What changed in this filing

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Item 1. Financial Statements

2022-11-02 compared with 2022-08-08 · 219 added, 136 removed, 486 unchanged (42% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

ASSETS (unaudited)

1 unchanged sentence

Cash and cash equivalents $ 134,180 $ 329,633

Marketable investment securities 131,802 —

Accounts receivable, net 22,835 17,282

23 unchanged sentences

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

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

no shares issued and outstanding as of September 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

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

26,350,530 and 25,378,520 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 551,883 505,482

Accumulated deficit ( 140,287 ) ( 93,767 )

Accumulated other comprehensive loss ( 189 ) —

Total stockholders’ equity 411,433 411,740

2 unchanged sentences

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

12 unchanged sentences

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

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

Net loss $ ( 20,249 ) $ ( 11,791 ) $ ( 46,520 ) $ ( 24,862 )

Loss per share, basic and diluted $ ( 0.77 ) $ ( 0.47 ) $ ( 1.79 ) $ ( 0.99 )

2 unchanged sentences

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net loss $ ( 20,249 ) $ ( 11,791 ) $ ( 46,520 ) $ ( 24,862 )

Other comprehensive loss:

Net unrealized loss on available-for-sale securities ( 189 ) — ( 189 ) —

Comprehensive loss $ ( 20,438 ) $ ( 11,791 ) $ ( 46,709 ) $ ( 24,862 )

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

2 unchanged sentences

Capital Accumulated

Deficit Total

Deficit Accumulated

Other Comprehensive Loss Total

Stockholders’

3 unchanged sentences

2016-02 — — — — — 21 — 21

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

Stock-based compensation expense — — — — 4,913 — — 4,913

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

3 unchanged sentences

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

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

Stock-based compensation expense — — — — 4,766 — — 4,766

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

1 unchanged sentence

BALANCE, JUNE 30, 2021 — $ — 25,164,053 $ 25 $ 491,458 $ ( 75,546 ) $ — $ 415,937

Stock-based compensation expense — — — — 5,210 — — 5,210

Exercise of common stock options — — 82,756 — 1,523 — — 1,523

Issuance of common stock under the employee stock purchase plan — — 39,737 — 855 — — 855

Net loss — — — — — ( 11,791 ) — ( 11,791 )

BALANCE, SEPTEMBER 30, 2021 — $ — 25,286,546 $ 25 $ 499,046 $ ( 87,337 ) $ — $ 411,734

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Accumulated

Other Comprehensive Loss Total

Stockholders’

Shares Amount Shares Amount

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

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

Stock-based compensation expense — — — — 8,419 — — 8,419

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

3 unchanged sentences

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

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

Stock-based compensation expense — — — — 8,783 — — 8,783

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

3 unchanged sentences

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

Stock-based compensation expense — — — — 9,196 — — 9,196

Exercise of common stock options — — 17,093 — 166 — — 166

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 4,818 — ( 46 ) — — ( 46 )

Issuance of common stock under the employee stock purchase plan — — 36,320 — 895 — — 895

Unrealized loss on marketable investment securities — — — — — — ( 189 ) ( 189 )

Net loss — — — — — ( 20,249 ) — ( 20,249 )

BALANCE, SEPTEMBER 30, 2022 — $ — 26,350,530 $ 26 $ 551,883 $ ( 140,287 ) $ ( 189 ) $ 411,433

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

2 unchanged sentences

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

OPERATING ACTIVITIES

5 unchanged sentences

Deferred income taxes ( 1,839 ) —

Accretion of discounts on marketable investment securities ( 184 ) —

Other 186 ( 99 )

Change in operating assets and liabilities:

15 unchanged sentences

Proceeds from sale of property and equipment 9 6

Purchases of marketable investment securities ( 131,808 ) —

Net cash used in investing activities ( 162,063 ) ( 35,768 )

6 unchanged sentences

Net cash provided by financing activities 2,265 5,295

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

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

CASTLE BIOSCIENCES, INC.

1 unchanged sentence

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 195,453 ) ( 46,675 )

Beginning of period 329,633 409,852

End of period $ 134,180 $ 363,177

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

2 unchanged sentences

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

Consideration payable in acquisition of business $ 313 $ —

Operating lease assets obtained in exchange for lease obligations $ 5,912 $ 427

Property and equipment acquired with tenant improvement allowance $ 51 $ 54

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

6 unchanged sentences

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.

Summary of Significant Accounting Policies

4 unchanged sentences

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

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

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

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

The results for the three and nine months ended September 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.

10 unchanged sentences

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

5 unchanged sentences

We have not experienced any losses on our cash or cash equivalents.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Marketable Investment Securities

All debt securities are recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 320, Investments-Debt Securities (‘‘ASC 320’’).

Management determines the appropriate classification of securities at the time of purchase and re-evaluates such determination at each balance sheet date.

All debt securities are classified as available-for-sale and are recorded at fair value in accordance with ASC 320.

We recognize the unrealized gains and losses related to changes in fair value as a separate component of accumulated other comprehensive loss within total stockholders’ equity, net of related deferred income tax effects on our condensed consolidated balance sheets.

Premiums or discounts from par value are amortized to interest income over the life of the underlying investment.

Realized gains and losses on available-for-sale securities are calculated at the individual security level and included in interest income in the condensed consolidated statements of operations.

Impairments on available-for-sale debt securities, if any, are recorded in condensed consolidated statements of operations.

See Notes 5 and 11 for further details.

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:

In accordance with ASC Topic 606, Revenue from Contracts with Customers (“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.

10 unchanged sentences

Historically, our credit losses have not been significant.

The allowance for credit losses was zero as of June 30, 2022, and December 31, 2021.

The allowance for credit losses was zero as of September 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.

8 unchanged sentences

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

7 unchanged sentences

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.

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

Contingent Consideration

1 unchanged sentence

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.

1 unchanged sentence

(“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.

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 each period.

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

3 unchanged sentences

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.

Our board of directors reviews and evaluates the performance against these objectives and ultimately determines the actual achievement levels attained.

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.

As of September 30, 2022 and December 31, 2021, we accrued $ 13,667,000 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.

1 unchanged sentence

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.

Comprehensive loss is made up of net loss plus other comprehensive loss, if any.

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

3 unchanged sentences

Information on the disaggregation of revenues is included below.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

5 unchanged sentences

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

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 may result in prompt payment.

7 unchanged sentences

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.

Included in revenues for the three months ended September 30, 2022 and 2021 were $( 277,000 ) and $( 92,000 ), 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 nine months ended September 30, 2022 and 2021 were $( 1,850,000 ) and $ 4,130,000 , 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.

1 unchanged sentence

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.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Disaggregation of Revenues

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

4 unchanged sentences

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

Six Months Ended

June 30, Percentage of

Nine Months Ended

September 30, Percentage of

Accounts Receivable

1 unchanged sentence

Accounts Receivable

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

2022 2021 September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021

Medicare 52 % 57 % 26 % 24 % — % — %

7 unchanged sentences

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):

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 nine months ended September 30, 2022 and 2021 because to do so would be antidilutive (in thousands):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

5 unchanged sentences

See Notes 6 and 11 for additional information.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Marketable Investment Securities

The following table presents our available-for-sale debt securities (in thousands):

Amortized Cost Unrealized Estimated Fair Value

As of September 30, 2022

Government Securities $ 131,991 $ — $ ( 189 ) $ 131,802

Total $ 131,991 $ — $ ( 189 ) $ 131,802

We had no available-for-sale debt securities as of December 31, 2021.

Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity.

We classify all investments as current assets, as these are readily available for use in current operations.

The cost of securities sold is determined based on the specific identification method for purposes of recording gains and losses.

There were no realized gains or losses on sales of investments for the three and nine months ended September 30, 2022 and 2021.

We evaluated our investment portfolio under the available-for-sale debt securities impairment model guidance and determined our investment portfolio is comprised of low-risk, investment grade securities.

As of September 30, 2022, unrealized losses on available-for-sale investments are not attributed to credit risk.

We believe that an allowance for credit losses is unnecessary because the unrealized losses on certain of our marketable investment securities are due to market factors.

No credit-related or noncredit-related impairment losses were recorded for the three and nine months ended September 30, 2022 and 2021.

The allowance for credit losses was zero as of September 30, 2022 and December 31, 2021.

As of September 30, 2022, all of our available-for-sale debt securities had contractual maturities of one year or less.

Accrued interest receivable is included in prepaid expenses and other current assets in our condensed consolidated balance sheets.

As of September 30, 2022 and December 31, 2021 the accrued interest receivable balance was immaterial and zero, respectively.

Additional information relating to fair value of marketable investment securities can be found in Note 11.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Myriad myPath, LLC

4 unchanged sentences

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)

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

AltheaDx, Inc.

7 unchanged sentences

This amount does not reflect transaction costs from the acquisition or the effects of the valuation allowance reduction discussed in Note 14.

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.

Transaction costs associated with the acquisition were $ 1,711,000 for the nine months ended September 30, 2022 and were recognized as expenses in the unaudited condensed consolidated statements of operations.

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

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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.

During the three months ended September 30, 2022, the Company recognized an immaterial measurement period adjustment to cash consideration transferred with a corresponding adjustment to goodwill.

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 for the three and nine months ended September 30, 2022 and 2021, respectively 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 nine months ended September 30, 2021 and therefore removed from the nine months ended September 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:

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

1 unchanged sentence

Net loss $ ( 20,211 ) $ ( 14,577 ) $ ( 52,313 ) $ ( 31,664 )

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)

Related Party Transaction

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

Further, Frank Stokes, our Chief Financial Officer;

7 unchanged sentences

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Lab equipment (1)

8 unchanged sentences

Property and equipment, net $ 13,054 $ 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):

(1) Includes lab equipment under a finance lease of $ 369 thousand and accumulated depreciation of $ 101 thousand as of September 30, 2022 and $ 237 thousand and accumulated depreciation of $ 8 thousand as of December 31, 2021.

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

7 unchanged sentences

Acquisition of AltheaDx 10,486

Balance, June 30, 2022 $ 10,494

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

Balance, September 30, 2022 $ 10,486

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

CASTLE BIOSCIENCES, INC.

2 unchanged sentences

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

June 30, 2022

September 30, 2022

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

7 unchanged sentences

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):

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

Years Ending December 31,

2 unchanged sentences

Total $ 119,871

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.

Amortization expense of intangible assets was $ 2.3 million and $ 6.1 million for the three and nine months ended September 30, 2022, respectively.

Amortization expense of intangible assets was $ 0.7 million and $ 1.0 million for the three and nine months ended September 30, 2021.

Other Accrued and Current Liabilities

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

June 30, 2022 December 31, 2021

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

September 30, 2022 December 31, 2021

Accrued service fees $ 2,564 $ 1,905

2 unchanged sentences

Employee stock purchase plan contributions 220 760

Accrued fixed asset purchases 469 10

Consideration payable for business acquisition 313 —

Accrued royalties 215 141

Other 281 663

5 unchanged sentences

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 adoption had no effect on the condensed consolidated statements of operations for the three and nine months ended September 30, 2021.

Net cash (used in) provided by operating activities, investing activities or financing activities for the nine months ended September 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

Nine Months Ended

September 30, 2021

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

5 unchanged sentences

Other liabilities $ 3 $ ( 3 ) $ —

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.

Additionally, the condensed consolidated statement of stockholders’ equity for the three and nine months ended September 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.

On March 11, 2022, we amended an existing lease agreement to expand rentable space in Phoenix, Arizona.

We evaluated the amendment under ASC 842 and determined that the modification was a new contract and an operating lease.

In August 2022, we took control of the facilities and recognized $ 0.9 million of additional operating lease liabilities arising from obtaining operating lease assets.

Payments for the amended lease will begin after the commencement date, upon the completion of certain leasehold improvements, and will continue for an initial term of 10.3 years.

We intend to use the additional space for laboratory facilities.

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.

On April 1, 2022, we entered into a lease agreement for commercial office space in Pittsburgh, Pennsylvania, which provides for a term of 10.5 years, a five-year renewal option, an early termination clause, and a lease incentive allowance of $ 2.5 million to apply toward leasehold improvements.

In September 2022, we took control of the facilities and recognized $ 5.0 million of additional operating lease liabilities arising from obtaining operating lease assets.

Lease payments will commence at a future date upon the completion of leasehold improvements, at which point the facilities will be ready for intended use.

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

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date.

The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value.

There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:

Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (in thousands):

As of June 30, 2022

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values.

Accordingly, the fair value estimates disclosed, or amounts recorded may not be indicative of the amount that us or holders of the instruments could realize in a current market exchange.

The table below provides information, by level within the fair value hierarchy, of our financial assets and financial liabilities that are accounted for at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in thousands):

As of September 30, 2022

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

3 unchanged sentences

$ 124,095 $ — $ — $ 124,095

Government Securities (2)

$ 131,802 $ — $ — $ 131,802

Contingent consideration (3)

6 unchanged sentences

$ 327,721 $ — $ — $ 327,721

Government Securities (2)

$ — $ — $ — $ —

Contingent consideration (3)

1 unchanged sentence

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

(2) Classified as “Marketable investment securities” in the condensed consolidated balance sheets.

(3) Current portion, if any, classified as “Other accrued and current liabilities” in the condensed consolidated balance sheets.

4 unchanged sentences

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.

If the settlement were to occur as of September 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 6.

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.

If the settlement were to occur as of September 30, 2022, we would make no AltheaDx Earnout Payments based on the achievement of the performance conditions to date.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 20.0 %, respectively, as of September 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 September 30, 2022.

The risk-adjusted discount rate for years 2022, 2023, and 2024 were 7.7 %, 8.8 % and 8.9 %, 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):

The contingent consideration liability is remeasured at fair value at 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.

The following table discloses the summary of changes in the contingent consideration liability measured at fair value using Level 3 inputs for the nine months ended September 30, 2022 (in thousands):

Cernostics AltheaDx Total

2 unchanged sentences

Change in fair value ( 18,257 ) 270 ( 17,987 )

Balance, June 30, 2022

Balance, September 30, 2022

$ 30 $ 1,798 $ 1,828

5 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 June 30, 2022, 586,155 shares remained available for grant under the 2019 Plan.

As of September 30, 2022, 583,279 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:

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

Weighted-Average

8 unchanged sentences

Forfeited/Cancelled ( 238,450 ) $ 31.87

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

Exercisable at June 30, 2022

Balance as of September 30, 2022 3,495,895 $ 34.96 7.7 $ 15,481

Exercisable at September 30, 2022

1,764,834 $ 28.26 7.0 $ 13,411

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock Units

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

The following table summarizes our RSU activity for the nine months ended September 30, 2022:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

4 unchanged sentences

Forfeited/Cancelled ( 225,710 ) $ 26.35

Balance as of June 30, 2022

Balance as of September 30, 2022

1,743,884 $ 35.90

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

During the nine months ended September 30, 2022, we issued 78,652 of common stock pursuant to scheduled purchases under the ESPP.

As of September 30, 2022, 814,599 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:

Six Months Ended

Nine Months Ended

September 30,

Average expected term (years) 5.9 6.0

5 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 30,

Average expected term (years) 1.2 1.2

10 unchanged sentences

We use the closing price of our common stock on the date of grant to determine the fair value of RSUs.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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):

Stock-based compensation expense related to stock options, RSUs and the ESPP is included in the statements of operations as follows (in thousands):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

3 unchanged sentences

Total stock-based compensation expense $ 9,196 $ 5,210 $ 26,398 $ 14,889

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

For the nine months ended September 30, 2022 and 2021, the weighted-average grant date fair value of options granted was $ 14.34 and $ 40.76 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 16.79 and $ 28.23 per share, respectively.

As of September 30, 2022, the total unrecognized compensation cost related to outstanding awards was $ 94,365,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 2.8 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.

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 for the nine months ended September 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