CASTLE BIOSCIENCES INC 10-Q

Item 1. Financial Statements. CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) June 30, 2022 December 31, 2021 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 273,166 $ 329,633 Accounts receivable, net 22,606 17,282 Inventory 3,365 2,021 Prepaid expenses and other current assets 5,775 4,807 Total current assets 304,912 353,743 Long-term accounts receivable, net 1,367 1,308 Property and equipment, net 11,203 9,501 Operating lease assets 7,004 7,383 Goodwill and other intangible assets, net 132,671 88,922 Other assets – long-term 1,223 1,715 Total assets $ 458,380 $ 462,572 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 3,281 $ 2,546 Accrued compensation 14,850 15,483 Operating lease liabilities 1,211 1,179 Other accrued and current liabilities 8,177 5,678 Total current liabilities 27,519 24,886 Noncurrent portion of contingent consideration 1,949 18,287 Noncurrent operating lease liabilities 6,480 6,900 Deferred tax liability 614 635 Other liabilities 158 124 Total liabilities 36,720 50,832 Commitments and Contingencies (Note 11) Stockholders’ Equity Preferred stock, $ 0.001 par value per share; 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 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 26 25 Additional paid-in capital 541,672 505,482 Accumulated deficit ( 120,038 ) ( 93,767 ) Total stockholders’ equity 421,660 411,740 Total liabilities and stockholders’ equity $ 458,380 $ 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 NET REVENUES $ 34,838 $ 22,758 $ 61,690 $ 45,571 OPERATING EXPENSES AND OTHER OPERATING INCOME Cost of sales (exclusive of amortization of acquired intangible assets) 7,686 3,697 13,630 6,725 Research and development 11,926 6,793 22,687 12,701 Selling, general and administrative 37,498 20,822 67,951 38,983 Amortization of acquired intangible assets 2,097 256 3,745 256 Change in fair value of contingent consideration ( 20,398 ) — ( 17,836 ) — Total operating expenses, net 38,809 31,568 90,177 58,665 Operating loss ( 3,971 ) ( 8,810 ) ( 28,487 ) ( 13,094 ) Interest income 370 24 400 28 Interest expense ( 4 ) — ( 7 ) — Loss before income taxes ( 3,605 ) ( 8,786 ) ( 28,094 ) ( 13,066 ) Income tax (benefit) expense ( 1,957 ) 5 ( 1,823 ) 5 Net loss and comprehensive loss $ ( 1,648 ) $ ( 8,791 ) $ ( 26,271 ) $ ( 13,071 ) Loss per share, basic and diluted $ ( 0.06 ) $ ( 0.35 ) $ ( 1.02 ) $ ( 0.52 ) Weighted-average shares outstanding, basic and diluted 26,064 25,091 25,746 25,002 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 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 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 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. 3 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended June 30, 2022 2021 OPERATING ACTIVITIES Net loss $ ( 26,271 ) $ ( 13,071 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,779 867 Stock-based compensation expense 17,202 9,679 Change in fair value of contingent consideration ( 17,836 ) — Deferred income taxes ( 1,839 ) — Other 39 69 Change in operating assets and liabilities: Accounts receivable ( 5,628 ) ( 5,275 ) Prepaid expenses and other current assets ( 707 ) 1,347 Inventory ( 1,066 ) 223 Operating lease assets 437 462 Other assets 504 ( 95 ) Accounts payable 302 ( 683 ) Operating lease liabilities ( 445 ) ( 590 ) Accrued compensation ( 1,013 ) ( 523 ) Medicare advance payment — ( 2,173 ) Other accrued liabilities 1,111 ( 306 ) Net cash used in operating activities ( 30,431 ) ( 10,069 ) INVESTING ACTIVITIES 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 ) FINANCING ACTIVITIES Payment of common stock offering costs — ( 336 ) Proceeds from exercise of common stock options 509 2,345 Payment of employees’ taxes on vested restricted stock units ( 88 ) — Proceeds from contributions to the employee stock purchase plan 1,511 1,392 Repayment of principal portion of finance lease liabilities ( 55 ) — Net cash provided by financing activities 1,877 3,401 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 56,467 ) ( 41,513 ) Beginning of period 329,633 409,852 End of period $ 273,166 $ 368,339 4 Table of Contents CASTLE BIOSCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (in thousands) Six Months Ended June 30, 2022 2021 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 696 $ 3 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. 5 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, 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 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. 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. Unaudited Interim Financial Information 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 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 The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax exposure and the realization of deferred tax assets, the useful lives and recoverability of long-lived assets, the valuation of acquired intangible assets, the valuation of contingent consideration and other contingent liabilities. We base these estimates on historical and anticipated results, trends, and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. We have considered the potential impact of the COVID-19 pandemic on our estimates and assumptions. The extent to which the COVID-19 pandemic may impact our estimates in future periods is uncertain and subject to change. 6 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 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. 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 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 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. Acquisitions 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 7 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 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. GAAP. 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. GAAP. 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. 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 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. 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 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. 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 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. 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 8 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 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. 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 (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 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. 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) as of June 30, 2022 and December 31, 2021. Disaggregation of Revenues The table below provides the disaggregation of revenue by type (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Dermatologic $ 31,897 $ 20,378 $ 56,236 $ 41,288 Other 2,941 2,380 5,454 4,283 Total net revenues $ 34,838 $ 22,758 $ 61,690 $ 45,571 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 and prognostic tests. 9 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 Six Months Ended June 30, Percentage of Accounts Receivable (current) Percentage of Accounts Receivable (noncurrent) 2022 2021 June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Medicare 52 % 57 % 21 % 24 % — % — % Medicare Advantage plans 34 % 25 % 49 % 40 % — % — % BlueCross BlueShield plans 6 % 7 % 19 % 22 % 57 % 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. 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 June 30, 2022 2021 2022 2021 Stock options and restricted stock units (“RSUs”) 4,974 3,374 4,828 3,417 ESPP 111 56 101 66 Total 5,085 3,430 4,929 3,483 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. 5. Acquisitions Myriad myPath, LLC On May 28, 2021, we completed the acquisition of all of the equity of Myriad myPath, LLC, a laboratory in Salt Lake City, 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. 10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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) 17,111 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. 11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 June 30, 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 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 until the acquisition of AltheaDx was completed, were direct or indirect beneficial owners of AltheaDx securities and received consideration in the 12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) transaction. Further, Frank Stokes, our Chief Financial Officer; Tobin W. 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. 6. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): 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 Furniture and fixtures 1,423 1,288 Construction in progress 703 27 Total 17,883 12,543 Less accumulated depreciation (1) ( 6,680 ) ( 3,042 ) Property and equipment, net $ 11,203 $ 9,501 (1) Includes lab equipment under a finance lease of $ 369 thousand and accumulated depreciation of $ 66 thousand. Depreciation expense was recorded in the unaudited condensed consolidated statements of operations and comprehensive loss as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 185 $ 111 $ 354 $ 213 Research and development 80 64 170 108 Selling, general and administrative 266 203 510 290 Total $ 531 $ 378 $ 1,034 $ 611 7. Goodwill and Other Intangible Assets, Net Goodwill Information on the change in carrying value of our goodwill is presented below (in thousands): Goodwill 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. 13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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) Developed technology $ 127,318 $ ( 5,639 ) $ 121,679 13.7 Assembled workforce 563 ( 65 ) 498 4.4 Total intangible assets, net $ 127,881 $ ( 5,704 ) $ 122,177 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 June 30, 2022 is as follows (in thousands): Years Ending December 31, 2022 (remainder of year) $ 4,611 2023 9,147 2024 9,172 2025 9,147 2026 9,137 Thereafter 80,963 Total $ 122,177 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. 8. Other Accrued and Current Liabilities Other accrued liabilities consisted of the following (in thousands): June 30, 2022 December 31, 2021 Accrued service fees $ 3,163 $ 1,905 Clinical studies 2,165 1,655 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 Total $ 8,177 $ 5,678 14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 9. Leases 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): Six Months Ended June 30, 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 $ — $ 462 $ 462 Operating lease liabilities $ — $ ( 590 ) $ ( 590 ) Other liabilities $ ( 128 ) $ 128 $ — 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 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 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. 15 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 10. 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 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 (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds (1) $ 266,803 $ — $ — $ 266,803 Liabilities Contingent consideration (2) $ — $ — $ 1,979 $ 1,979 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 (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 (“Cernostics Earnout Payments”). 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 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 16 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 11. 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. 12. 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 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 six months ended June 30, 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 231,376 $ 22.02 Exercised ( 98,953 ) $ 5.15 Forfeited/Cancelled ( 140,468 ) $ 35.43 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 six months ended June 30, 2022: Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value Balance as of December 31, 2021 1,050,174 $ 44.31 Granted 705,430 $ 23.90 Vested ( 11,475 ) $ 69.56 Forfeited/Cancelled ( 64,175 ) $ 35.81 Balance as of June 30, 2022 1,679,954 $ 35.89 17 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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 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 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: Six Months Ended June 30, 2022 2021 Average expected term (years) 5.8 6 Expected stock price volatility 68.34 % - 71.58 % 66.94 % - 67.98 % Risk-free interest rate 1.54 % - 2.91 % 0.51 % - 1.09 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Six Months Ended June 30, 2022 2021 Average expected term (years) 1.3 1.2 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 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. 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 897 $ 415 $ 1,750 $ 925 Research and development 1,831 1,073 3,659 2,131 Selling, general and administrative 6,055 3,278 11,793 6,623 Total stock-based compensation expense $ 8,783 $ 4,766 $ 17,202 $ 9,679 18 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) 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. 13. Income Taxes 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. 19 Table of Contents