period $ 273,166 $ 368,339

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

Six Months Ended

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Accrued purchases of property and equipment $ 696 $ 3

Deferred acquisition costs $ 1,026 $ —

Common stock issued in acquisition of business $ 17,111 $ —

Contingent consideration in acquisition of business $ 1,528 $ —

Consideration payable in acquisition of business $ 313 $ —

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

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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.

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

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.

Since the COVID-19 pandemic began in March 2020, we have maintained uninterrupted business operations with no interruption in turnaround times for delivery of test reports, but we 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 and test reports attributable to our lead product, DecisionDx®-Melanoma, a test for 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.

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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 accompanying condensed consolidated balance sheet as of June 30, 2022;

the condensed consolidated statements of operations and comprehensive loss, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2022 and 2021;

and the condensed consolidated statements of cash flows for the six months ended June 30, 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 June 30, 2022, the results of our consolidated operations for the three and six months ended June 30, 2022 and 2021 and our consolidated cash flows for the six months ended June 30, 2022 and 2021.

The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2022 and 2021 are also unaudited.

The results for the three and six months ended June 30, 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.

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

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated 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

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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)

the circumstances, including assumptions as to future events.

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

These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources.

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The extent to which the COVID-19 pandemic may impact our estimates in future periods is uncertain and subject to change.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash and Cash Equivalents including Concentrations of Credit Risk

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

The estimated timing of payment utilized as a basis for classification as noncurrent 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.

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Historically, our credit losses have not been significant.

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

The allowance for credit losses was zero as of June 30, 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.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination.

In accordance with ASC Topic 350, Intangibles—Goodwill and Other , our goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that it may be impaired.

We perform annual impairment reviews of our goodwill balance during the fourth quarter of each year.

We may perform a qualitative assessment to determine if it is necessary to perform a quantitative impairment test.

If we determine that a quantitative impairment test is necessary, we apply the guidance in Accounting Standards Update (“ASU”) No.

2017-04, Intangibles—Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment , by comparing the fair value of the reporting unit to its carrying value, including the goodwill.

If the carrying value exceeds the fair value, we recognize an impairment loss for the amount by which the carrying value exceeds fair value, up to the total amount of goodwill allocated to the reporting unit.

We did no t incur any goodwill impairment losses in any of the periods presented.

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

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

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

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

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

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

Otherwise, it is treated as an asset acquisition.

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

Business combinations are accounted for using the acquisition method.

Under the acquisition method, goodwill is measured as a residual

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Contingent Consideration

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

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

(“Cernostics”) asset acquisition, we account for the contingent consideration as 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 a business combination, in accordance with ASC 805, contingent consideration is recorded at fair value as of the acquisition date and classified as liabilities or equity based on applicable U.S.

For contingent consideration classified as liabilities, we remeasure the contingent consideration at fair value each period with changes in fair value recorded in the statements of operations and comprehensive loss each period.

For contingent consideration in transactions that are not business combinations, we apply applicable U.S.

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

(“Cernostics”), an asset acquisition we completed on December 3, 2021, we account for the contingent consideration as a liability in accordance with ASC Topic 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.

Contingent consideration is classified as current or noncurrent in our condensed consolidated balance sheets based on the contractual timing of future settlement.

For additional information on contingent consideration, see Notes 5 and 10.

Accrued Compensation

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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.

Our 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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2022 and December 31, 2021, we accrued $ 9,835,000 and $ 12,071,000 , respectively, for liabilities associated with these bonus plans.

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

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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.

Most of our revenues are attributable to our DecisionDx®-Melanoma test for cutaneous melanoma.

We also provide a test for uveal melanoma, DecisionDx®-UM, a test for patients with cutaneous squamous cell carcinoma, DecisionDx®-SCC, two tests for use in patients with suspicious pigmented lesions, MyPath® Melanoma and DiffDx®-Melanoma, and a test for patients diagnosed with Barrett’s esophagus (“BE”), the TissueCypher® Barrett’s Esophagus Assay.

We also began offering a pharmacogenomics (“PGx”) testing service focused on mental health, IDgenetix®, following a business combination completed in April 2022.

Information on the disaggregation of revenues is included below.

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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”) 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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

A successful appeal at any of these levels may result in prompt 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.

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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 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 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 (e.g., 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.

Included in revenues for the three months ended June 30, 2022 and 2021 were $ 578,000 and $( 166,000 ), respectively, of net positive (negative) revenue adjustments associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the six months ended June 30, 2022 and 2021 were $( 300,000 ) and $ 5,092,000 , respectively, of net (negative) positive revenue adjustments.

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 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.

Contract balances consisted solely of accounts receivable (both current and noncurrent) as of June 30, 2022 and December 31, 2021.

Disaggregation of Revenues

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Dermatologic $ 31,897 $ 20,378 $ 56,236 $ 41,288

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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.

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 and prognostic 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

Three Months Ended

March 31, Percentage of

Six Months Ended

June 30, Percentage of

Accounts Receivable

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Accounts Receivable

(non-current)

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

2022 2021 June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021

Medicare 52 % 57 % 21 % 24 % — % — %

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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.

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):

Because we reported a net loss for all periods presented, all potentially dilutive securities are antidilutive and are excluded from the computation of diluted loss per share for such periods.

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the three and six months ended June 30, 2022 and 2021 because to do so would be antidilutive (in thousands):

Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Stock options and restricted stock units (“RSUs”) 4,974 3,374 4,828 3,417

Employee stock purchase plan 91 76

ESPP 111 56 101 66

Total 5,085 3,430 4,929 3,483

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.

In addition, in connection with the acquisitions of Cernostics and AltheaDx, Inc.

(“AltheaDx”), we may issue, or may be required to issue, shares of our common stock to satisfy our contingent consideration obligations, pending the outcome of certain commercial and regulatory milestones, as required by the respective definitive agreements.

See Notes 5 and 10 for additional information.

Myriad myPath, LLC

On May 28, 2021, we completed the acquisition of all of the equity of Myriad myPath, LLC, a laboratory in Salt Lake City, for a cash purchase price of $ 32,500,000 .

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

Cernostics, Inc.

On December 3, 2021, we completed the acquisition of Cernostics, which offers the TissueCypher Barrett’s Esophagus Assay for patients with BE, for total consideration of $ 49,019,000 , consisting of cash consideration of $ 30,732,000 and contingent consideration with an acquisition date fair value of $ 18,287,000 .

In connection with the acquisition, we recorded a receivable as of the acquisition date for the post-closing purchase price adjustment, representing the difference between actual and estimated cash and working capital.

During the three months ended June 30, 2022, we received cash of $ 547,000 in settlement of this receivable.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AltheaDx, Inc.

On April 26, 2022, we completed the acquisition of 100 % of the equity interests in AltheaDx.

AltheaDx offers the IDgenetix test, a PGx test focused on mental health.

We believe this acquisition enables us to expand upon our existing portfolio of testing solutions in support of our growth strategy.

We have concluded that the transaction represents a business combination under ASC 805.

The financial results of AltheaDx have been included in our unaudited condensed consolidated financial statements since the date of the acquisition.

The amount of revenue from AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was not material.

The loss attributable to AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was approximately $ 3,383,000 .

This amount does not reflect transaction costs from the acquisition or the effects of the valuation allowance reduction discussed in Note 13.

Transaction costs associated with the acquisition were $ 1,711,000 for both the three and six months ended June 30, 2022 and were recognized as expenses in the unaudited condensed consolidated statements of operations and comprehensive loss.

The preliminary acquisition-date fair value of the consideration transferred consisted of the following (in thousands, except shares):

April 26, 2022

Cash $ 30,510

Common stock ( 763,887 shares)

Contingent consideration 1,528

Total $ 49,149

The fair value of the common stock issued was measured using the April 26, 2022 closing price of $ 22.40 per share, as reported by the Nasdaq Global Market.

With respect to the contingent consideration, we may be required to pay up to $ 75.0 million in cash and common stock in connection with the achievement of certain milestones based on 2022, 2023 and 2024 performance and expanded Medicare coverage for the IDgenetix test (the “AltheaDx Earnout Payments”).

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.

In accordance with the terms of the definitive agreement governing the acquisition of AltheaDx, the maximum number of shares of our common stock issuable to former AltheaDx security holders may not exceed 1,271,718 shares.

Therefore, taking into consideration the number of shares already issued at closing, a maximum of 507,831 additional shares of our common stock remain issuable with respect to the AltheaDx Earnout Payments.

In the event a number of shares in excess of 507,831 would otherwise be issuable in connection with the AltheaDx Earnout Payments, we will issue shares up to the maximum number permitted and pay cash for the remaining portion of the obligation.

See Note 10 for additional information on the measurement of the contingent consideration.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the preliminary allocation of the fair values of assets acquired and liabilities assumed in the acquisition of AltheaDx at the date of acquisition (in thousands):

April 26, 2022

Cash and cash equivalents $ 3,536

Accounts receivable 302

Inventory 279

Prepaid expenses and other current assets 262

Property and equipment 314

Intangible asset 37,000

Other assets – long-term 12

Accounts payable ( 231 )

Accrued compensation ( 380 )

Other accrued and current liabilities ( 532 )

Deferred tax liabilities ( 1,819 )

Other liabilities ( 88 )

Net identifiable assets acquired 38,655

Goodwill 10,494

Total consideration transferred $ 49,149

The intangible asset is comprised of developed technology with an estimated useful life of 15 years and is being amortized on a straight-line basis.

The goodwill, which is not expected to be deductible for income tax purposes, was primarily attributable to potential future growth opportunities and the organized workforce.

Our calculations of the consideration transferred and the purchase price allocation for the acquisition of AltheaDx are based on a preliminary valuation and are subject to revision as the valuation is finalized and additional information about the fair value of the assets and liabilities becomes available.

The primary areas that are not yet finalized are income taxes, intangible assets, contingent consideration and the resulting goodwill.

The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information for the three and six months ended June 30, 2022 and 2021 combines our historical financial results and the results of AltheaDx, assuming that the companies were combined as of January 1, 2021, and includes adjustments for amortization expense from the acquired intangible assets and additional stock-based compensation expense.

Nonrecurring pro forma adjustments consist of acquisition-related transaction costs of $ 1,711,000 and an income tax benefit of $ 1,769,000 , both assumed to have been recognized during the six months ended June 30, 2021 and therefore removed from the three and six months ended June 30, 2022.

The following unaudited pro forma financial information (in thousands) is for informational purposes only and is not necessarily indicative of (i) the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2021 or (ii) the results of operations that are expected in future periods:

Pro Forma Data

Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Net revenues $ 35,392 $ 22,840 $ 62,670 $ 45,676

Net loss $ ( 4,289 ) $ ( 11,267 ) $ ( 32,680 ) $ ( 17,479 )

Related Party Transaction

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 until the acquisition of AltheaDx was completed, were direct or indirect beneficial owners of AltheaDx securities and received consideration in the

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Further, Frank Stokes, our Chief Financial Officer;

Juvenal, our Chief Commercial Officer;

Kristen Oelschlager, our Chief Operating Officer and certain immediate family members of Mr.

Maetzold and Ms.

Oelschlager were direct or indirect beneficial owners of AltheaDx securities and received consideration in the transaction.

These individuals may receive additional consideration in the form of AltheaDx Earnout Payments if the relevant commercial and regulatory milestone events occur.

Our entry into the definitive agreement to acquire AltheaDx was approved by our board of directors based upon the unanimous recommendation of a special transaction committee comprised entirely of independent members of our board of directors without any financial interest in AltheaDx or any conflict of interest with respect to the acquisition of AltheaDx.

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

June 30, 2022 December 31, 2021

Lab equipment (1)

$ 6,778 $ 3,727

Leasehold improvements 4,965 5,044

Computer equipment 4,014 2,457

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Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Cost of sales (exclusive of amortization of acquired intangible assets) $ 185 $ 111 $ 354 $ 213

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Total $ 531 $ 378 $ 1,034 $ 611

Goodwill and Other Intangible Assets, Net

Information on the change in carrying value of our goodwill is presented below (in thousands):

Balance, December 31, 2021 $ —

Acquisition of AltheaDx 10,494

Balance, June 30, 2022 $ 10,494

There were no accumulated impairments of goodwill as of June 30, 2022 or December 31, 2021.

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

Other Intangible Assets, Net

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

June 30, 2022

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

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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):

The estimated future aggregate amortization expense as of June 30, 2022 is as follows (in thousands):

Years Ending December 31,

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Total $ 122,177

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.

Amortization expense of intangible assets was $ 2.1 million and $ 3.7 million for the three and six months ended June 30, 2022, respectively.

Amortization expense of intangible assets was $ 0.3 million for each of the three and six months ended June 30, 2021.

Other Accrued and Current Liabilities

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Accrued service fees $ 3,163 $ 1,905

Clinical studies 2,165 1,655

Payroll tax liabilities 260 695

Payroll-related liabilities 848 695

Employee stock purchase plan contributions 815 760

Accrued fixed asset purchases 469 10

Consideration payable for business acquisition 313 —

Accrued royalties 215 141

Other 189 512

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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.

In the fourth quarter of 2021, we adopted ASU No.

2016-02, Leases (Topic 842), and ASC 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 and six months ended June 30, 2021.

Net cash (used in) provided by operating activities, investing activities or financing activities for the six months ended June 30, 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

Six Months Ended

June 30, 2021

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

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Other liabilities $ ( 128 ) $ 128 $ —

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.

Additionally, the condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 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

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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.

Total undiscounted future minimum payment obligations as of June 30, 2022 associated with the lease amendment totaled approximately $ 1.4 million.

As of June 30, 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.

Pittsburgh Lease

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 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 resulting in base rent obligations totaling $ 1.5 million per year.

The landlord under the Pittsburgh Lease has agreed to contribute up to $ 2.5 million towards the cost of the leasehold improvements and we will 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 Pittsburgh 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 provides us one five-year renewal option and also provides us a right of first refusal with respect to the lease of certain additional space in the same building.

As of June 30, 2022, we have not recorded the Pittsburgh Lease on our condensed consolidated balance sheet because we do not have possession or control of the underlying asset.

CASTLE BIOSCIENCES, INC.

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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

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 June 30, 2022 and December 31, 2021 (in thousands):

As of June 30, 2022

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

4 unchanged sentences

Contingent consideration (2)

$ — $ — $ 1,979 $ 1,979

As of December 31, 2021

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Contingent consideration (2)

$ — $ — $ 18,287 $ 18,287

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

(2) Current portion, if any, classified as “Other accrued and current liabilities” 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 Cernostics Earnout Payments may be settled in cash or shares of our common stock, at our sole discretion.

The portion of any Cernostics 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 Cernostics Earnout Payments may not exceed 5,034,653 shares.

Any Cernostics 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 June 30, 2022, we would make no Cernostics Earnout Payments based on the achievement of the performance conditions to date.

In connection with our acquisition of AltheaDx, we have also recorded a contingent consideration liability for the additional consideration of up to $ 75.0 million that may become payable based on the achievement of certain commercial milestones relating to the years ending December 31, 2022, 2023, and 2024, as discussed further in Note 5.

If the settlement were to occur as of June 30, 2022, we would make no AltheaDx 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

The analysis for the Cernostics Earnout Payments uses assumptions for expected volatility of the financial metrics and a risk-adjusted discount rate, which were 40.0 % and 20.2 %, respectively, as of June 30, 2022, and 20.0 % and 16.1 %, respectively, as of December 31, 2021.

The assumptions for expected volatility of the financial metrics used in the analysis for the AltheaDx Earnout Payments was 36.0 % as of June 30, 2022.

The risk-adjusted discount rate for years 2022, 2023, and 2024 were 6.3 %, 7.4 % and 7.5 %, respectively.

The contingent consideration liability is remeasured at fair value at

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

each reporting period taking into account any updated assumptions or changes in circumstances.

Any changes in the fair value are recorded as gains or losses 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 June 30, 2022 (in thousands):

Cernostics AltheaDx Total

Balance, December 31, 2021 $ 18,287 $ — $ 18,287

Acquisition of AltheaDx — 1,528 1,528

Change in fair value ( 18,257 ) 421 ( 17,836 )

Balance, June 30, 2022

$ 30 $ 1,949 $ 1,979

Commitments and Contingencies

4 unchanged sentences

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.

As of June 30, 2022, 586,155 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:

Stock option activity under our stock plans for the six months ended June 30, 2022 is set forth below:

Weighted-Average

8 unchanged sentences

Forfeited/Cancelled ( 140,468 ) $ 35.43

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

Exercisable at March 31, 2022

Balance as of June 30, 2022 3,578,643 $ 34.71 7.9 $ 12,314

Exercisable at June 30, 2022

1,599,766 $ 26.99 7.2 $ 10,253

Restricted Stock Units

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

The following table summarizes our RSU activity for the six months ended June 30, 2022:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

4 unchanged sentences

Forfeited/Cancelled ( 64,175 ) $ 35.81

Balance as of March 31, 2022

Balance as of June 30, 2022

1,679,954 $ 35.89

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Employee Stock Purchase Plan

During the six months ended June 30, 2022, we issued 42,332 of common stock pursuant to scheduled purchases under the ESPP.

As of June 30, 2022, 850,919 shares remained available for issuance under the ESPP.

Determining Fair Value - Summary of Assumptions

1 unchanged sentence

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

Three Months Ended

Six Months Ended

Average expected term (years) 5.8 6

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

Three Months Ended

Six Months Ended

Average expected term (years) 1.3 1.2

6 unchanged sentences

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.

The fair value of our common stock is the closing price per share, as reported by 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.

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2022 2021 2022 2021

Cost of sales (exclusive of amortization of acquired intangible assets) $ 897 $ 415 $ 1,750 $ 925

2 unchanged sentences

Total stock-based compensation expense $ 8,783 $ 4,766 $ 17,202 $ 9,679

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)

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.

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

For the six months ended June 30, 2022 and 2021, the weighted-average grant date fair value of options granted was $ 14.07 and $ 41.35 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 June 30, 2022, the total unrecognized compensation cost related to outstanding awards was $ 99,493,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3.0 years.

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

In connection with our acquisition of AltheaDx, we recorded $ 1,819,000 in deferred tax liabilities based on our preliminary allocation of the fair values of assets acquired and liabilities assumed.

As a result of these additional deferred tax liabilities , we determined that $ 1,769,000 of our existing valuation allowance on deferred tax assets should be reduced, which was reflected in our income tax benefit on the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2022 as a discrete item.

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