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Item 9A. Controls and Procedures

2024-02-28 compared with 2023-02-28 · 256 added, 258 removed, 940 unchanged (35% of the section changed)

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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.

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

Internal Control-Integrated Framework (2013 Framework) .

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.

As of December 31, 2023, 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 Internal Control-Integrated Framework (2013 Framework) .

Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was effective based on those criteria.

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Other Information.

Securities Trading Plans of Directors and Executive Officers

On November 5, 2023 , Frank Stokes , our Chief Financial Officer , adopted a Rule 10b5-1 trading arrangement providing for the sale from time to time of an aggregate of up to 43,309 shares of our common stock.

The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c).

The duration of the trading arrangement will be from February 5, 2024 until the earlier of the completion of all transactions under the trading arrangement or the termination of the plan.

On November 6, 2023 , Frank Stokes terminated a trading arrangement for the sale of the Company's common stock.

Such trading arrangement was not intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c), but complied with the then-applicable requirements of Rule 10b5-1(c) when adopted in May 11, 2023 .

Such trading arrangement provided for the sale of up to 4,000 shares between August 15, 2023 and the completion of all the transactions under the trading arrangement.

On December 5, 2023 , Derek Maetzold , our Chief Executive Officer , adopted a Rule 10b5-1 trading arrangement providing for the sale from time to time of an aggregate of up to 228,103 shares of our common stock.

The trading arrangement is intended to satisfy the affirmative defense in Rule 10b5-1(c).

The duration of the trading arrangement will be from March 7, 2024 through September 6, 2024.

No other officers or directors, as defined in Rule 16a-1(f), adopted and/or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as defined in Regulation S-K Item 408, during the last fiscal quarter.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

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• 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,”

• The information relating to our insider trading policies is to be included in the section entitled “Clawback Policy.”

Such information is to be included in the Proxy Statement and is incorporated herein by reference.

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Principal Accountant Fees and Services.

Our independent registered public accounting firm is KPMG LLP , San Diego, CA , Audit Firm ID:

Our independent registered public accounting firm is KPMG LLP , Houston, TX , Audit Firm ID:

The information required by this item is to be included in the Proxy Statement under the section entitled “Proposal 2:

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10.11+ Castle Biosciences, Inc.

2022 Inducement Plan.

2022 Inducement Plan , incorporated by reference to Exhibit 99.1 of th e Registrant ’ s Registration Statement on Form S- 8 ( File No .

333-275881 ) , f iled with the SEC on December 4, 2023 .

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.

2022 Inducement Plan , incorporated by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2023.

10.13+ Forms of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the Castle Biosciences, Inc.

2022 Inducement Plan, incorporated by reference to Exhibit 10.13 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2023.

10.14+ Non-Employee Director Compensation Policy, as amended effective January 31, 2023 , incorporated by reference to Exhibit 10.14 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2023.

10.15+ Amended and Restated Executive Employment Agreement, dated September 20, 2012, as amended, by and between the Registrant and Derek J.

1 unchanged sentence

333-232369), as amended, originally filed with the SEC on June 26, 2019.

10.16*+ Castle Biosciences, Inc.

Retirement Policy Approved January 13, 2023

10.16+ 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.

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10.18+ 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.

10.19+ Castle Biosciences, Inc.

Retirement Policy , incorporated by reference to Exhibit 10.

1 6 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 202 3 .

10.20*+† Castle Biosciences, Inc.

Severance and Change in Control Plan , incorporated by reference to Exhibit 10.

20 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 202 4 .

10.21 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.

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10.25† 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.

Exhibit Number Description of document

10.26† Fifth Amendment to Standard Office Lease, dated October 24, 2022, by and between the Registrant and Alturas Siete I, LLC , incorporated by reference to Exhibit 10.25 of the Registrant’s Current Report on Form 10-K filed with the SEC on February 28, 2023.

10.27 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.

10.28 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.

Exhibit Number Description of document

10.29 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 Third Amendment to Standard Office Lease, dated February 9, 2023, by and between the Registrant and Alturas Siete, II, LLC , incorporated by reference to Exhibit 10.

29 of the Registrant’s Annual Report on Form 10- K f ile d with the SEC on February 28 , 2023 .

10.31 Fourth Amendment to Standard Office Lease, dated April 18, 2023 by and between the Registrant and Alturas Siete II, LLC, incorporated by reference to Exhibit 10.4 of the Registrant ’ s Quarterly Report on Form 10-Q f ile d with the SEC on May 10 2023 .

10.32 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.

10.33 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.

10.34 Second Amendment to Commercial Lease, executed December 15, 2022, by and between the Registrant and Tannos Land Holdings III, LLC , incorporated by reference to Exhibit 10.32 of the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2023.

10.35† 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.

10.36 Purchase Sale Agreement of Land, dated Jul 10, 2023, by and between the Registrant and Hal B.

Boone, incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 2, 202 3.

10.37 First Amend ment to Purchase Sale Agreement of Land, dated October 4, 2023, by and between the Registrant and Hal B.

Boone, incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 2, 2023.

Second Amendment to Purchase Sale Agreement of Land, dated January 9, 202 4 , by and between the Registrant and Hal B.

10.39# 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.

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Section 1350.

97.1*+ Castle Biosciences, Inc.

Incentive Compensation Recoupment Policy .

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.

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101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase.

Exhibit Number Description of document

101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase.

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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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates 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 a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Measurement of test revenue

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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.

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.

We have served as the Company’s auditor since 2018.

San Diego, California

Houston, Texas

February 28, 2024

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Total current liabilities 47,667 36,128

Noncurrent portion of contingent consideration — 18,287

Noncurrent operating lease liabilities 14,173 11,533

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Accumulated deficit ( 218,371 ) ( 160,905 )

Accumulated other comprehensive loss ( 381 ) —

Accumulated other comprehensive income (loss) 136 ( 381 )

Total stockholders’ equity 391,269 399,150

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Operating loss ( 67,977 ) ( 72,855 )

Interest income 3,968 68

Interest and other non-operating income 10,623 3,968

Interest expense ( 11 ) ( 17 )

Loss before income taxes ( 57,365 ) ( 68,904 )

Income tax benefit ( 1,766 ) ( 8,720 )

Income tax expense (benefit) 101 ( 1,766 )

Net loss $ ( 57,466 ) $ ( 67,138 )

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Other comprehensive loss:

Net unrealized loss on available-for-sale securities ( 381 ) —

Net unrealized gain (loss) on available-for-sale securities 517 ( 381 )

Comprehensive loss $ ( 56,949 ) $ ( 67,519 )

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Deficit Accumulated

Other Comprehensive Loss Total

Other Comprehensive Income (Loss) Total

Stockholders’

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— $ — 25,378,520 $ 25 $ 505,482 $ ( 93,767 ) $ — $ 411,740

Adoption of ASC 842 — — — — — 21 — 21

Stock-based compensation expense — — — — 36,321 — — 36,321

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Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 183,887 — ( 1,688 ) — — ( 1,688 )

Public offerings of common stock, adjustment to offering costs — — — — 39 — — 39

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 )

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Issuance of common stock under the employee stock purchase plan — — 139,872 — 2,714 — — 2,714

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 unrealized gain on marketable investment securities — — — — — — 517 517

Net loss — — — — — ( 57,466 ) — ( 57,466 )

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Accretion of discounts on marketable investment securities ( 5,491 ) ( 1,368 )

Other 635 158

Change in operating assets and liabilities:

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Accrued compensation 4,587 8,495

Medicare advance payment — ( 8,350 )

Other accrued and current liabilities 2,139 ( 963 )

Other liabilities — ( 276 )

Net cash used in operating activities ( 5,626 ) ( 41,655 )

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Purchases of marketable investment securities ( 189,075 ) ( 134,689 )

Proceeds from maturities of marketable investment securities 186,500 —

Net cash used in investing activities ( 16,183 ) ( 166,545 )

FINANCING ACTIVITIES

Payment of common stock offering costs — ( 336 )

Proceeds from exercise of common stock options 269 833

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Repayment of principal portion of finance lease liabilities ( 142 ) ( 122 )

Net cash provided by financing activities 1,515 5,421

Net cash (used in) provided by financing activities ( 2,298 ) 1,515

Net changes in cash and cash equivalents ( 24,107 ) ( 206,685 )

Beginning of year 122,948 329,633

End of year $ 98,841 $ 122,948

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

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Years Ended December 31,

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:

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Operating lease assets obtained in exchange for lease obligations $ 1,547 $ 6,075

Asset acquisition, liability for contingent consideration $ — $ 18,287

Property and equipment acquired with tenant improvement allowance $ 1,281 $ 51

Asset acquisition, receivable for purchase price adjustment $ — $ 519

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

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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.

Summary of Significant Accounting Policies

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All intercompany accounts and transactions have been eliminated in consolidation.

In connection with preparing consolidated financial statements for each annual and interim reporting period, the Company is required to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Substantial doubt exists when conditions and events, considered in aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued.

This evaluation initially does not take into consideration the potential mitigating effect of management’s plans and actions that have not been fully implemented as of the date that the financial statements are issued.

When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern.

The mitigating effect of management’s plans, however, is only considered if both:

(1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued;

and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.

We have a history of recurring net losses and negative cash flows and as of December 31, 2023, we had an accumulated deficit of $ 218.4 million.

We believe our $ 98.8 million of cash and cash equivalents, and $ 144.3 million of marketable investment securities as of December 31, 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 consolidated financial statements were issued.

Use of Estimates

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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.

Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax exposure and the realizability of deferred tax assets, the useful lives and recoverability of long-lived assets, the goodwill impairment test, the valuation of acquired intangible assets and 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.

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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.

The Company views its operations and manages

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

its business as one operating segment.

All revenues are attributable to U.S.-based operations and all assets are held in the United States.

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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.

Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the financial institutions in which deposits are held.

Marketable Investment Securities

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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

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.

We recognize the unrealized gains and losses related to changes in fair value as a separate component of accumulated other comprehensive income (loss) within total stockholders’ equity, net of any 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.

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

See Notes 5 and 11 for further details.

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

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.

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.

We carry inventories of test supplies in our laboratory facilities.

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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 .

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between five and

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Our leasehold improvements primarily relate to our office and laboratory facilities in Friendswood, Texas, Phoenix, Arizona and Pittsburgh, Pennsylvania, and are generally being depreciated 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.

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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

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

during the fourth quarter of each year.

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.

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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.

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.

On October 1, 2023, we performed our annual impairment test which indicated that the fair value of our reporting unit exceeded its carrying value by 34 % and therefore no impairment was indicated.

We continued to monitor for additional indicators of impairment through December 31, 2023 and did not observe any factors that could result in an impairment of goodwill.

Long-Lived Assets

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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 met,

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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For additional information on the contingent consideration, see Notes 6 and 11.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Effective January 1, 2021, we account for leases in accordance with ASC Topic 842, Leases (“ ASC 842”) .

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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.

6 unchanged sentences

R&D costs include, but are not limited to, payroll and personnel-related expenses, stock-based compensation expense, materials, laboratory supplies, and consulting costs.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Selling, General and Administrative Expenses

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The higher amount for the year ended December 31, 2023 primarily reflects an increase in the number of employees compared to the year ended December 31, 2022.

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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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.

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 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.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date.

Forfeitures are accounted for as they occur.

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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.

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).

CARES Act Payroll Tax Deferral

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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.

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

Accounting Pronouncements Yet to be Adopted

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740) — Improvements to Income Tax Disclosures ("ASU 2023-09"), which is intended to enhance the transparency and decision usefulness of income tax disclosures.

The amendments in ASU 2023-09 provide for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information.

ASU 2023-09 is effective for the Company prospectively to all annual periods beginning after December 15, 2024.

Early adoption is permitted.

We are currently evaluating the impact this update will have on our consolidated financial statements and disclosures.

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which require public companies disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.

The guidance is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

The guidance is applied retrospectively to all periods presented in the financial statements, unless it is impracticable.

We are currently evaluating the impact this update will have on our consolidated financial statements and disclosures.

W e have evaluated all other recently issued, but not yet effective, accounting pronouncements and do not believe that these accounting pronouncements will have any material impact on our consolidated financial statements or disclosures upon adoption.

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, 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 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 (“BE”), the TissueCypher® 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.

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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.

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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.

We may pursue, on a case-by-case basis, reimbursement from such patients in the form of co-payments and co-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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).

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.

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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.

The amounts are estimated using 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.

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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.

Included in revenues for the years ended December 31, 2023 and 2022 were $ 4,476,000 of net negative revenue adjustments and $ 1,987,000 of net negative 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.

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 December 31, 2023 and 2022.

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

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balance of the Advance Payment.

Recoupment of the full amount of the Advance Payment was complete by December 31, 2021.

Disaggregation of Revenues

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Dermatologic (1)

Other 12,230 8,332

$ 183,375 $ 124,809

Non-Dermatologic (2)

36,413 12,230

Total net revenues $ 219,788 $ 137,039

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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:

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* 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.

There were no other third-party payors that individually accounted for more than 10% of our total revenue or accounts receivable for the periods shown in the table above.

Loss Per Share

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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.

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because to do so would be antidilutive or, in the case of PSUs, the applicable performance conditions have not yet been met (in thousands):

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the years ended December 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):

Years Ended December 31,

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Total 6,999 5,317

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 Notes 6 and 11 for additional information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Marketable Investment Securities

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

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

December 31, 2023

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Total $ 144,122 $ 143 $ ( 7 ) $ 144,258

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

December 31, 2022

Amortized Cost Unrealized Estimated Fair Value

government securities $ 136,058 $ — $ ( 381 ) $ 135,677

Total $ 136,058 $ — $ ( 381 ) $ 135,677

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

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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.

As of December 31, 2023, some of our available-for sale investments had unrealized losses which were not attributed to credit risk.

As of December 31, 2022, unrealized losses on available-for-sale investments were 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.

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

As of December 31, 2022, all of our available-for-sale debt securities had contractual maturities of one year or less.

As of December 31, 2023 and 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.

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

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

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

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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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

existing portfolio of testing solutions in support of our growth strategy.

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 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 amount of revenue attributable to 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”).

This amount did 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, included in selling, general and administrative expenses in the consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We 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.

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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.

Contingent consideration liability associated with the AltheaDx Earnout Payments was zero as of the April 26, 2022 date of acquisition based on the expectations of achievement of the milestones.

Our calculations of the consideration transferred and the purchase price allocation for the acquisition of AltheaDx were 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.

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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):

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Total fair value of net assets assumed $ 49,149 $ ( 1,536 ) $ 47,613

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following unaudited pro forma financial information for the year ended December 31, 2022 combines our historical financial results and the results of AltheaDx, assuming that the companies were combined as of January 1, 2022, 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 $ 1,626,000 , both assumed to have been recognized during the year ended December 31, 2022 and therefore removed from the year ended December 31, 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, 2022 or (ii) the results of operations that are expected in future periods:

Pro Forma Data

Years Ended December 31,

Year Ended December 31, 2022

Net revenues $ 137,591

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Related Parties

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.

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

Further, Frank Stokes, our Chief Financial Officer;

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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.

These individuals may receive additional contingent consideration based on the achievement of certain commercial milestones relating to the AltheaDx Earnout Payments if the relevant commercial and regulatory milestone events occur.

As of December 31, 2023 and December 31, 2022, our contingent consideration liability for the AltheaDx Earnout Payments was zero based on expectations of achievement of the milestones.

See Note 11 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment, Net

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Property and equipment, net $ 25,433 $ 14,315

(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.

(1) As of December 31, 2023 and December 31, 2022, includes lab equipment under finance lease of $ 369 thousand and accumulated depreciation of $ 278 thousand and $ 137 thousand, respectively.

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

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Total $ 3,317 $ 2,278

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Goodwill and Other Intangible Assets, Net

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

Balance, December 31, 2021

Acquisition of AltheaDx 10,692

Balance, December 31, 2022

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

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

We had no goodwill as of December 31, 2021.

Other Intangible Assets, Net

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Total other intangible assets, net $ 125,880 $ ( 19,237 ) $ 106,643

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2022

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Amortization expense of intangible assets was $ 9.0 million and $ 8.3 million for the years ended December 31, 2023 and 2022, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Accrued and Current Liabilities

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

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

As of December 31,

Accrued service fees $ 2,125 $ 1,905

Clinical studies $ 3,475 $ 1,822

Employee stock purchase plan contributions 900 760

Payroll-related liabilities 37 695

Accrued service fees 2,097 2,125

ESPP contributions 896 900

Other 849 415

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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 lease general office and laboratory facilities in Pittsburgh Pennsylvania (the “Pittsburgh Lease”).

The Pittsburgh Lease has 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.

Of this amount, we have $ 1.3 million of lease incentives remaining as of December 31, 2023 to use for future leasehold improvements that will become available for use in 2026.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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Finance Lease

In connection with the acquisitions of AltheaDx in April 2022 and Cernostics in December 2021, we assumed finance leases for laboratory equipment.

In connection with the acquisitions of AltheaDx in April 2022 and Cernostics, Inc.

(“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.

We discount our lease obligations using our incremental borrowing rate at the commencement date of the lease.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Lease Balances and Costs

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2025 2,251 30

2025 2,014 30

Thereafter 12,531 —

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Present value of lease payments $ 15,310 $ 96

As of December 31, 2022, we expect $ 0.7 million in undiscounted future lease payments for leases that had not yet commenced.

As of December 31, 2023, undiscounted future lease payments for leases that had not yet commenced was zero .

Fair Value Measurements

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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.

Accordingly, the fair value estimates disclosed, or amounts recorded may not be indicative of the amount that we 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, 2023 and 2022 (in thousands):

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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.

In connection with our acquisition of 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, subject to certain limitations.

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

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.

The fair value of the contingent consideration associated with our

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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.

acquisition of Cernostics decreased by $ 18.3 million for the year ended December 31, 2022 with no similar activity for the year ended December 31, 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, as discussed further in Note 6.

The portions of the AltheaDx Earnout Payments associated with the commercial milestones for the years ended December 31, 2023 and 2022 were $ 37.5 million and $ 35.0 million, respectively, and were not paid since the applicable commercial milestones were not met.

Also, the year 2023 contained a 2022 catch-up provision for additional payment up to $ 17.5 million, dependent on achievement of results in excess of the 2023 milestone, and was not paid since the milestone was not met.

Therefore, as of December 31, 2023, we have a remaining potential payment obligation of up to $ 20.0 million with respect to the remaining commercial milestones for 2024.

If the settlement of the remaining portion of the AltheaDx Earnout Payments would have occurred on December 31, 2023, no amounts would have been due because no commercial milestones had been achieved as of such 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.

There have been no changes in the fair value of the AltheaDx contingent consideration during the year ended December 31, 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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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 $ — $ — $ —

Commitments and Contingencies

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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.

On February 1, 2024, we received a subpoena from United States Department of Health and Human Services Office of Inspector General and are fully cooperating with the government’s inquiry.

This inquiry, and any potential resulting claim asserted against us, with or without merit, could be time-consuming, expensive to address and divert management’s attention and other resources.

These claims also could subject us to significant liability for damages and harm our reputation.

Our insurance and indemnities may not cover all claims that may be asserted against us.

We are unable to predict the outcome and are unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

Stockholders’ Equity

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No dividends were declared or paid during the years ended December 31, 2023 or 2022.

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.

Stock Incentive Plans and Stock-Based Compensation

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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

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

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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.

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 December 31, 2023, there were 402,608 shares available for grant under the Inducement Plan.

Options under the plans may be granted as incentive stock options (“ISO”) or non-statutory stock options (“NSOs”).

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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.

As of December 31, 2023, 366,432 shares remained available for grant 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.

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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.

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

The following table summarizes our RSU activity for the years ended December 31, 2023 and 2022:

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(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 254,197 and 73,821 for the years ended December 31, 2023 and 2022, 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.

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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.

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

The following table summarizes our PSU activity for the year ended December 31, 2023:

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

Balance as of January 1, 2022 — $ —

Granted 196,033 $ 23.23

Forfeited/Cancelled — $ —

Balance as of December 31, 2022 196,033 $ 23.23

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Balance as of December 31, 2023 196,033 $ 23.23

Retirement Policy

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, 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

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Retirement Policy, we accelerated the recognition of compensation expense of $ 1.6 million during the year ended December 31, 2023.

Employee Stock Purchase Plan

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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.

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 had 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

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Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

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 Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

• Dividend yield .

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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.

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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.

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Dividend yield — %

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

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

Stock-Based Compensation Expense

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For the years ended December 31, 2023 and 2022, the weighted-average grant date fair value of stock options was $ 15.99 and $ 14.34 per option, respectively, and the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 11.43 and $ 16.79 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.

As of December 31, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $ 85,536,000 , which is expected to be recognized over a weighted-average period of 2.3 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, 2023 and 2022 was $ 1,282,000 and $ 3,745,000 , respectively.

The aggregate intrinsic value of shares issued under the ESPP was $ 534,000 and $ 6,341,000 during

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the years ended December 31, 2022 and 2021, respectively.

The aggregate intrinsic value of shares issued under the ESPP was $ 479,000 and $ 534,000 during the years ended December 31, 2023 and 2022, respectively.

The aggregate fair value of RSUs that vested during the years ended December 31, 2023 and 2022 was $ 18,084,000 and $ 5,863,000 , respectively.

No tax benefits related to stock-based compensation were recorded in the consolidated statements of operations during the years ended December 31, 2023 and 2022 due to the valuation allowance on net deferred tax assets.

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The components of income tax expense (benefit) are as follows (in thousands):

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Total deferred ( 223 ) ( 1,877 )

Total income tax benefit $ ( 1,766 ) $ ( 8,720 )

Total income tax expense (benefit) $ 101 $ ( 1,766 )

The differences between income taxes expected at the U.S.

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Transaction costs — 359

Other 26 ( 157 )

Income tax benefit $ ( 1,766 ) $ ( 8,720 )

Permanent differences 1,474 —

Income tax expense (benefit) $ 101 $ ( 1,766 )

CASTLE BIOSCIENCES, INC.

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R&D tax credit 8,025 5,665

Other 445 240

Total deferred tax assets 79,499 76,642

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Section 481(a) adjustment (cash to accrual) — ( 956 )

Other ( 31 ) —

Total deferred tax liabilities ( 24,677 ) ( 27,117 )

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Also, as of December 31, 2023, we had state NOL carryforwards of approximately $ 114,294,000 , 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.

Our R&D tax credit carryforwards of $ 8,025,000 , which includes $ 655,000 of state credits at December 31, 2023, 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.

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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.

During the year ended December 31, 2022, in connection with the acquisition of AltheaDx, we recorded additional net deferred tax liability of $ 1,672,000 , 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 of our valuation allowance should be reduced, which was reflected in our income tax benefit for the year ended December 31, 2022.

At December 31, 2023 and 2022, we placed a valuation allowance of $ 55,028,000 and $ 49,953,000 , respectively, against our net deferred tax asset balance, as we have determined that it is more likely than not that they will not be realized.

CASTLE BIOSCIENCES, INC.

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However, since we have been in an NOL position since 2008, our 2008 to 2019 federal tax returns and our 2008 to 2018 state tax returns are potentially subject to examination adjustments to the extent of those NOL carryforwards.

Subsequent Events

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, for the purpose of developing a commercial office building which may be used as our future corporate headquarters.

Under the agreement, we had the option to terminate the contract within 90 days, for any reason.

On October 4, 2023, we amended the definitive agreement to extend the option period by an additional 30 days.

On January 9, 2024, we amended the definitive agreement to obtain easement rights on an adjacent property for purpose of constructing storm drainage improvements and appurtenances on the property.

On February 9, 2024, we closed on the purchase of the land for cash consideration of $ 7.2 million .

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-K

Item 9A. Controls and Procedures