What changed in this filing

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Item 1. Financial Statements

2023-08-02 compared with 2023-05-03 · 204 added, 100 removed, 447 unchanged (40% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

ASSETS (unaudited)

26 unchanged sentences

Preferred stock, $ 0.001 par value per share;

10,000,000 shares authorized as of March 31, 2023 and December 31, 2022;

no shares issued and outstanding as of March 31, 2023 and December 31, 2022

10,000,000 shares authorized as of June 30, 2023 and December 31, 2022;

no shares issued and outstanding as of June 30, 2023 and December 31, 2022

Common stock, $ 0.001 par value per share;

200,000,000 shares authorized as of March 31, 2023 and December 31, 2022;

26,686,201 and 26,553,681 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

200,000,000 shares authorized as of June 30, 2023 and December 31, 2022;

26,784,008 and 26,553,681 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 587,771 560,409

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

NET REVENUES $ 50,138 $ 34,838 $ 92,175 $ 61,690

OPERATING EXPENSES

OPERATING EXPENSES AND OTHER OPERATING INCOME

Cost of sales (exclusive of amortization of acquired intangible assets) 11,058 7,686 21,240 13,630

8 unchanged sentences

Loss before income taxes ( 18,761 ) ( 3,605 ) ( 47,951 ) ( 28,094 )

Income tax expense

Income tax expense (benefit)

16 ( 1,957 ) 30 ( 1,823 )

Net loss $ ( 18,777 ) $ ( 1,648 ) $ ( 47,981 ) $ ( 26,271 )

6 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net loss $ ( 18,777 ) $ ( 1,648 ) $ ( 47,981 ) $ ( 26,271 )

Other comprehensive income:

Net unrealized gain on marketable investment securities

Other comprehensive (loss) income:

Net unrealized (loss) gain on marketable investment securities

( 8 ) — 237 —

Comprehensive loss $ ( 18,785 ) $ ( 1,648 ) $ ( 47,744 ) $ ( 26,271 )

18 unchanged sentences

— $ — 25,485,420 $ 25 $ 515,701 $ ( 118,390 ) $ — $ 397,336

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

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

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

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

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

BALANCE, JUNE 30, 2022

— $ — 26,292,299 $ 26 $ 541,672 $ ( 120,038 ) $ — $ 421,660

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Accumulated

Other Comprehensive Loss Total

Stockholders’

Shares Amount Shares Amount

BALANCE, JANUARY 1, 2023

5 unchanged sentences

Net unrealized gain on marketable investment securities

— — — — — — 245 245

Net loss — — — — — ( 29,204 ) — ( 29,204 )

1 unchanged sentence

— $ — 26,686,201 $ 27 $ 575,367 $ ( 190,109 ) $ ( 136 ) $ 385,149

Stock-based compensation expense — — — — 12,849 — — 12,849

Exercise of common stock options — — 15,606 — 89 — — 89

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 82,201 — ( 534 ) — — ( 534 )

Net unrealized loss on marketable investment securities

— — — — — ( 8 ) ( 8 )

Net loss — — — — — ( 18,777 ) — ( 18,777 )

BALANCE, JUNE 30, 2023

— $ — 26,784,008 $ 27 $ 587,771 $ ( 208,886 ) $ ( 144 ) $ 378,768

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

2 unchanged sentences

(in thousands)

Three Months Ended

Six Months Ended

OPERATING ACTIVITIES

17 unchanged sentences

Net cash used in operating activities

( 29,225 ) ( 30,431 )

INVESTING ACTIVITIES

Purchases of property and equipment ( 7,373 ) ( 1,807 )

Asset acquisition, adjustment to purchase price — 547

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

Proceeds from sale of property and equipment 8 8

2 unchanged sentences

Net cash provided by (used in) investing activities

1,197 ( 27,913 )

FINANCING ACTIVITIES

7 unchanged sentences

End of period $ 95,874 $ 273,166

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

Six Months Ended

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Accrued purchases of property and equipment $ 728 $ 696

Deferred acquisition costs $ — $ 1,026

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

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

Consideration payable in acquisition of business $ — $ 313

Operating lease assets obtained in exchange for lease obligations $ 485 $ —

Property and equipment acquired with tenant improvement allowance $ 1,236 $ —

7 unchanged sentences

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

We have a history of recurring net losses and negative cash flows and as of March 31, 2023, we had an accumulated deficit of $ 190.1 million.

We believe our cash and cash equivalents of $ 114.8 million, marketable investment securities of $ 117.2 million as of March 31, 2023 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 unaudited condensed consolidated financial statements were issued.

We have a history of recurring net losses and negative cash flows and as of June 30, 2023, we had an accumulated deficit of $ 208.9 million.

We believe our $ 95.9 million of cash and cash equivalents and $ 129.6 million of marketable investment securities as of June 30, 2023, and anticipated revenue from our test reports, will be sufficient to meet our cash requirements through at least the 12-month period following the date that these unaudited condensed consolidated financial statements were issued.

Summary of Significant Accounting Policies

4 unchanged sentences

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2023 and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, the condensed consolidated statements of stockholders’ equity and the condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of March 31, 2023 and the results of our consolidated operations and our consolidated cash flows for the three months ended March 31, 2023 and 2022.

The financial data and other information disclosed in these notes related to the three months ended March 31, 2023 and 2022 are also unaudited.

The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.

The accompanying condensed consolidated balance sheet as of June 30, 2023;

the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of stockholders’ equity, each for the three and six months ended June 30, 2023 and 2022;

and the condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of June 30, 2023, the results of our consolidated operations for the three and six months ended June 30, 2023 and 2022 and our consolidated cash flows for the six months ended June 30, 2023 and 2022.

The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2023 and 2022 are also unaudited.

The results for the three and six months ended June 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.

The balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date.

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

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K (the "2022 Form 10-K") for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023.

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the "2022 Form 10-K").

Use of Estimates

36 unchanged sentences

Historically, our credit losses have not been significant.

The allowance for credit losses was zero as of March 31, 2023 and December 31, 2022.

The allowance for credit losses was zero as of June 30, 2023 and December 31, 2022.

Adjustments for implicit price concessions attributable to variable consideration, as discussed below, are incorporated into the measurement of the accounts receivable balances and are not part of the allowance for credit losses.

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

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

On June 2, 2023, a Medicare administrative contractor (“MAC”) finalized a local coverage determination (“LCD”) pursuant to which the DecisionDx-SCC test would no longer be covered by Medicare effective July 17, 2023.

On June 5, 2023, our stock price decreased significantly and did not recover before June 30, 2023.

In response to this trigger, we tested goodwill for impairment at June 30, 2023.

We elected to bypass the optional qualitative assessment and proceeded directly to the quantitative assessment.

In conducting our interim test, we concluded that our business consists of a single reporting unit.

To measure the fair value of our reporting unit, we used a market approach whereby we calculated our total market capitalization on the impairment test date, based on the closing price of our common stock as reported on the Nasdaq Global Market, and applied a reasonable control premium.

The control premium was based on an analysis of control premiums paid in recent acquisitions of companies in the same or similar industry as us.

Our impairment test indicated that the fair value of our reporting unit exceeded its carrying value by 13 % and therefore no impairment was indicated.

In July 2023, the MAC suspended the LCD and then posted a new draft LCD for comment that is substantially the same as the LCD that was to become effective.

Factors that could result in a future impairment of goodwill include declines in the price of our common stock, increased competition, changes in macroeconomic developments, unfavorable government or regulatory developments and changes in coverage or reimbursement conditions.

Accrued Compensation

3 unchanged sentences

We also accrue for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets.

As of March 31, 2023 and December 31, 2022, we accrued approximately $ 5,858,000 and $ 18,209,000 , respectively, for liabilities associated with these bonus plans.

As of June 30, 2023 and December 31, 2022, we accrued approximately $ 10,350,000 and $ 18,209,000 , respectively, for liabilities associated with these bonus plans.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation

3 unchanged sentences

For awards with graded vesting and 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 options and RSUs, the requisite service period is generally the award’s vesting period (typically four years ).

PSUs vest upon the achievement of certain performance conditions and the provision of service with us through a specified period.

2 unchanged sentences

The requisite service period for PSUs is based on an analysis of vesting requirements and performance conditions for the particular award.

Certain employees are entitled to acceleration of vesting of a portion of their awards upon retirement, subject to age, years of service and notice requirements.

Certain employees are entitled to acceleration of vesting of a portion of their awards upon retirement, subject to age, service and notice requirements.

In these cases, the requisite service period takes into consideration the employee’s retirement eligibility, and is reassessed at each reporting date.

4 unchanged sentences

Comprehensive loss is made up of net loss plus net unrealized gain (loss) on marketable investment securities, which is our only other item of other comprehensive income (loss).

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

All of our revenues from contracts with customers are associated with the provision of 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 (“SCC”), DecisionDx®-SCC, a test for use in patients with suspicious pigmented lesions, MyPath® 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.

We also provide a test for patients with cutaneous squamous cell carcinoma (“SCC”), DecisionDx ® -SCC, a test 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, the TissueCypher ® Barrett’s Esophagus Test.

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

Information on the disaggregation of revenues is included below.

7 unchanged sentences

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).

Medicare claims that were either submitted to Medicare prior to the LCD or other coverage commencement date or are not covered but meet the definition of being medically reasonable and necessary pursuant to the controlling Section 1862(a)(1)(A) of the Social Security Act are generally appealed and may ultimately be paid at the first (termed ‘‘redetermination’’), second (termed ‘‘reconsideration’’) or third level of appeal ( de novo hearing with an Administrative Law Judge).

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions.

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.

5 unchanged sentences

Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues.

Included in revenues for the three months ended March 31, 2023 and 2022 were $ 1,336,000 of net negative revenue adjustments and $ 602,000 of net positive revenue adjustments, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Included in revenues for the three months ended June 30, 2023 and 2022 were $ 88,000 of net negative revenue adjustments and $ 578,000 of net positive revenue adjustments, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the six months ended June 30, 2023 and 2022 were $ 1,705,000 and $ 300,000 of net negative revenue adjustments, respectively.

These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Because our contracts with customers have an expected duration of one year or less, we have elected the practical expedient in ASC 606 to not disclose information about our remaining performance obligations.

Any incremental costs to obtain contracts are recorded as selling, general and administrative expenses as incurred due to the short duration of our contracts.

Contract balances consisted solely of accounts receivable (both current and noncurrent) as of March 31, 2023 and December 31, 2022.

Contract balances consisted solely of accounts receivable (both current and noncurrent) as of June 30, 2023 and December 31, 2022.

Disaggregation of Revenues

1 unchanged sentence

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Dermatologic (1)

1 unchanged sentence

Non-Dermatologic (2)

7,108 2,941 13,234 5,454

Total net revenues $ 50,138 $ 34,838 $ 92,175 $ 61,690

(1) Consists of DecisionDx-Melanoma, DecisionDx-SCC and Diagnostic GEP offering.

(2) Consists of TissueCypher, DecisionDx-UM and IDgenetix.

(1) Consists of DecisionDx-Melanoma, DecisionDx-SCC and our Diagnostic Gene Expression Profile offering (MyPath Melanoma and DiffDx-Melanoma).

(2) Consists of TissueCypher Barrett’s Esophagus Test, DecisionDx-UM and IDgenetix.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 tests.

Our significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows:

Percentage of Revenues

Three Months Ended

March 31, Percentage of

Six Months Ended

June 30, Percentage of

Accounts Receivable

3 unchanged sentences

(noncurrent) as of

2023 2022 March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022

2023 2022 June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022

Medicare 49 % 52 % 23 % 28 % * *

10 unchanged sentences

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

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the three months ended March 31, 2023 and 2022 because to do so would be antidilutive or, in the case of PSUs, the applicable performance conditions have not yet been met (in thousands):

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the three and six months ended June 30, 2023 and 2022 because to do so would be antidilutive or, in the case of PSUs, the applicable performance conditions have not yet been met (in thousands):

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Stock options 3,326 3,530 3,357 3,535

RSUs and PSUs 3,562 1,444 3,589 1,293

ESPP 309 111 294 101

Total 7,197 5,085 7,240 4,929

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.

In addition, in connection with our acquisition of AltheaDx, Inc.

(“AltheaDx”) in April 2022, 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 Note 10 for additional information.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Marketable Investment Securities

The following tables present our available-for-sale debt securities (in thousands):

March 31, 2023

June 30, 2023

Amortized Cost Unrealized Estimated Fair Value

8 unchanged sentences

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

There were no realized gains or losses on sales of investments for the three months ended March 31, 2023 and 2022.

There were no realized gains or losses on sales of investments for the three and six months ended June 30, 2023 and 2022.

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 March 31, 2023, unrealized losses on our available-for-sale investments are not attributed to credit risk.

As of June 30, 2023, unrealized losses on our available-for-sale investments are not attributed to credit risk.

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

No credit-related or noncredit-related impairment losses were recorded for the three months ended March 31, 2023 and 2022.

The allowance for credit losses was zero as of March 31, 2023 and December 31, 2022.

As of March 31, 2023, all of our available-for-sale debt securities had contractual maturities of one year or less.

No credit-related or noncredit-related impairment losses were recorded for the three and six months ended June 30, 2023 and 2022.

The allowance for credit losses was zero as of June 30, 2023 and December 31, 2022.

As of June 30, 2023, 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 unaudited condensed consolidated balance sheets.

As of March 31, 2023 and December 31, 2022 the accrued interest receivable balance was immaterial.

As of June 30, 2023 and December 31, 2022 the accrued interest receivable balance was immaterial.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Additional information relating to the fair value of marketable investment securities can be found in Note 10.

AltheaDx, Inc.

On April 26, 2022, we completed the acquisition of 100 % of the equity interests in AltheaDx which offers the IDgenetix test that focuses on mental health.

We acquired AltheaDx for $ 30.5 million in cash and $ 17.1 million in common stock issued, for total consideration of $ 47.6 million.

The fair value of assets acquired and liabilities assumed primarily consisted of finite-lived intangible assets of $ 35.0 million, goodwill of $ 10.7 million, cash and cash equivalents of $ 3.5 million and deferred tax liabilities of $ 1.7 million.

We have concluded that the transaction represents a business combination under ASC Topic 805, Business Combinations .

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

For further details refer to our consolidated financial statements included in our 2022 From 10-K filed with the SEC on February 28, 2023.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For further details refer to our consolidated financial statements included in our 2022 From 10-K .

The amount of revenue attributable to AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was not material for the three and six months ended June 30, 2022.

The loss attributable to AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was approximately $ 3,383,000 for the three and six months ended June 30, 2022.

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

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

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information for the three months ended March 31, 2022 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.

The following unaudited pro forma financial information for the three and six months ended June 30, 2022 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.

Non-recurring pro forma adjustments consist of acquisition-related transaction costs of $ 1,711,000 and an income tax benefit of $ 1,769,000 , both assumed to have been recognized during the year ended December 31, 2021 and therefore removed from the three and six months ended June 30, 2022.

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

1 unchanged sentence

Three Months Ended

June 30, 2022 Six Months Ended

June 30, 2022

Net revenues $ 35,243 $ 62,242

Net loss $ ( 4,062 ) $ ( 31,945 )

Related Parties

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

Bradbury, the Chairperson of our board of directors, each served on the board of directors of AltheaDx until the acquisition of AltheaDx was completed, were direct or indirect beneficial owners of AltheaDx securities and received consideration in connection with our acquisition of AltheaDx.

Further, Frank Stokes, our Chief Financial Officer;

Juvenal, our Chief Commercial Officer;

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

Maetzold and Ms.

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

These individuals may receive additional contingent consideration based on the achievement of certain commercial milestones relating to the 2022, 2023, and 2024 commercial milestones (“AltheaDx Earnout Payments”) if the relevant commercial and regulatory milestone events occur.

As of June 30, 2023 and December 31, 2022, our contingent consideration liability for the AltheaDx Earnout Payments was zero.

See Note 10 for additional information.

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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment, Net

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Lab equipment (1)

8 unchanged sentences

Property and equipment, net $ 20,511 $ 14,315

(1) As of March 31, 2023 and December 31, 2022 includes lab equipment under finance lease of $ 369 thousand and $ 369 thousand, respectively and accumulated depreciation of $ 172 thousand and $ 137 thousand, respectively.

(1) As of June 30, 2023 and December 31, 2022, includes lab equipment under finance lease of $ 369 thousand and $ 369 thousand, respectively, and accumulated depreciation of $ 207 thousand and $ 137 thousand, respectively.

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

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Cost of sales (exclusive of amortization of acquired intangible assets) $ 405 $ 185 $ 700 $ 354

Selling, general and administrative 296 244

Research and development 83 80 162 170

Selling, general and administrative 304 266 600 510

Total $ 792 $ 531 $ 1,462 $ 1,034

Goodwill and Other Intangible Assets, Net

The balance of our goodwill was $ 10.7 million as of March 31, 2023 and December 31, 2022.

There were no accumulated impairments of goodwill as of March 31, 2023 or December 31, 2022.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The balance of our goodwill was $ 10.7 million as of June 30, 2023 and December 31, 2022.

There were no accumulated impairments of goodwill as of June 30, 2023 or December 31, 2022.

Other Intangible Assets, Net

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

March 31, 2023

June 30, 2023

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

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Total other intangible assets, net $ 125,880 $ ( 14,693 ) $ 111,187

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2022

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Total other intangible assets, net $ 125,880 $ ( 10,224 ) $ 115,656

Amortization expense of intangible assets was $ 2.2 million and $ 1.6 million for the three months ended March 31, 2023 and 2022, respectively.

Amortization expense of intangible assets was $ 2.2 million and $ 4.5 million for the three and six months ended June 30, 2023, respectively, and $ 2.1 million and $ 3.7 million for the three and six months ended June 30, 2022, respectively.

Other Accrued and Current Liabilities

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Clinical studies $ 3,601 $ 1,822

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 March 31, 2023 and December 31, 2022 (in thousands):

As of March 31, 2023

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 June 30, 2023 and December 31, 2022 (in thousands):

As of June 30, 2023

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

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(“Cernostics”) in December 2021, we recorded a liability for 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 (“Cernostics Earnout Payments”).

At our sole discretion, we could have settled Cernostics Earnout Payments in cash or shares of our common stock, the aggregate of which 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.

At our sole discretion, we could have settled Cernostics Earnout Payments in cash or shares of our common stock, subject to certain limitations.

There were no Cernostics Earnout Payments that became payable because the commercial milestones were not achieved during the earnout period and the final valuation of the contingent consideration was assessed to be zero as of December 31, 2022.

In the first quarter of 2022 the fair value of the contingent consideration associated with our acquisition of Cernostics increased by $ 2.6 million with no similar activity in the first quarter of 2023 .

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 milestones (“AltheaDx Earnout Payments”).

The fair value of the contingent consideration associated with our acquisition of Cernostics decreased by $ 20.8 million and $ 18.2 million for the three and six months ended June 30, 2022, respectively, with no similar activity for the same periods in 2023 .

In connection with our acquisition of AltheaDx, we agreed to pay contingent consideration of up to $ 75.0 million relating to the AltheaDx Earnout Payments.

The portion of the AltheaDx Earnout Payments associated with the commercial milestones for the year ended December 31, 2022 was not 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

Therefore, as of June 30, 2023, we have a potential payment obligation of up to $ 57.5 million with respect to the remaining commercial milestones for 2023 and 2024.

If the settlement of the remaining portion of the AltheaDx Earnout Payments would have occurred on June 30, 2023, no amounts would have been due because no commercial milestones had been achieved as of such date.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the remaining commercial milestones for 2023 and 2024 remains as of March 31, 2023.

If the settlement of the remaining portion of the AltheaDx Earnout Payments would have occurred as of March 31, 2023, no amounts would have been due based on no 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 valuation of the AltheaDx contingent consideration was zero as of March 31, 2023 and December 31, 2022, and no gains or losses were recorded associated with changes in fair value during the three months ended March 31, 2023.

We recognized a loss of $ 0.4 million during the three and six months ended June 30, 2022 associated with the change in fair value of the preliminary AltheaDx contingent consideration.

The valuation of the AltheaDx contingent consideration was zero as of June 30, 2023 and December 31, 2022, and no gains or losses were recorded associated with changes in fair value during the three and six months ended June 30, 2023.

The contingent consideration liability is remeasured at fair value at each reporting period taking into account any updated assumptions or changes in circumstances.

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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.

As of March 31, 2023, we have granted awards of 24,197 in excess of the number of shares authorized for issuance under the 2019 Plan.

As of June 30, 2023, we have granted awards with an aggregate of 9,930 shares of underlying common stock in excess of the number of shares authorized for issuance under the 2019 Plan.

On December 22, 2022, our board of directors approved the 2022 Inducement Plan (the “Inducement Plan”).

Our Inducement Plan provides for the grant of RSU awards and other stock 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.

As of March 31, 2023, there have been no awards granted under the 2022 Inducement Plan.

As of June 30, 2023, there were 161,264 shares available for grant under the Inducement Plan.

Stock Options

Stock option activity under our stock plans for the three months ended March 31, 2023 is set forth below:

Stock option activity under our stock plans for the six months ended June 30, 2023 is set forth below:

Weighted-Average

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Forfeited/Cancelled ( 63,670 ) $ 45.73

Balance as of March 31, 2023 3,350,169 $ 35.26 7.2 $ 11,371

Exercisable at March 31, 2023

Balance as of June 30, 2023 3,310,239 $ 35.34 7.0 $ 5,450

Exercisable at June 30, 2023

2,374,351 $ 31.51 6.7 $ 5,450

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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 three months ended March 31, 2023:

We issue new shares of common stock upon the vesting of RSUs.

The following table summarizes our RSU activity for the six months ended June 30, 2023:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

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Forfeited/Cancelled ( 153,613 ) $ 26.17

Balance as of March 31, 2023

Balance as of June 30, 2023

3,486,848 $ 26.78

(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 12,082 for the three months ended March 31, 2023.

(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 37,556 for the six months ended June 30, 2023.

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 three months ended March 31, 2023:

We issue new shares of common stock upon the vesting of PSUs.

The following table summarizes our PSU activity for the six months ended June 30, 2023:

Performance-Based Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

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Forfeited/Cancelled — $ —

Balance as of March 31, 2023

Balance as of June 30, 2023

196,033 $ 23.23

Retirement Policy

In January 2023, our Board approved a retirement policy (the “Retirement Policy”) that provides for acceleration of a portion of unvested awards that were granted to certain eligible employees upon meeting age, years of service and notice requirements.

In January 2023, our board of directors approved a retirement policy (the “Retirement Policy”) that provides for acceleration of a portion of unvested awards that were granted to certain eligible employees upon meeting age, service and notice requirements.

We considered the adoption of the Retirement Policy to be a modification of existing awards under ASC Topic 718 , Compensation – Stock Compensation .

The modification did not result in any incremental compensation cost.

However, adoption of the policy resulted in a new estimate of the requisite service period for certain awards.

In connection with the implementation of the Retirement Policy, we accelerated the recognition of compensation expense of $ 0.7 million during the three months ended March 31, 2023.

However, the adoption of the of the policy resulted in a new estimate of the requisite service period for certain awards, which we reassess at each balance sheet date.

In connection with the Retirement Policy, we accelerated the recognition of compensation expense of $ 0.4 million and $ 1.1 million during the three and six months ended June 30, 2023, respectively.

Employee Stock Purchase Plan

The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 265,536 shares becoming available under the ESPP effective January 1, 2023.

During the three months ended March 31, 2023, we issued 77,190 of common stock pursuant to scheduled purchases under the ESPP.

As of March 31, 2023, 1,002,945 shares remained available for issuance under the ESPP.

During the six months ended June 30, 2023, we issued 77,190 of common stock pursuant to scheduled purchases under the ESPP.

As of June 30, 2023, 1,002,945 shares remained available for issuance under the ESPP.

CASTLE BIOSCIENCES, INC.

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

Three Months Ended

Six Months Ended

Average expected term (years) 5.0 5.8

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

Three Months Ended

Six Months Ended

Average expected term (years) 1.3 1.3

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Cost of sales (exclusive of amortization of acquired intangible assets) $ 1,202 $ 897 $ 2,474 $ 1,750

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Total stock-based compensation expense $ 12,849 $ 8,783 $ 26,374 $ 17,202

For the three months ended March 31, 2023 and 2022, the weighted-average grant date fair value of stock options was $ 17.39 and $ 22.76 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 11.00 and $ 19.91 per share, respectively.

As of March 31, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $ 118,403,000 , which is expected to be recognized over a weighted-average period of 2.8 years.

For the six months ended June 30, 2023 and 2022, the weighted-average grant date fair value of stock options was $ 15.99 and $ 14.07 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 11.00 and $ 19.91 per share, respectively.

As of June 30, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $ 108,870,000 , which is expected to be recognized over a weighted-average period of 2.6 years.

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

In connection with our acquisition of AltheaDx in 2022, we recorded deferred tax liabilities based on our allocation of the fair values of assets acquired and liabilities assumed.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Subsequent Event

On July 10, 2023, following approval by our board of directors, we entered into a definitive agreement to purchase a plot of land located in Friendswood, Texas for a purchase price of $ 7.6 million, subject to certain adjustments.

We have the option to terminate the contract within 90 days, for any reason, and will use this time to complete initial suitability diligence.

Closing, if it should occur, is expected in late 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements