CASTLE BIOSCIENCES INC 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. As of December 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 110 Table of Contents Internal Control-Integrated Framework (2013 Framework) . Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective based on those criteria. Our independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal control over financial reporting as of December 31, 2022, as stated in its report contained in Item 15 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 111 Table of Contents PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2023 Annual Meeting of Stockholders (the “Proxy Statement”) pursuant to Regulation 14A of the Exchange Act, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference. Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is to be included in the Proxy Statement as follows: • The information relating to our executive officers is to be included in the section entitled “Executive Officers,” • The information relating to our directors and nominees for director is to be included in the section entitled “Proposal 1: Election of Directors,” • The information relating to our audit committee and audit committee financial expert is to be included in the section entitled “Information Regarding the Board of Directors and Corporate Governance,” and • If required, the information regarding delinquent reports under Section 16(a) of the Exchange Act is to be included in the section entitled “Delinquent Section 16(a) Reports.” Such information is to be included in the Proxy Statement and is incorporated herein by reference. We have adopted a written Code of Business Conduct and Ethics (“Ethics Code”) that applies to all officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Ethics Code is available on our website at www.CastleBiosciences.com. If we ever were to amend or waive any provision that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations, if any, with respect to any such waiver or amendment by posting such information on our website, rather than by filing a Current Report on Form 8-K. Item 11. Executive Compensation. The information required by this item is to be included in the Proxy Statement under the section entitled “Executive Compensation” and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item with respect to equity compensation plans is to be included in the Proxy Statement under the section entitled “Equity Compensation Plan Information” and the information required by this item with respect to security ownership of certain beneficial owners and management is to be included in the Proxy Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management” and in each case is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is to be included in the Proxy Statement under the sections entitled “Transactions with Related Persons and Indemnifications—Related Person Transactions Policy and Procedures” and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. Our independent registered public accounting firm is KPMG LLP , San Diego, CA , Audit Firm ID: 185 . The information required by this item is to be included in the Proxy Statement under the section entitled “Proposal 2: Ratification of Selection of Independent Registered Public Accounting Firm” and is incorporated herein by reference. 112 Table of Contents PART IV Item 15. Exhibit and Financial Statement Schedules. (a)(1) Financial Statements. The consolidated financial statements and supplementary data required by this item are included after the Signature page of this Annual Report on Form 10-K beginning on page F-1 . (a)(2) Financial Statement Schedules. All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. (a)(3) Exhibits. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report on Form 10-K. Exhibit Index Exhibit Number Description of document 2.1^† Agreement and Plan of Merger, dated October 18, 2021, by and among the Company, Space Merger Sub, Inc., Cernostics, Inc., and Shareholder Representative Services LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, as amended, originally filed with the SEC on December 6, 2021. 2.2^† Agreement and Plan of Merger, dated April 4, 2022, by and among the Registrant, AltheaDx, Inc., Acorn Merger Sub, Inc. and Fortis Advisors LLC, incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2022. 3.1 Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019. 3.2 Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 29, 2019. 4.1 Description of securities registered under Section 12 of the Exchange Act, incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K filed with the SEC on March 10, 2020. 4.2 Form of Common Stock Certificate of the Registrant, incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 4.3 Sixth Amended and Restated Investors’ Rights Agreement, dated July 12, 2019, by and among the Registrant and certain of its stockholders, incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.1+ Form of Indemnity Agreement by and between the Registrant and its directors and officers, incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.2+ Castle Biosciences, Inc. 2008 Stock Plan, incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.3+ Forms of Stock Option Agreement, Exercise Notice and Investment Representation Statement under the 2008 Stock Plan, incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.4+ Castle Biosciences, Inc. 2018 Equity Incentive Plan, as amended, incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.5+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.6+ Castle Biosciences, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 99.3 of the Registrant’s Registration Statement on Form S-8 (File No. 333-232884), originally filed with the SEC on July 29, 2019. 113 Table of Contents Exhibit Number Description of document 10.7+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.8+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2020. 10.9+ Castle Biosciences, Inc. 2019 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.10+ Form of Director Agreement by and between the Registrant and certain of its directors, incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.11*+ Castle Biosciences, Inc. 2022 Inducement Plan. 10.12*+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Castle Biosciences, Inc. 2022 Inducement Plan. 10.13*+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the Castle B iosciences, Inc. 2022 Inducement Plan. 10.14*+ Non-Employee Director Compensation Policy, as amended effective January 31, 2023. 10.15+ Amended and Restated Executive Employment Agreement, dated September 20, 2012, as amended, by and between the Registrant and Derek J. Maetzold, incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.16*+ Castle Biosciences, Inc. Retirement Policy Approved January 13, 2023 10.17+ Offer Letter Agreement, dated November 9, 2017, by and between the Registrant and Frank Stokes, incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.18+ Executive Employment Agreement, dated September 15, 2008, as amended, by and between the Registrant and Kristen Oelschlager, incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021. 10.19+ Executive Employment Agreement, dated October 1, 2008, as amended, by and between the Registrant and Tobin Juvenal, incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021. 10.20 Standard Office Lease, dated as of October 5, 2015, by and between the Registrant and Merced Restart Phoenix Investors II, LLC, incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 10.21 First Amendment to Lease, dated December 4, 2018, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.15 of the Registrant's Annual Report on Form 10-K, filed with the SEC on March 10, 2020. 10.22 Second Amendment to Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.23 Third Amendment to Standard Office Lease, dated November 29, 2021, by and between the Company and Alturas Siete, I, LLC, incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 3, 2021. 10.24† Fourth Amendment to Standard Office Lease, dated March 11, 2022, by and between the Registrant and Alturas Siete I, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 17, 2022. 10.25*† Fifth Amendment to Standard Office Lease, dated October 24, 2022, by and between the Registrant and Alturas Siete I, LLC. 10.26 Standard Office Lease, dated December 16, 2019, by and between the Registrant and Alturas Siete, II, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.27 First Amendment to Standard Office Lease, dated February 16, 2021, by and between the Registrant and Alturas Siete II , LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2021. 114 Table of Contents Exhibit Number Description of document 10.28 Second Amendment to Standard Office Lease, dated November 29, 2021, by and between the Company and Alturas Siete, II, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 3, 2021. 10.29* Third Amendment to Standard Office Lease, dated February 9, 2023, by and between the Registrant and Alturas Siete, II, LLC. 10.30 Commercial Lease, dated December 17, 2019, by and between the Registrant and Tannos Land Holding III, LLC, incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2019. 10.31 First Amendment to Commercial Lease, dated November 13, 2020, by and between the Registrant and Tannos Land Holdings III, LLC , incorporated by reference to Exhibit 10.23 of the Registrant's Annual Report on Form 10-K filed with the SEC on March 11, 2021. 10.32* Second Amendment to Commercial Lease, executed December 15, 2022, by and between the Registrant and Tannos Land Holdings III, LLC. 10.33† Lease Agreement, dated April 1, 2022, by and between the Registrant and ACA Concourse East Unit 3 LLC, incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q filed with the SEC on May 9, 2022. 10.34# Exclusive License Agreement, dated as of November 14, 2009, by and between the Registrant and The Washington University, incorporated by reference to Exhibit 10.17 of the Registrant’s Registration Statement on Form S-1 (File No. 333-232369), as amended, originally filed with the SEC on June 26, 2019. 21.1* Subsidiaries of the Registrant. 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm. 31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 32.1** Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act, and 18 U.S.C. Section 1350. 101.INS* Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema. 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase. 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase. 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase. 104* Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101). _____________________________________ * Filed herewith ** Furnished herewith. + Indicates management contract or compensatory plan. # Pursuant to Item 601(b)(10) of Regulation S-K, certain portions of this exhibit have been omitted (indicated by “[***]”) because the Company has determined that the information is not material and is the type that the Company treats as private or confidential. † Certain schedules or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished to the SEC upon request; provided, however, that we may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedule or exhibit so furnished. ^ Pursuant to Item 601(b)(2) of Regulation S-K, certain portions of this exhibit have been omitted (indicated by “[***]”) because the Company has determined that the information is not material and is the type that the Company treats as private or confidential. 115 Table of Contents Item 16. Form 10-K Summary. None. 116 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASTLE BIOSCIENCES, INC. Date: February 28, 2023 By: /s/ Derek J. Maetzold Derek J. Maetzold President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated. SIGNATURE TITLE DATE /s/ Derek J. Maetzold President, Chief Executive Officer and Director February 28, 2023 (Derek J. Maetzold) ( Principal Executive Officer ) /s/ Frank Stokes Chief Financial Officer February 28, 2023 (Frank Stokes) ( Principal Financial and Accounting Officer ) /s/ Daniel M. Bradbury Chairperson of the Board of Directors February 28, 2023 (Daniel M. Bradbury) /s/ Mara G. Aspinall Member of the Board of Directors February 28, 2023 (Mara G. Aspinall) /s/ Kimberlee S. Caple Member of the Board of Directors February 28, 2023 (Kimberlee S. Caple) /s/ G. Bradley Cole Member of the Board of Directors February 28, 2023 (G. Bradley Cole) /s/ Ellen Goldberg Member of the Board of Directors February 28, 2023 (Ellen Goldberg) /s/ Miles D. Harrison Member of the Board of Directors February 28, 2023 (Miles D. Harrison) /s/ Tiffany P. Olson Member of the Board of Directors February 28, 2023 (Tiffany P. Olson) 117 Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 5 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F- 6 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2022 and 2021 F- 7 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 F- 8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F- 9 Notes to the Consolidated Financial Statements F- 11 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Castle Biosciences, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Castle Biosciences, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. F-2 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Measurement of test revenue As discussed in Notes 2 and 3 of the consolidated financial statements, test revenue is recognized when the performance obligation is satisfied, upon delivery of the test report. The amount of revenue recognized reflects the amount of consideration to which the Company expects to be entitled and considers the effects of variable consideration. The measurement of test revenue is determined by contractually established rates as well as historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of the Company’s past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence, such as the judgment and actions of third parties. The Company reported net revenues of $137.0 million for the year ended December 31, 2022, a portion of which related to test revenue. We identified the evaluation of the measurement of test revenue as a critical audit matter. Evaluating the measurement of test revenue, specifically the estimation of the amount of test revenue expected to be collectible related to commercial payors and certain others, required especially complex and subjective auditor judgment. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the estimation of the expected collectible test revenue related to commercial payors and certain others. This included controls related to management’s review of the assumptions and inputs used in the determination of test revenue expected to be collectible from commercial payors and certain others. For a selection of tests, we evaluated certain historical data inputs that are used in management’s model to estimate test revenue expected to be collectible by comparing the data from the model to physician test requisition forms, proof of delivery, and cash collection activity. These data inputs included collection activity, amounts of historical claims, insurance payor categories, test dates, test types, claim aging categories, and revenue recognition dates. In addition, we inquired of the individuals who are responsible for monitoring and tracking the status of anticipated collections to understand the progress of these activities and any impact to management’s estimates. Valuation of developed technology acquired in business combination As discussed in Note 6 to the consolidated financial statements, on April 26, 2022, the Company acquired 100% of the equity interests in AltheaDx, Inc. for total consideration transferred of $47.6 million. As a result of the acquisition, the Company recorded an intangible asset comprised of developed technology in the amount of $35.0 million, based on the estimated acquisition-date fair value. The transaction was accounted for as a business combination. We identified the assessment of the acquisition-date fair value of the developed technology intangible asset as a critical audit matter. Key assumptions used to estimate the fair value of the developed technology included the projected revenues, projected EBITDA and the discount rate. Evaluating the key assumptions involved challenging auditor judgment as they represent subjective determinations of future performance, as well as future market and economic conditions. Additionally, the audit effort associated with evaluating the fair value of the developed technology required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s determination of the acquisition-date fair value of the developed technology intangible asset, including controls related to the development of the projected revenues, projected EBITDA and discount rate assumptions. We F-3 Table of Contents assessed the reasonableness of the Company’s projected revenues and EBITDA by comparing them to relevant industry data and other third-party information. In addition, we involved valuation professionals with specialized skills and knowledge who: • assisted in evaluating the discount rate used in the valuation by comparing the inputs to publicly available data for comparable entities • tested the estimate of the fair value of the developed technology using the Company’s cash flow forecasts and the discount rate • compared the result to the Company’s fair value estimate. /s/ KPMG LLP We have served as the Company’s auditor since 2018. San Diego, California February 28, 2023 F-4 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2022 2021 ASSETS Current Assets Cash and cash equivalents $ 122,948 $ 329,633 Marketable investment securities 135,677 — Accounts receivable, net 23,476 17,282 Inventory 3,980 2,021 Prepaid expenses and other current assets 6,207 4,807 Total current assets 292,288 353,743 Long-term accounts receivable, net 1,087 1,308 Property and equipment, net 14,315 9,501 Operating lease assets 12,181 7,383 Goodwill and other intangible assets, net 126,348 88,922 Other assets – long-term 1,110 1,715 Total assets $ 447,329 $ 462,572 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 4,731 $ 2,546 Accrued compensation 24,358 15,483 Operating lease liabilities 1,777 1,179 Other accrued and current liabilities 5,262 5,678 Total current liabilities 36,128 24,886 Noncurrent portion of contingent consideration — 18,287 Noncurrent operating lease liabilities 11,533 6,900 Deferred tax liability 428 635 Other liabilities 90 124 Total liabilities 48,179 50,832 Commitments and Contingencies (Note 12) Stockholders’ Equity Preferred stock, $ 0.001 par value; 10,000,000 shares authorized as of December 31, 2022 and 2021; no shares issued and outstanding as of December 31, 2022 and 2021. — — Common stock, $ 0.001 par value; 200,000,000 authorized as of December 31, 2022 and 2021; 26,553,681 and 25,378,520 shares issued and outstanding as of December 31, 2022 and 2021, respectively. 27 25 Additional paid-in capital 560,409 505,482 Accumulated deficit ( 160,905 ) ( 93,767 ) Accumulated other comprehensive loss ( 381 ) — Total stockholders’ equity 399,150 411,740 Total liabilities and stockholders’ equity $ 447,329 $ 462,572 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years Ended December 31, 2022 2021 NET REVENUES $ 137,039 $ 94,085 OPERATING EXPENSES AND OTHER OPERATING INCOME Cost of sales (exclusive of amortization of acquired intangible assets) 32,009 15,822 Research and development 44,903 29,646 Selling, general and administrative 143,003 86,738 Amortization of acquired intangible assets 8,266 1,958 Change in fair value of contingent consideration ( 18,287 ) — Total operating expenses, net 209,894 134,164 Operating loss ( 72,855 ) ( 40,079 ) Interest income 3,968 68 Interest expense ( 17 ) ( 1 ) Loss before income taxes ( 68,904 ) ( 40,012 ) Income tax benefit ( 1,766 ) ( 8,720 ) Net loss $ ( 67,138 ) $ ( 31,292 ) Loss per share, basic and diluted $ ( 2.58 ) $ ( 1.24 ) Weighted-average shares outstanding, basic and diluted 26,054 25,137 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Years Ended December 31, 2022 2021 Net loss $ ( 67,138 ) $ ( 31,292 ) Other comprehensive loss: Net unrealized loss on available-for-sale securities ( 381 ) — Comprehensive loss $ ( 67,519 ) $ ( 31,292 ) The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Shares Amount Shares Amount BALANCE, JANUARY 1, 2021 — $ — 24,812,487 $ 25 $ 478,162 $ ( 62,496 ) $ — $ 415,691 Adoption of ASC 842 — — — — — 21 — 21 Stock-based compensation expense — — — — 21,740 — — 21,740 Exercise of common stock options — — 416,037 — 4,234 — — 4,234 Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 39,548 — ( 781 ) — — ( 781 ) Public offerings of common stock, adjustment to offering costs — — — — 39 — — 39 Issuance of common stock under the employee stock purchase plan — — 110,448 — 2,088 — — 2,088 Net loss — — — — — ( 31,292 ) — ( 31,292 ) BALANCE, DECEMBER 31, 2021 — $ — 25,378,520 $ 25 $ 505,482 $ ( 93,767 ) $ — $ 411,740 Stock-based compensation expense — — — — 36,321 — — 36,321 Exercise of common stock options — — 148,735 1 832 — — 833 Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 183,887 — ( 1,688 ) — — ( 1,688 ) Issuance of common stock under the employee stock purchase plan — — 78,652 — 2,352 — — 2,352 Issuance of common stock in acquisition of business — — 763,887 1 17,110 — — 17,111 Net unrealized loss on marketable investment securities — — — — — — ( 381 ) ( 381 ) Net loss — — — — — ( 67,138 ) — ( 67,138 ) BALANCE, DECEMBER 31, 2022 — $ — 26,553,681 $ 27 $ 560,409 $ ( 160,905 ) $ ( 381 ) $ 399,150 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 OPERATING ACTIVITIES Net loss $ ( 67,138 ) $ ( 31,292 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 10,543 3,407 Stock-based compensation expense 36,321 21,740 Change in fair value of contingent consideration ( 18,287 ) — Deferred income taxes ( 1,877 ) ( 8,736 ) Accretion of discounts on marketable investment securities ( 1,368 ) — Other 158 — Change in operating assets and liabilities: Accounts receivable ( 6,218 ) ( 4,631 ) Prepaid expenses and other current assets ( 1,224 ) 617 Inventory ( 1,680 ) 327 Operating lease assets 991 931 Other assets 618 ( 180 ) Accounts payable 582 ( 182 ) Operating lease liabilities ( 608 ) ( 852 ) Accrued compensation 8,495 6,208 Medicare advance payment — ( 8,350 ) Other accrued and current liabilities ( 963 ) 2,286 Other liabilities — ( 276 ) Net cash used in operating activities ( 41,655 ) ( 18,983 ) INVESTING ACTIVITIES Purchases of property and equipment ( 5,632 ) ( 3,483 ) Asset acquisitions, net of cash and cash equivalents acquired 547 ( 63,184 ) Acquisition of business, net of cash and cash equivalents acquired ( 26,966 ) — Proceeds from sale of property and equipment 195 10 Purchases of marketable investment securities ( 134,689 ) — Net cash used in investing activities ( 166,545 ) ( 66,657 ) FINANCING ACTIVITIES Payment of common stock offering costs — ( 336 ) Proceeds from exercise of common stock options 833 4,234 Payment of employees’ taxes on vested restricted stock units ( 1,688 ) ( 781 ) Proceeds from contributions to the employee stock purchase plan 2,492 2,312 Repayment of principal portion of finance lease liabilities ( 122 ) ( 8 ) Net cash provided by financing activities 1,515 5,421 The accompanying notes are an integral part of these consolidated financial statements. F-9 Table of Contents CASTLE BIOSCIENCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (in thousands) Years Ended December 31, 2022 2021 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 206,685 ) ( 80,219 ) Beginning of year 329,633 409,852 End of year $ 122,948 $ 329,633 SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest $ 16 $ 1 Income taxes $ 120 $ 16 DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued purchases of property and equipment $ 1,396 $ 33 Common stock issued in acquisition of business $ 17,111 $ — Operating lease assets obtained in exchange for lease obligations $ 6,075 $ 2,892 Asset acquisition, liability for contingent consideration $ — $ 18,287 Property and equipment acquired with tenant improvement allowance $ 51 $ 54 Asset acquisition, receivable for purchase price adjustment $ — $ 519 The accompanying notes are an integral part of these consolidated financial statements. F-10 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 clinicians and their patients with personalized, clinically actionable information to inform treatment decisions and improve health outcomes. We are based in Friendswood, Texas (a suburb of Houston, Texas) and our laboratory operations are conducted at our facilities located in Phoenix, Arizona and Pittsburgh, Pennsylvania. We have a history of recurring net losses and negative cash flows and as of December 31, 2022, we had an accumulated deficit of $ 160.9 million. We believe our marketable investment securities of $ 135.7 million, cash and cash equivalents of $ 122.9 million as of December 31, 2022 and revenue from our test reports will be sufficient to meet our anticipated cash requirements through at least the 12-month period following the date that these consolidated financial statements were issued. 2. Summary of Significant Accounting Policies Basis of Presentation Our 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. 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 goodwill impairment test, 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. Operating Segments Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. All revenues are attributable to U.S.-based operations and all assets are held in the United States. 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. 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 F-11 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) of accumulated other comprehensive loss within total stockholders’ equity, net of related deferred income tax effects on our 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 consolidated statements of operations. Impairments on available-for-sale debt securities, if any, are recorded in consolidated statements of operations. See Notes 5 and 11 for further details. Revenue Recognition 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. 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 clinician, 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 December 31, 2022 and 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. Inventory We carry inventories of test supplies in our laboratory facilities. The inventories are carried at the lower of weighted average cost and net realizable value and expensed through cost of sales as the supplies are used. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between five and ten years . Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Our leasehold improvements primarily relate to our office and laboratory facilities in Friendswood, Texas, Phoenix, Arizona and Pittsburgh, Pennsylvania, and are generally being amortized through the end of the lease terms in 2025 and 2033, respectively. Maintenance and repairs are charged to expense as incurred, and material improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations in the period realized. Intangible Assets Our intangible assets, which are comprised primarily of acquired developed technology, are considered to be finite-lived and are amortized on a straight-line basis over their estimated useful lives. 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 F-12 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 not incur any goodwill impairment losses in any of the periods presented. We have concluded that our business is comprised of a single reporting unit. For our annual impairment test for the year ended December 31, 2022, we elected to bypass the qualitative assessment and proceeded directly to the quantitative assessment by comparing our reporting unit’s fair value to its carrying value. Since we have a single reporting unit, fair value of the reporting unit was measured at our total market capitalization on the impairment test date based on the closing price of our common stock. Our impairment test indicated that the fair value of our reporting unit substantially exceeded its carrying value. Factors that could result in an impairment of goodwill in the future include declines in the price of our common stock, increased competition, changes in macroeconomic developments and unfavorable government or regulatory developments. Long-Lived Assets We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total of estimated future undiscounted cash flows, expected to result from the use of the asset and its eventual disposition, are less than the carrying amount. Impairment, if any, would be calculated based on the excess of the carrying amount of the long-lived asset over the long-lived asset’s fair value. There were no impairment charges recognized for the years ended December 31, 2022 and 2021. 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 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 contingent 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 each period. For contingent consideration in transactions that are not business combinations, we apply U.S. GAAP. With respect to additional contingent consideration that must or may be settled by issuance of a variable number of shares, we account for the contingent consideration as a liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). 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 consolidated balance sheets based on the contractual timing of future settlement. For additional information on the contingent consideration, see Notes 6 and 11. F-13 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Leases Effective January 1, 2021, we account for leases in accordance with ASC Topic 842, Leases (“ ASC 842”) . We categorize leases at their commencement as either operating or finance leases based on the criteria in ASC 842. Under ASC 842, we record right-of-use (“ROU”) assets and lease liabilities for each lease arrangement identified, except that we have elected the short-term lease exemption for all leases with a term of 12 months or less. Lease liabilities are recorded at the present value of future lease payments discounted using our incremental borrowing rate for the lease established at the commencement date and ROU assets are measured at the amount of the lease liability plus any initial direct costs, less any lease incentives received before commencement. For our operating leases, we recognize a single lease cost over the lease term on a straight-line basis. We have elected the practical expedient of not separating nonlease components from lease components in all leases. Upon adoption of ASC 842, effective January 1, 2021, we recognized operating lease ROU assets of $ 5,405,000 , operating lease liabilities of $ 6,076,000 , reductions to noncurrent liabilities of $ 751,000 , reductions to current assets of $ 59,000 and a credit to accumulated deficit of $ 21,000 . See Note 10 for details on our leases. Cost of Sales (exclusive of amortization of acquired intangible assets) Cost of sales is expensed as incurred and includes material and service costs associated with testing samples, personnel costs (including salaries, bonuses, benefits and stock-based compensation expense), electronic medical records, order and delivery systems, shipping charges to transport samples, third-party test fees, and allocated overhead including rent, information technology costs, equipment and facilities depreciation and utilities. Research and Development Research and development (“R&D”) costs are charged to operations as incurred. Advance payments for goods and services that will be used in future R&D activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform R&D services on behalf of us will be expensed as services are rendered or when the milestone is achieved. R&D costs include, but are not limited to, payroll and personnel-related expenses, stock-based compensation expense, materials, laboratory supplies, and consulting costs. Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses are attributable to sales, marketing, executive, finance and accounting, legal and human resources functions. These expenses consist of personnel costs (including salaries, employee benefit costs, bonuses and stock-based compensation expenses), customer services expenses, direct marketing expenses, educational and promotional expenses, market research, audit and legal expenses, and consulting. We expense all SG&A costs as incurred. Accrued Compensation We accrue for liabilities under discretionary employee and executive bonus plans. Our 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 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 December 31, 2022 and 2021, we accrued approximately $ 18,209,000 and $ 12,071,000 , respectively, for liabilities associated with these bonus plans. These amounts are classified as current or noncurrent accrued liabilities in the balance sheets based on the expected timing of payment. Retirement Plan We have an Internal Revenue Code (“IRC”) Section 401(k) profit sharing plan (the “Plan”) for eligible employees. The Plan is funded by employee contributions and provides for discretionary contributions in the form of matching and/or profit-sharing contributions. For the years ended December 31, 2022 and 2021, we provided a discretionary matching contribution of $ 3,525,000 and $ 2,036,000 , respectively. The higher amount for the year ended December 31, 2022 primarily reflects an increase in the number of employees compared to the year ended December 31, 2021. F-14 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of tax expense. No material amounts of tax-related interest or penalties were recorded during the years ended December 31, 2022 and 2021. Stock-Based Compensation Stock-based compensation expense for equity instruments issued to employees is measured based on the grant-date fair value of the awards. The fair value of employee stock options and offerings under the 2019 Employee Stock Purchase Plan (the “ESPP”) are estimated on the date of grant using the Black-Scholes option-pricing valuation model. For restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”), the fair value is equal to the closing price of our common stock on the date of grant. For awards with only service conditions, we recognize compensation costs on a straight-line basis over the requisite service period of the awards. For options and RSUs, the requisite service period is generally the awards’ vesting period (typically four years ). For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date. PSUs vest upon the achievement of certain performance conditions and the provision of service with us through a specified period. Accruals of compensation cost for PSUs are based on the probable outcome of the performance conditions and are reassessed each reporting period. We recognize compensation cost for PSUs separately for each vesting tranche on a ratable basis over the requisite service period. The requisite service period for PSUs is based on an analysis of vesting requirements and performance conditions for the particular award. Forfeitures are accounted for as they occur. 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. Comprehensive loss is made up of net loss plus other comprehensive loss, if any. CARES Act Payroll Tax Deferral The CARES Act permitted employers to defer the payment of the employer share of social security taxes due for the period beginning March 27, 2020 and ending December 31, 2020. Of the amounts deferred, 50% were required to be paid by December 31, 2021 and the remaining 50% were required to be paid by December 31, 2022. We began deferring payment of the employer share of social security taxes in May 2020. Of the $ 551,000 originally deferred, 50% was repaid during the year ended December 31, 2021 and the remaining $ 276,000 of such taxes were repaid during the year ended December 31, 2022. 3. Revenue All of our revenues from contracts with customers are associated with the provision of diagnostic and prognostic testing services. Our revenues are primarily attributable to our DecisionDx®-Melanoma test for cutaneous melanoma. We also provide 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, a test for uveal melanoma (“UM”), DecisionDx®-UM, and a test for patients diagnosed with Barrett’s esophagus (“BE”), the TissueCypher® Barrett’s Esophagus Test. 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. F-15 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO 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. The payments for our services are primarily 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 Medicare are generally paid at a rate established on Medicare’s Clinical Laboratory Fee Schedule or by the respective Medicare contractor within 30 days from receipt. Medicare claims that were either submitted to Medicare prior to the local coverage determination (“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). A successful appeal at any of these levels may result in prompt payment. In the absence of Medicare 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 Medicare, 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 years ended December 31, 2022 and 2021 were $ 1,987,000 of net negative revenue adjustments and $ 3,324,000 of net positive revenue adjustments, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration. 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 December 31, 2022 and 2021. Medicare Advance Payment On April 16, 2020, we received an advance payment of $ 8.3 million (the “Advance Payment”) from the Centers for Medicare & Medicaid Services (“CMS”) under its Accelerated and Advance Payment Program, which was expanded to provide increased cash flow to service providers during the COVID-19 pandemic. CMS began recoupment of the Advance Payment in April 2021 by applying 25% of the Medicare payments otherwise owed to us against the F-16 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) balance of the Advance Payment. Recoupment of the full amount of the Advance Payment was complete by December 31, 2021. Disaggregation of revenues The table below provides the disaggregation of revenue by type (in thousands): Years Ended December 31, 2022 2021 Dermatologic $ 124,809 $ 85,753 Other 12,230 8,332 Total net revenues $ 137,039 $ 94,085 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. 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 Percentage of Accounts Receivable (current) Percentage of Accounts Receivable (noncurrent) Year Ended December 31, As of December 31, As of December 31, 2022 2021 2022 2021 2022 2021 Medicare 53 % 57 % 28 % 24 % * * Payor A 12 % * 14 % 12 % 16 % 15 % Payor B * * * 10 % * * * Less than 10% There were no other third-party payors that individually accounted for more than 10% of the Company’s total revenue or accounts receivable for the periods shown in the table above. 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, vesting of RSUs and PSUs or purchases under the ESPP. The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. Contingently issuable PSU awards are included in the computation of diluted loss per share when the applicable performance criteria would be met and the common shares would be issuable if the end of the reporting period were the end of the contingency period. 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 years ended December 31, 2022 and 2021 F-17 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) because to do so would be antidilutive or, in the case of PSUs, the applicable performance conditions have not yet been met (in thousands): Years Ended December 31, 2022 2021 Stock options 3,521 3,209 RSUs and PSUs 1,650 250 ESPP 146 62 Total 5,317 3,521 In addition, in connection with the acquisition of AltheaDx, Inc. (“AltheaDx”), we may be required to issue shares of our common stock to satisfy the contingent consideration obligations, pending the outcome of certain commercial and regulatory milestones, as required by the definitive agreement to acquire AltheaDx. For purposes of calculating diluted loss per share, no such shares were assumed to have been issued because none of the applicable conditions have been met to date. See Notes 6 and 11 for additional information. 5. Marketable Investment Securities The following table presents our available-for-sale debt securities (in thousands): December 31, 2022 Amortized Cost Unrealized Estimated Fair Value Gains Losses U.S. government securities $ 136,058 $ — $ ( 381 ) $ 135,677 Total $ 136,058 $ — $ ( 381 ) $ 135,677 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 years ended December 31, 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 December 31, 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 years ended December 31, 2022 and 2021. The allowance for credit losses was zero as of December 31, 2022 and 2021. As of December 31, 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 consolidated balance sheets. As of December 31, 2022 and 2021 the accrued interest receivable balance was immaterial and zero, respectively. Additional information relating to the fair value of marketable investment securities can be found in Note 11. 6. 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 where the MyPath Melanoma test for difficult-to-diagnose melanocytic lesions was developed and offered, for a cash purchase price of $ 32,500,000 . Following the completion of the acquisition, we became the sole provider of the MyPath Melanoma test. Based on the guidance in ASC 805, we concluded that substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset and therefore the transaction represents F-18 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) an asset acquisition. We incurred $ 684,000 of direct transaction costs that were included in the cost of the acquisition. The allocation of the acquisition to individual assets resulted in an intangible asset representing developed technology of $ 33,054,000 and inventory of $ 130,000 . The intangible asset has an estimated useful life of 12 years and is being amortized on a straight-line basis. Cernostics, Inc. On December 3, 2021, we completed the acquisition of Cernostics, Inc. (“Cernostics”), which offers the TissueCypher Barrett’s Esophagus Test for patients with BE. We acquired Cernostics for an upfront cash purchase price of $ 30,732,000 , including $ 653,000 of direct transaction costs. A portion of the upfront cash consideration is being held in escrow for a specified period following closing to secure indemnification claims, if any. Our consolidated balance sheet at December 31, 2021 reflected a receivable for the post-closing purchase price adjustment, representing the difference between actual and estimated cash and working capital at closing, among other things. During the year ended December 31, 2022, we received cash of $ 547,000 in settlement of this receivable. We also agreed to pay up to an additional $ 50.0 million in cash or shares of our common stock, at our sole discretion, based on the achievement of certain commercial milestones relating to the year ended December 31, 2022 (“Cernostics Earnout Payments”). The portion of any Cernostics Earnout Payments that could have been settled in shares of our common stock was subject to certain limitations and the aggregate number of shares that could have been issued for the Cernostics Earnout Payments may not have exceeded 5,034,653 shares. Any Cernostics Earnout Payments in shares of our common stock would have been based on the volume weighted-average price of our common stock for the 15 trading days ending December 30, 2022. The Cernostics Earnout Payments represent contingent consideration. ASC 480 provides guidance on accounting for certain obligations that must or may be settled by issuance of a variable number of shares. In accordance with that guidance, we recognized a liability of $ 18,287,000 , which represented the fair value of the obligation as of the acquisition date. Our consolidated balance sheet at December 31, 2022 reflected a liability of zero for the Cernostics Earnout Payments since the applicable commercial milestones were not met. See Note 11 for additional information on the measurement of the contingent consideration. 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 and therefore the transaction represents an asset acquisition. The cost of the acquisition, which is comprised of the cash consideration, transaction costs and contingent consideration, was allocated to the assets acquired and the liabilities assumed as follows (in thousands): December 3, 2021 Cash and cash equivalents $ 1,251 Accounts receivable 104 Prepaid expenses and other current assets 198 Property and equipment 455 Intangible assets 57,827 Accounts payable ( 655 ) Accrued compensation ( 167 ) Other accrued and current liabilities ( 386 ) Finance lease liabilities ( 237 ) Deferred tax liabilities ( 9,371 ) Total cost allocated $ 49,019 The intangible assets were comprised of developed technology of $ 57,264,000 with an estimated useful life of 15 years and an assembled workforce of $ 563,000 , with an estimated useful life of five years , and each is being amortized on a straight-line basis. 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 enabled us to expand upon our F-19 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 consolidated financial statements since the date of the acquisition. The amount of revenue from AltheaDx included in the consolidated statements of operations from the acquisition date through December 31, 2022 was $ 912,000 . The loss attributable to AltheaDx included in the consolidated statements of operations from the acquisition date through December 31, 2022 was approximately $ 12,372,000 . This amount does not reflect transaction costs from the acquisition or the effects of the valuation allowance reduction discussed in Note 15. Transaction costs associated with the acquisition were $ 1,711,000 for the year ended December 31, 2022 and were recognized as expenses in the consolidated statements of operations. We have also agreed to pay up to an additional $ 75.0 million in cash and common stock in connection with the achievement of certain milestones based on 2022, 2023 and 2024 commercial milestones for the IDgenetix test (the “AltheaDx Earnout Payments”). Upon any achievement of each relevant milestone event, the associated payment 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. Contingent consideration liability associated with the AltheaDx Earnout Payments was zero as of the April 26, 2022 date of acquisition. Our calculations of the consideration transferred and the purchase price allocation for the acquisition of AltheaDx are finalized as of December 31, 2022. During the measurement period, we recorded adjustments to accrued liabilities, income taxes, intangible assets, contingent consideration and the resulting goodwill after finalizing our valuation of these items. F-20 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the acquisition-date fair value of the consideration transferred, summarizes the final allocation of the fair values of assets acquired and liabilities assumed in the acquisition of AltheaDx, and includes measurement period adjustments recorded during 2022 (in thousands, except for shares): April 26, 2022 (as initially reported) Measurement Period Adjustments April 26, 2022 (as adjusted) Consideration Transferred Cash $ 30,510 $ ( 8 ) $ 30,502 Common stock ( 763,887 shares) 17,111 — 17,111 Contingent consideration 1,528 ( 1,528 ) — Total consideration transferred $ 49,149 $ ( 1,536 ) $ 47,613 Fair Value Allocation Cash and cash equivalents $ 3,536 $ — $ 3,536 Accounts receivable 302 — 302 Inventory 279 — 279 Prepaid expenses and other current assets 262 — 262 Property and equipment 314 — 314 Intangible asset 37,000 ( 2,000 ) 35,000 Other assets – long-term 12 — 12 Accounts payable ( 231 ) — ( 231 ) Accrued compensation ( 380 ) — ( 380 ) Other accrued and current liabilities ( 532 ) 119 ( 413 ) Deferred tax liabilities ( 1,819 ) 147 ( 1,672 ) Other liabilities ( 88 ) — ( 88 ) Net identifiable assets acquired 38,655 ( 1,734 ) 36,921 Goodwill 10,494 198 10,692 Total fair value of net assets assumed $ 49,149 $ ( 1,536 ) $ 47,613 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. A portion of the upfront cash and stock consideration is being held in escrow for a specified period following closing to secure indemnification claims, if any. During the fourth quarter of 2022, we reversed losses originally recorded during the second and third quarters of 2022 that were associated with the remeasurement of contingent consideration before finalizing the valuation. Also during the fourth quarter of 2022, we recorded an immaterial adjustment to reduce the amortization expense associated with the intangible asset. 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. Unaudited Pro Forma Financial Information The following unaudited pro forma financial information for the years ended December 31, 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 $ 1,626,000 , both assumed to have been recognized during the year ended December 31, 2021 and therefore removed from the year ended December 31, 2022. F-21 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Years Ended December 31, 2022 2021 Net revenues $ 137,591 $ 94,671 Net loss $ ( 72,819 ) $ ( 41,764 ) Related Parties Derek J. Maetzold, our President and Chief Executive Officer (“CEO”), 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 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 contingent consideration in the form of the 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. 7. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): As of December 31, 2022 2021 Lab equipment (1) $ 9,721 $ 3,727 Leasehold improvements 5,171 5,044 Computer equipment 4,336 2,457 Furniture and fixtures 1,660 1,288 Construction-in-progress 1,275 27 Total 22,163 12,543 Less accumulated depreciation (1) ( 7,848 ) ( 3,042 ) Property and equipment, net $ 14,315 $ 9,501 (1) Includes lab equipment under a finance lease of $ 369 thousand and accumulated depreciation of $ 137 thousand as of December 31, 2022 and $ 237 thousand and accumulated depreciation of $ 8 thousand as of December 31, 2021. Depreciation expense was recorded in the consolidated statements of operations as follows (in thousands): Years Ended December 31, 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 874 $ 478 Research and development 337 248 Selling, general and administrative 1,067 722 Total $ 2,278 $ 1,448 F-22 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. 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 10,692 Balance, December 31, 2022 $ 10,692 There were no accumulated impairments of goodwill as of December 31, 2022 or 2021. We had no goodwill as of December 31, 2021. Other Intangible Assets, Net Our other intangible assets, net consist of the following (in thousands): December 31, 2022 Gross carrying value Accumulated amortization Net Weighted-Average Remaining Life (in years) Developed technology $ 125,317 $ ( 10,102 ) $ 115,215 12.9 Assembled workforce 563 ( 122 ) 441 4.0 Total other intangible assets, net $ 125,880 $ ( 10,224 ) $ 115,656 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 other intangible assets, net $ 90,880 $ ( 1,958 ) $ 88,922 The estimated future aggregate amortization expense as of December 31, 2022 is as follows (in thousands): Years Ending December 31, 2023 $ 9,013 2024 9,038 2025 9,013 2026 9,004 2027 8,901 Thereafter 70,687 Total $ 115,656 Amortization expense of intangible assets was $ 8.3 million and $ 2.0 million for the years ended December 31, 2022 and 2021, respectively. F-23 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Other Accrued and Current Liabilities Other accrued liabilities consisted of the following (in thousands): As of December 31, 2022 2021 Accrued service fees $ 2,125 $ 1,905 Clinical studies 1,822 1,655 Employee stock purchase plan contributions 900 760 Payroll-related liabilities 37 695 Other 378 663 Total $ 5,262 $ 5,678 10. Leases Operating Leases We lease office space in Friendswood, Texas (the “Friendswood Lease”) for use as our corporate headquarters. The Friendswood Lease commenced in late 2020 under a 60 -month term and a renewal option for one additional five-year term. We lease two facilities in Phoenix, Arizona for laboratory and office space. For both leases, the current terms end in 2033 with options to renew for two additional five-year terms. 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 obtained access to the facilities and initiated leasehold improvement work. 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. We have not included the optional renewal periods in the measurement of the lease obligations because it is not reasonably certain that we will exercise these renewal options. Our other operating leases primarily consist of office equipment. Finance Lease In connection with the acquisitions of AltheaDx in April 2022 and Cernostics in December 2021, we assumed finance leases for laboratory equipment. Discount Rates We discount our lease obligations using our incremental borrowing rate at the commencement date. The incremental borrowing rate is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We primarily consider industry data, our credit rating and the lease term to determine our incremental borrowing rate. F-24 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Lease Balances and Costs Lease balances reflected in the consolidated balance sheet were as follows (in thousands): As of December 31, Lease Balance Classification 2022 2021 Lease Assets Operating Operating lease assets $ 12,181 $ 7,383 Finance Property and equipment, net $ 232 $ 229 Lease Liabilities Current Operating Operating lease liabilities $ 1,777 $ 1,179 Finance Other accrued and current liabilities $ 148 $ 105 Noncurrent Operating Noncurrent operating lease liabilities $ 11,533 $ 6,900 Finance Other liabilities $ 90 $ 124 Costs associated with our leases were included in the consolidated statement of operations as follows (in thousands): Years Ended December 31, Lease Cost 2022 2021 Operating lease cost (1) $ 1,997 $ 1,450 Finance lease cost Amortization of lease assets 129 8 Interest on finance lease liabilities 16 1 Short-term lease cost 477 29 Total lease cost $ 2,619 $ 1,488 (1) Includes variable lease cost of $ 371 thousand and $ 187 thousand for the years ended December 31, 2022 and 2021, respectively. F-25 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other Information Supplemental cash flow information on leases is as follows (in thousands): Years Ended December 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 1,283 $ 1,145 Operating cash flows from interest paid on finance leases $ 16 $ 1 Financing cash flows from finance leases $ 122 $ 8 Information regarding the weighted-average lease term and weighted-average discount rate is presented below: As of December 31, 2022 2021 Weighted-average remaining lease term (years) Operating leases 9.4 9.1 Finance leases 1.9 2.3 Weighted-average discount rate Operating leases 7.3 % 4.9 % Finance leases 6.4 % 5.0 % The following is a maturity analysis of our operating lease and finance lease liabilities as of December 31, 2022 (in thousands): Operating leases Finance leases Years Ending December 31, 2023 $ 1,838 $ 153 2024 2,122 72 2025 2,014 30 2026 2,180 — 2027 2,219 — Thereafter 12,921 — Total lease payments 23,294 255 Less: Interest component ( 9,984 ) ( 17 ) Present value of lease payments $ 13,310 $ 238 As of December 31, 2022, we expect $ 0.7 million in undiscounted future lease payments for leases that had not yet commenced. 11. 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. F-26 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Level 3 – Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions. 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 liabilities that are accounted for at fair value on a recurring basis as of December 31, 2022 and 2021 (in thousands): As of December 31, 2022 Quoted Prices in Active Markets for Identical Items (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets Money market funds (1) $ 108,673 $ — $ — $ 108,673 U.S. government securities (2) $ 135,677 $ — $ — $ 135,677 Liabilities Contingent consideration (3) $ — $ — $ — $ — 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 U.S. government securities (2) $ — $ — $ — $ — Liabilities Contingent consideration (3) $ — $ — $ 18,287 $ 18,287 (1) Classified as “Cash and cash equivalents” in the consolidated balance sheets. (2) Classified as “Marketable investment securities” in the consolidated balance sheets. (3) Current portion, if any, classified as “Other accrued and current liabilities” in the consolidated balance sheets. Contingent Consideration In connection with our acquisition of Cernostics, we recorded a contingent consideration liability for the additional contingent consideration of up to $ 50.0 million that could have been payable based on the achievement of certain commercial milestones relating to the year ending December 31, 2022. The Cernostics Earnout Payments could have been settled in cash or shares of our common stock, at our sole discretion. The portion of any Cernostics Earnout Payments that could have been settled in shares of our common stock were subject to certain limitations and the aggregate number of shares that could have been issued for the Cernostics Earnout Payments could not have exceeded 5,034,653 shares. Any Cernostics Earnout Payments in shares of our common stock could have been based on the volume weighted-average price of our common stock for the 15 trading days ending December 30, 2022. There were no Cernostics Earnout Payments that became payable because the commercial milestones were not achieved during the earnout period. In connection with our acquisition of AltheaDx, we agreed to pay contingent consideration of up to $ 75.0 million based on the achievement of certain commercial milestones relating to the 2022, 2023, and 2024 commercial F-27 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) milestones, as discussed further in Note 6. The portion of the AltheaDx Earnout Payments associated with the commercial milestones for the year ended December 31, 2022 will not be paid since the applicable commercial milestones were not met. This portion represented $ 35.0 million of the $ 75.0 million total potential payment obligation, exclusive of the catch-up payment in 2023 of $ 17.5 million which will become payable if all 2023 commercial milestones are fully met. Therefore, a potential payment obligation of up to $ 57.5 million with respect to the remaining commercial milestones for 2023 and 2024 remains as of December 31, 2022. If the settlement of the remaining portion of the Althea Earnout Payments were to occur as of December 31, 2022, no amounts would be due based on the achievement of the commercial milestones to date. The contingent consideration was 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 used assumptions for expected volatility of the financial metrics and a risk-adjusted discount rate, which were 20.0 % and 16.1 %, respectively, as of December 31, 2021. The final valuation for the contingent consideration as of the date of acquisition was assessed to be zero and resulted in a measurement period adjustment. See Note 6 for additional information on the measurement period adjustment. Since the final valuation, there have been no changes in the fair value of the contingent consideration during the year ended December 31, 2022. 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 consolidated statement of operations. A measurement period adjustment was recognized in the fourth quarter of 2022 to reverse the preliminary valuation of the contingent consideration and losses recorded during the interim period. The following table discloses the summary of changes in the contingent consideration liability measured at fair value using Level 3 inputs for the year ended December 31, 2022 (in thousands): Cernostics AltheaDx Total Balance, December 31, 2021 $ 18,287 $ — $ 18,287 Acquisition of AltheaDx — — — Change in fair value ( 18,287 ) — ( 18,287 ) Balance, December 31, 2022 $ — $ — $ — 12. 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. 13. Stockholders’ Equity Capital Stock The Company’s Amended and Restated Certificate of Incorporation, dated July 29, 2019, authorizes the Company to issue up to 200,000,000 shares of common stock with a par value of $ 0.001 per share. The Company is also authorized to issue up to 10,000,000 shares of preferred stock with a par value of $ 0.001 per share. No dividends were declared or paid during the years ended December 31, 2022 or 2021. During the year ended December 31, 2021, we paid $ 336,000 in common stock offering costs related to a public offering of common stock completed in December 2020. 14. Stock Incentive Plans and Stock-Based Compensation Stock Incentive Plans Our stock incentive plans provide for the granting of options to purchase common stock and other equity-based awards to our employees, directors and consultants. On September 6, 2008, we adopted the 2008 Stock Plan (the “2008 Plan”), on August 15, 2018, we adopted the 2018 Stock Plan (the “2018 Plan”) and on July 24, 2019, we adopted the 2019 Equity Incentive Plan (the “2019 Plan”). Following the adoption of the 2018 Plan, no additional stock awards were granted under the 2008 Plan and following the adoption of the 2019 Plan, no additional stock awards were granted under the 2018 Plan. On December 22, 2022, our board of directors approved the 2022 F-28 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Inducement Plan (the “Inducement Plan”) to reserve 350,000 shares of our common stock that may be issued pursuant to awards made as an inducement material to the grantee’s entering into employment with us to the extent such grantee was not previously an employee of ours or is entering into employment following a bona fide period of non-employment with us. Options under the plans may be granted as incentive stock options (“ISO”) or non-statutory stock options (“NSOs”). ISOs may only be granted to our employees (including directors who are also considered employees). NSOs may be granted to our employees, directors and consultants. Options may be granted for terms up to ten years from the date of grant, as determined by the board of directors; provided, however, that with respect to an ISO granted to a person who owns stock representing more than 10 % of the voting power of all classes of stock of ours, the terms shall be for no more than five years from the date of grant. The exercise price of options granted must be no less than 100 % of the fair market value of the shares on the date of grant, provided, however, that with respect to an ISO granted to an employee who at the time of grant of such options owns stock representing more than 10 % of the voting power of all classes of stock of ours, the exercise price shall not be less than 110 % of the fair market value of the shares on the date of grant. Options generally vest over four years (generally 25 % after one year and monthly thereafter), subject to the option holder’s continued service with us. We issue new shares to satisfy option exercises. As of December 31, 2022, we have granted awards for 1,473,888 shares in excess of the number of shares authorized for issuance under the 2019 Plan. The 2019 Plan provides for automatic annual increases to the number of shares authorized for issuance, equal to 5 % of our common shares outstanding as of the immediately preceding year end, through January 1, 2029. Under this provision, effective January 1, 2023, an additional 1,327,684 shares became available under the 2019 Plan. Stock Options Stock option activity under our stock plans for the years ended December 31, 2022 and 2021 is set forth below: Weighted-Average Stock Options Outstanding Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2021 3,369,502 $ 28.11 Granted 841,336 $ 48.97 Exercised ( 414,890 ) $ 10.13 Forfeited/Cancelled ( 209,260 ) $ 33.97 Balance as of December 31, 2021 3,586,688 $ 34.75 Granted 263,645 $ 22.35 Exercised ( 148,735 ) $ 5.59 Forfeited/Cancelled ( 281,758 ) $ 34.08 Balance as of December 31, 2022 3,419,840 $ 35.11 7.5 $ 12,643 Exercisable at December 31, 2022 2,032,859 $ 30.09 7.0 $ 11,713 F-29 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Restricted Stock Units RSUs represent the right to receive shares of our common stock at a specified future date, subject to vesting. Our RSUs generally vest annually from the grant date in four equal installments subject to the holder’s continued service with us. We issue new shares to satisfy RSUs upon vesting. The following table summarizes our RSU activity for the years ended December 31, 2022 and 2021: Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value Balance as of January 1, 2021 161,477 $ 59.16 Granted 958,361 $ 43.05 Vested (1) ( 56,002 ) $ 61.07 Forfeited/Cancelled ( 13,662 ) $ 62.80 Balance as of December 31, 2021 1,050,174 $ 44.31 Granted 2,988,107 $ 23.15 Vested (1) ( 257,708 ) $ 45.14 Forfeited/Cancelled ( 302,651 ) $ 27.12 Balance as of December 31, 2022 3,477,922 $ 27.56 (1) The aggregate number of shares withheld upon vesting for employee tax obligations was 73,821 and 16,640 for the years ended December 31, 2022 and 2021, respectively. RSU Awards to Related Parties On October 1, 2021, the Audit Committee of our board of directors approved, at the recommendation of our Compensation Committee, a one-time award of RSUs to three employees who are the children of our CEO which we have determined to be outside the ordinary course of business. Under the IRC, those owning more than a specified percentage of a company’s stock are not eligible to receive certain preferential tax benefits that are afforded to qualifying stock compensation arrangements. In determining eligibility under the IRC, when calculating the number of shares of common stock owned, an individual must attribute all shares owned by specified family members. Because of the stock ownership of our CEO and this attribution requirement, the three children have not been eligible to participate in the ESPP and, at times, have not qualified to receive stock option grants on terms as favorable as those received by other similar employees. Our Compensation Committee recommended, and our Audit Committee approved, a one-time grant of RSUs designed to compensate the three children for these differences. The aggregate number of shares underlying the RSUs granted to the three children was 17,275 which are included in the table above. The awards had an aggregate grant date fair value of $ 1,129,000 , vested immediately upon grant and were recognized as stock-based compensation expense, included in selling, general and administrative expenses, during the year ended December 31, 2021. F-30 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Performance-Based Restricted Stock Units PSUs represent the right to receive shares of our common stock contingent upon the achievement of certain financial performance measures. We issue new shares to satisfy PSUs upon vesting. The following table summarizes our PSU activity for the year ended December 31, 2022: Performance-Based Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value Balance as of December 31, 2021 — $ — Granted 196,033 $ 23.23 Vested — $ — Forfeited/Cancelled — $ — Balance as of December 31, 2022 196,033 $ 23.23 Employee Stock Purchase Plan The ESPP became effective July 24, 2019. Offerings under the ESPP are generally 24 months in length with four six-month purchase periods unless terminated earlier, as described below. Eligible employees who enroll in an offering are able to purchase shares of our common stock at a discount through payroll deductions, subject to certain limitations. The purchase price of the shares of common stock is the lesser of (i) 85 % of the fair market value of such shares on the offering date and (ii) 85 % of the fair market value of such shares on the purchase date. A new offering begins approximately every six months . Offerings are concurrent, but in the event the fair market value of a share of common stock on the first day of any purchase period during an offering (the “New Offering”) is less than or equal to the fair market value of a share of common stock on the offering date for an ongoing offering (the “Ongoing Offering”), then the Ongoing Offering terminates immediately following the purchase of shares on the purchase date immediately preceding the New Offering and the participants in the terminated Ongoing Offering are automatically enrolled in the New Offering. In such case, we account for this event as a modification of the Ongoing Offering. Notwithstanding the above, our board of directors (or an authorized committee thereof) may modify the terms of or suspend any future offerings prior to their commencement. As of December 31, 2022, 814,599 shares remained available for issuance under the ESPP. The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 265,536 shares becoming available under the ESPP effective January 1, 2023. We issue new shares to satisfy the ESPP purchases. Determining Fair Value - Summary of Assumptions We use the Black-Scholes option pricing model to estimate the fair value of stock options and purchase rights granted under the ESPP at the date of grant, start of the offering or other relevant measurement date. Set forth below is a description of the significant assumptions used in the option pricing model: • Expected term . The expected term is the period of time that granted options are expected to be outstanding. For stock options, we have set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as we have concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate the expected term. For the ESPP, the expected term is the period of time from the offering date to the purchase date. • Expected volatility . 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. • Risk-free interest rate . We base the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for the ESPP, provided from the F-31 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms. • Dividend yield . We have not paid, and does not have plans to pay, cash dividends. Therefore, we use an expected dividend yield of zero in the Black-Scholes option valuation model. The fair value of our common stock is also an assumption used to determine the fair value of stock options. Prior to our initial public offering of common stock on July 29, 2019 (the “IPO”), our common stock was not publicly traded, therefore we estimated the fair value of our common stock. Following the IPO, the fair value of our common stock is the closing selling price per share of its common stock as reported on the Nasdaq Global Market on the date of grant or other relevant determination date. 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: Years Ended December 31, 2022 2021 Average expected term (years) 5.8 6.1 Expected stock price volatility 68.34 % - 75.02 % 66.50 % - 68.83 % Risk-free interest rate 1.54 % - 4.21 % 0.51 % - 1.48 % Dividend yield — % — % The following table sets forth assumptions used to determine the fair value of the purchase rights issued under the ESPP: Years Ended December 31, 2022 2021 Average expected term (years) 1.3 1.2 Expected stock price volatility 62.98 % - 91.78 % 61.13 % - 86.50 % Risk-free interest rate 0.60 % - 3.45 % 0.06 % - 0.20 % Dividend yield — % — % 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 is included in the consolidated statements of operations as follows (in thousands): Years Ended December 31, 2022 2021 Cost of sales (exclusive of amortization of acquired intangible assets) $ 3,755 $ 2,058 Research and development 7,635 4,522 Selling, general and administrative 24,931 15,160 Total stock-based compensation expense $ 36,321 $ 21,740 For the years ended December 31, 2022 and 2021, the weighted-average grant date fair value of stock options was $ 14.34 and $ 29.89 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 16.79 and $ 27.60 per share, respectively. As of December 31, 2022, the total unrecognized stock-based compensation cost related to outstanding awards was $ 131,644,000 , which is expected to be recognized on a straight-line basis over a weighted-average period of 3 years. The total unrecognized compensation cost will be adjusted for forfeitures in future periods as they occur. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2022 and 2021 was $ 3,745,000 and $ 27,191,000 , respectively. The aggregate intrinsic value of shares issued under the ESPP was $ 534,000 and $ 6,341,000 during F-32 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) the years ended December 31, 2022 and 2021, respectively. The aggregate fair value of RSUs that vested during the years ended December 31, 2022 and 2021 was $ 5,863,000 and $ 2,698,000 , respectively. No tax benefits related to stock-based compensation were recorded in the consolidated statements of operations during the years ended December 31, 2022 and 2021 due to the valuation allowance on net deferred tax assets. 15. Income Taxes The components of income tax expense (benefit) are as follows (in thousands): Years Ended December 31, 2022 2021 Current tax expense U.S. federal $ — $ — State and local 111 16 Total current 111 16 Deferred tax benefit U.S. federal ( 1,626 ) ( 8,726 ) State and local ( 251 ) ( 10 ) Total deferred ( 1,877 ) ( 8,736 ) Total income tax benefit $ ( 1,766 ) $ ( 8,720 ) The differences between income taxes expected at the U.S. federal statutory rate (21%) and the reported income tax expense (benefit) are summarized as follows (in thousands): Years Ended December 31, 2022 2021 Pre-tax loss $ ( 68,904 ) $ ( 40,012 ) U.S. federal taxes at statutory rate ( 14,470 ) ( 8,402 ) State income taxes ( 3,751 ) ( 1,764 ) Research and development tax credit ( 1,814 ) ( 1,658 ) Change in valuation allowance 17,075 2,570 Stock-based compensation 3,323 ( 880 ) Non-deductible officers’ compensation 1,326 1,571 Change in fair value of contingent consideration ( 3,840 ) — Transaction costs 359 — Other 26 ( 157 ) Income tax benefit $ ( 1,766 ) $ ( 8,720 ) F-33 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Significant components of deferred tax assets and liabilities are as follows (in thousands): As of December 31, 2022 2021 Deferred tax assets: Net operating loss (“NOL”) carryforwards $ 49,253 $ 24,316 Accrued liabilities 6,503 4,168 Capitalized R&D costs 6,738 — Lease liabilities 3,549 2,114 Stock-based compensation 4,489 2,202 R&D tax credit 5,665 3,670 Other 445 240 Total deferred tax assets 76,642 36,710 Less valuation allowance ( 49,953 ) ( 17,774 ) Deferred tax assets, net $ 26,689 $ 18,936 Deferred tax liabilities: Prepaid expenses $ ( 289 ) $ ( 330 ) Property and equipment ( 3,269 ) ( 2,285 ) Intangible assets ( 19,026 ) ( 12,913 ) ROU assets ( 3,577 ) ( 2,166 ) Section 481(a) adjustment (cash to accrual) ( 956 ) ( 1,877 ) Total deferred tax liabilities ( 27,117 ) ( 19,571 ) Net deferred tax liability $ ( 428 ) $ ( 635 ) At December 31, 2022, we had NOL carryforwards for federal income tax purposes of approximately $ 207,242,000 of which $ 106,093,000 will begin to expire in 2029 if not utilized to offset taxable income, and $ 101,149,000 may be carried forward indefinitely. Future changes in ownership, as defined by Section 382 of the IRC, could limit the amount of NOL carryforwards used in any one year. Also, as of December 31, 2022, we had state NOL carryforwards of approximately $ 114,041,000 , which begin to expire in 2028 if not utilized to offset state taxable income. Our R&D tax credit carryforwards of $ 5,665,000 at December 31, 2022 will begin to expire in 2034 if not utilized to offset federal income tax. In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years). We performed a Section 382 analysis from inception through the year ended December 31, 2022 and concluded we had experienced an ownership change in 2011, 2014 and 2020. These changes in ownership did not result in the expiration of any NOLs or R&D credits. However, future changes in ownership may further limit the ability of us to utilize our NOL carryforwards and R&D tax credit carryforwards. We have also performed Section 382 analyses with respect to the NOLs we obtained in our acquisitions of Cernostics and AltheaDx. Based on changes in ownership that have occurred, $ 36,347,000 of NOLs are expected to expire unused as a result of Section 382 limitations. During the years ended December 31, 2022 and 2021, in connection with the acquisitions of AltheaDx and Cernostics, we recorded additional net deferred tax liabilities of $ 1,672,000 and $ 9,371,000 , respectively, primarily due to book-tax differences related to the acquired intangible assets. As a result of these additional deferred tax liabilities, we determined that $ 1,626,000 and $ 8,726,000 of our existing valuation allowance should be reduced, which was reflected in our income tax benefit for the years ended December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, we placed a valuation allowance of $ 49,953,000 and $ 17,774,000 , respectively, against our net deferred tax asset balances, as we have determined that it is more likely than not that they will not be realized. F-34 Table of Contents CASTLE BIOSCIENCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) We assessed whether we had any significant uncertain tax positions related to open tax years and concluded there were none. Accordingly, no reserve for uncertain tax positions has been recorded as of December 31, 2022 and 2021. We are generally no longer subject to tax examinations for U.S. federal income tax purposes for fiscal years prior to 2019 and fiscal years prior to 2018 for multiple state jurisdictions. However, since we have been in an NOL position since 2008, our 2008 to 2018 federal tax returns and our 2008 to 2017 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards. F-35