What changed in this filing

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Item 1. Financial Statements

2024-05-02 compared with 2023-11-02 · 167 added, 226 removed, 454 unchanged (46% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

ASSETS (unaudited)

19 unchanged sentences

Total current liabilities 31,959 47,667

Long-term debt 10,000 —

Noncurrent operating lease liabilities 13,864 14,173

5 unchanged sentences

Preferred stock, $ 0.001 par value per share;

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

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

10,000,000 shares authorized as of March 31, 2024 and December 31, 2023;

no shares issued and outstanding as of March 31, 2024 and December 31, 2023

Common stock, $ 0.001 par value per share;

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

26,890,488 and 26,553,681 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

200,000,000 shares authorized as of March 31, 2024 and December 31, 2023;

27,585,669 and 27,410,532 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital 623,450 609,477

Accumulated deficit ( 220,905 ) ( 218,371 )

Accumulated other comprehensive loss ( 71 ) ( 381 )

Accumulated other comprehensive (loss) income ( 111 ) 136

Total stockholders’ equity 402,462 391,269

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

NET REVENUES $ 72,974 $ 42,037

OPERATING EXPENSES AND OTHER OPERATING INCOME

OPERATING EXPENSES

Cost of sales (exclusive of amortization of acquired intangible assets) 13,894 10,182

2 unchanged sentences

Amortization of acquired intangible assets 2,247 2,222

Change in fair value of contingent consideration — ( 151 ) — ( 17,987 )

Total operating expenses, net 78,445 73,559

3 unchanged sentences

Loss before income taxes ( 2,489 ) ( 29,190 )

Income tax expense (benefit)

32 — 62 ( 1,823 )

Income tax expense 45 14

Net loss $ ( 2,534 ) $ ( 29,204 )

6 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net loss $ ( 2,534 ) $ ( 29,204 )

Other comprehensive income (loss):

Net unrealized gain (loss) on marketable investment securities

73 ( 189 ) 310 ( 189 )

Other comprehensive (loss) income:

Net unrealized (loss) gain on marketable investment securities ( 247 ) 245

Comprehensive loss $ ( 2,781 ) $ ( 28,959 )

6 unchanged sentences

Deficit Accumulated

Other Comprehensive Loss Total

Other Comprehensive (Loss) income Total

Stockholders’

6 unchanged sentences

Issuance of common stock under the employee stock purchase plan — — 77,190 — 1,652 — — 1,652

Net unrealized gain on marketable investment securities — — — — — — 245 245

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

1 unchanged sentence

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

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

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

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

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

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

BALANCE, JUNE 30, 2022

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

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

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

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

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

Net unrealized loss on marketable investment securities — — — — — — ( 189 ) ( 189 )

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

BALANCE, SEPTEMBER 30, 2022

— $ — 26,350,530 $ 26 $ 551,883 $ ( 140,287 ) $ ( 189 ) $ 411,433

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

CASTLE BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Preferred Stock Common Stock Additional

Capital Accumulated

Deficit Accumulated

Other Comprehensive Loss Total

Stockholders’

Shares Amount Shares Amount

BALANCE, JANUARY 1, 2024

8 unchanged sentences

— $ — 27,585,669 $ 28 $ 623,450 $ ( 220,905 ) $ ( 111 ) $ 402,462

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

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

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

Net unrealized loss on marketable investment securities — — — — — — ( 8 ) ( 8 )

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

BALANCE, JUNE 30, 2023

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

Stock-based compensation expense — — — — 13,043 — — 13,043

Exercise of common stock options — — 3,656 — 13 — — 13

Issuance of common stock from vested restricted stock units and payment of employees’ taxes — — 40,142 — ( 271 ) — — ( 271 )

Issuance of common stock under the employee stock purchase plan — — 62,682 — 1,062 — — 1,062

Net unrealized gain on marketable investment securities

— — — — — — 73 73

Net loss — — — — — ( 6,905 ) — ( 6,905 )

BALANCE, SEPTEMBER 30, 2023

— $ — 26,890,488 $ 27 $ 601,618 $ ( 215,791 ) $ ( 71 ) $ 385,783

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

2 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

OPERATING ACTIVITIES

3 unchanged sentences

Stock-based compensation expense 12,675 13,525

Change in fair value of contingent consideration — ( 17,987 )

Deferred income taxes — 13

15 unchanged sentences

Purchases of property and equipment ( 9,152 ) ( 3,338 )

Asset acquisition, adjustment to purchase price — 547

Acquisition of business, net of cash and cash equivalents acquired — ( 26,966 )

Proceeds from sale of property and equipment 5 5

1 unchanged sentence

Proceeds from maturities of marketable investment securities 50,200 50,000

Net cash used in investing activities

Net cash (used in) provided by investing activities

( 19,701 ) 16,584

4 unchanged sentences

Repayment of principal portion of finance lease liabilities ( 36 ) ( 35 )

Proceeds from issuance of term debt 10,000 —

Net cash provided by financing activities

6 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Accrued purchases of property and equipment $ 699 $ 2,730

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

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

Operating lease assets obtained in exchange for lease obligations $ 499 $ 5,912

Decrease in operating lease assets with corresponding change in lease liabilities $ ( 7 ) $ —

Property and equipment acquired with tenant improvement allowance $ — $ 89

7 unchanged sentences

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

We have a history of recurring net losses and negative cash flows and as of September 30, 2023, we had an accumulated deficit of $ 215.8 million.

We believe our $ 91.2 million of cash and cash equivalents and $ 138.5 million of marketable investment securities as of September 30, 2023, and anticipated revenue from our test reports, will be sufficient to meet our cash requirements through at least the 12-month period following the date that these unaudited condensed consolidated financial statements were issued.

Summary of Significant Accounting Policies

3 unchanged sentences

All intercompany accounts and transactions have been eliminated in consolidation.

We have a history of recurring net losses and negative cash flows and as of March 31, 2024, we had an accumulated deficit of $ 220.9 million.

We believe our $ 82.9 million of cash and cash equivalents and $ 156.3 million of marketable investment securities as of March 31, 2024, and anticipated revenue from our test reports, will be sufficient to meet our cash requirements through at least the 12-month period following the date that these unaudited condensed consolidated financial statements were issued.

Unaudited Interim Financial Information

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

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

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

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

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

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

The accompanying condensed consolidated balance sheet as of March 31, 2024;

and the condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 are unaudited.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of March 31, 2024, the results of our consolidated operations for the three months ended March 31, 2024 and 2023 and our consolidated cash flows for the three months ended March 31, 2024 and 2023.

The financial data and other information disclosed in these notes related to the three months ended March 31, 2024 and 2023 are also unaudited.

The results for the three months ended March 31, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods, or any future year or period.

The balance sheet as of December 31, 2023 included herein was derived from the audited financial statements as of that date.

38 unchanged sentences

We generally do not perform evaluations of customers’ financial condition and generally do not require collateral.

Historically, our credit losses have not been significant.

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

Historically, our credit losses have not been significant given our application of the constraint to variable consideration.

The allowance for credit losses was zero as of March 31, 2024 and December 31, 2023.

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.

5 unchanged sentences

2017-04, Intangibles—Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment, by comparing the fair value of the reporting unit to its carrying value, including the goodwill.

If the carrying value exceeds the fair value, we recognize an impairment

Simplifying the Test for Goodwill Impairment, by comparing the fair value of the reporting unit to

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

loss for the amount by which the carrying value exceeds fair value, up to the total amount of goodwill allocated to the reporting unit.

its carrying value, including the goodwill.

If the carrying value exceeds the fair value, we recognize an impairment loss for the amount by which the carrying value exceeds fair value, up to the total amount of goodwill allocated to the reporting unit.

We did not incur any goodwill impairment losses in any of the periods presented.

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.

During the third quarter of 2023, we continued to monitor our market capitalization against the carrying value of our reporting unit and did not observe any significant changes since our impairment test at June 30, 2023.

We are currently performing our annual impairment test, as of October 1, 2023, and we have not identified any additional indicators of impairment to date.

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

Accrued Compensation

3 unchanged sentences

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

As of September 30, 2023 and December 31, 2022, we accrued approximately $ 15,535,000 and $ 18,209,000 , respectively, for liabilities associated with these bonus plans.

As of March 31, 2024 and December 31, 2023, we accrued approximately $ 6,574,000 and $ 21,706,000 , respectively, for liabilities associated with these bonus plans.

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

16 unchanged sentences

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

We 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 (“SCC”), DecisionDx ® -SCC, a test for use in patients with suspicious pigmented lesions, MyPath ® Melanoma and DiffDx ® -Melanoma, a test for uveal melanoma (“UM”), DecisionDx ® -UM and a test for patients diagnosed with Barrett’s esophagus, the TissueCypher ® Barrett’s Esophagus Test.

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

We also provide a test for patients with cutaneous squamous cell carcinoma, DecisionDx ® -SCC, a test for use in patients with suspicious pigmented lesions, MyPath ® Melanoma, a test for uveal melanoma, DecisionDx ® -UM, a test for patients diagnosed with Barrett’s esophagus, the TissueCypher ® Barrett’s Esophagus Test and a pharmacogenomics testing service focused on mental health, IDgenetix ® .

We previously offered a second test for patients with suspicious pigmented lesions, DiffDx ® -Melanoma, which we suspended in February 2023.

Information on the disaggregation of revenues is included below.

7 unchanged sentences

The Medicare claims that are covered by Medicare are generally paid at a rate established on Medicare’s Clinical Laboratory Fee Schedule or by the respective Medicare contractor within 30 days from receipt.

Medicare claims that were either submitted to Medicare prior to the 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 local coverage determination 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.

7 unchanged sentences

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

Included in revenues for the three months ended September 30, 2023 and 2022 were $ 883,000 of net positive revenue adjustments and $ 277,000 of net negative revenue adjustments, respectively, associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods.

Such amounts of variable consideration for the nine months ended September 30, 2023 and 2022 were $ 3,085,000 and $ 1,850,000 of net negative revenue adjustments, respectively.

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

Included in revenues for the three months ended March 31, 2024 and 2023 were $ 1,656,000 of net positive revenue adjustments and $ 1,336,000 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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 expenses as incurred due to the short duration of our contracts.

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

Contract balances consisted solely of accounts receivable (both current and noncurrent) as of March 31, 2024 and December 31, 2023.

Disaggregation of Revenues

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Dermatologic (1)

1 unchanged sentence

Non-Dermatologic (2)

10,342 3,087 23,571 8,541

Total net revenues $ 72,974 $ 42,037

5 unchanged sentences

Percentage of Revenues

Nine Months Ended

September 30, Percentage of

Three Months Ended March 31, Percentage of

Accounts Receivable

3 unchanged sentences

(noncurrent) as of

2023 2022 September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022

2024 2023 March 31, 2024 December 31, 2023 March 31, 2024 December 31, 2023

Medicare 49 % 49 % 20 % 20 % * *

9 unchanged sentences

However, potentially dilutive shares are excluded from the computation of diluted loss per share when their effect is antidilutive.

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the three months ended March 31, 2024 and 2023 because to do so would be antidilutive or, in the case of PSUs, the applicable performance conditions have not yet been met (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Stock options 3,192 3,389

RSUs and PSUs 3,131 3,420

ESPP 371 168 320 124

Total 6,656 7,088

5 unchanged sentences

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

September 30, 2023

March 31, 2024

Amortized Cost Unrealized Estimated Fair Value

8 unchanged sentences

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

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

There were no realized gains or losses on sales of investments for the three months ended March 31, 2024 and 2023.

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

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

As of March 31, 2024, unrealized losses on our available-for-sale investments are not attributed to credit risk.

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

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

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

As of September 30, 2023, all of our available-for-sale debt securities had contractual maturities of one year or less.

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

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

No credit-related or noncredit-related impairment losses were recorded for the three months ended March 31, 2024 and 2023.

The allowance for credit losses was zero as of March 31, 2024 and December 31, 2023.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2024, all of our available-for-sale debt securities had contractual maturities of one year or less.

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

As of March 31, 2024 and December 31, 2023, the accrued interest receivable balance was immaterial.

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

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

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

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

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

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

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

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

The loss attributable to AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was approximately $ 8,199,000 for the nine months ended September 30, 2022.

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

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

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

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information for the three and nine months ended September 30, 2022 combines our historical financial results and the results of AltheaDx, assuming that the companies were combined as of January 1, 2021, and includes adjustments for amortization expense from the acquired intangible assets and additional stock-based compensation expense.

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

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

Pro Forma Data

Three Months Ended

September 30, 2022 Nine Months Ended

September 30, 2022

Net revenues $ 37,011 $ 99,253

Net loss $ ( 20,302 ) $ ( 52,247 )

Related Parties

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

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

Further, Frank Stokes, our Chief Financial Officer;

Juvenal, our Chief Commercial Officer;

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

Maetzold and Ms.

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

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

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

See Note 10 for additional information.

Our entry into the definitive agreement to acquire AltheaDx was approved by our board of directors based upon the unanimous recommendation of a special transaction committee comprised entirely of independent members of our board of directors without any financial interest in AltheaDx or any conflict of interest with respect to the acquisition of AltheaDx.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment, Net

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Lab equipment (2)

8 unchanged sentences

Property and equipment, net $ 32,904 $ 25,433

(1) As of September 30, 2023 and December 31, 2022, includes lab equipment under finance lease of $ 369 thousand and $ 369 thousand, respectively, and accumulated depreciation of $ 243 thousand and $ 137 thousand, respectively.

(1) On February 9, 2024, we purchased approximately 23 acres of land in Friendswood, Texas for purpose of developing a commercial office building to be used as our future corporate headquarters.

(2) As of March 31, 2024 and December 31, 2023, includes lab equipment under finance lease of $ 369 thousand and accumulated depreciation of $ 313 thousand and $ 278 thousand, respectively.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Cost of sales (exclusive of amortization of acquired intangible assets) $ 655 $ 295

3 unchanged sentences

Goodwill and Other Intangible Assets, Net

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

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

The balance of our goodwill was $ 10.7 million as of March 31, 2024 and December 31, 2023.

There were no accumulated impairments of goodwill as of March 31, 2024 or December 31, 2023.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Intangible Assets, Net

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

September 30, 2023

March 31, 2024

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

2 unchanged sentences

Total other intangible assets, net $ 125,880 $ ( 21,484 ) $ 104,396

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2023

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

Amortization expense of intangible assets was $ 2.3 million and $ 6.7 million for the three and nine months ended September 30, 2023, respectively, and $ 2.3 million and $ 6.1 million for the three and nine months ended September 30, 2022, respectively.

Amortization expense of intangible assets was $ 2.2 million for the three months ended March 31, 2024 and the three months ended March 31, 2023 .

Other Accrued and Current Liabilities

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

September 30, 2023 December 31, 2022

Clinical studies $ 3,020 $ 1,822

March 31, 2024 December 31, 2023

Accrued service fees $ 3,358 $ 2,097

Clinical studies 2,344 3,475

ESPP contributions 276 896

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Total $ 6,744 $ 7,317

Long-Term Debt

We had no debt as of December 31, 2023.

Our long-term debt as of March 31, 2024 is presented in the table below (in thousands):

March 31, 2024

Term debt $ 10,200

Unamortized discount ( 200 )

Total long-term debt 10,000

Current portion of long-term debt —

Total $ 10,000

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future maturities of principal amounts on long-term debt as of March 31, 2024 are as follows (in thousands):

Years Ending December 31,

Total $ 10,000

2024 Loan and Security Agreement

On March 26, 2024 (the ‘‘Closing Date’’), we entered into a Loan and Security Agreement (the ‘‘2024 LSA”), by and between us, our wholly owned subsidiary, Castle Narnia Real Estate Holding 1, LLC and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (the “Lender’’).

The 2024 LSA provides for (i) on the Closing Date, $ 10.0 million aggregate principal amount of term loans (discussed in the ‘‘2024 Term Loan’’ section below), and (ii) from the Closing Date until March 31, 2025, an additional line of credit of $ 25.0 million with the same interest rate and maturity as the term debt available (discussed in the ‘‘2024 Credit Line’’ section below) at our option.

The obligations under the 2024 LSA are secured by substantially all of our assets, excluding intellectual property, the real property held by us, and are subject to certain other exceptions and limitations.

We have the right to prepay the 2024 LSA in whole, subject to a prepayment fee of approximately 1.50 % if prepaid prior to March 26, 2026.

Amounts repaid under the 2024 LSA may not be reborrowed.

In addition, the 2024 LSA contains customary conditions of borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of our capital stock.

Should an event of default occur, including the occurrence of a material adverse change, we could be liable for immediate repayment of all obligations under the 2024 LSA.

Should we seek to amend the terms of the 2024 LSA, the consent of the Lender would be required.

As of March 31, 2024, we were in compliance with this covenant.

The 2024 LSA bears interest at a floating rate equal to the greater of (a) the WSJ Prime Rate plus 0.25 % or (b) 6.00 % per annum.

The Term Loans are interest only from the Closing Date through November 30, 2025, which may be extended at our option through November 30, 2026 as long as no event of default under the 2024 LSA has occurred.

After the end of the interest only period, we are required to pay equal monthly installments of principal through the maturity date of November 1, 2028.

We are also obligated to make an additional final payment of 2.00 % of the aggregate original principal amounts of Term Loans advanced by the Lender, due at the earlier of the maturity date or date the Term Loans are repaid in full.

2024 Term Loan

On March 26, 2024, we drew $ 10.0 million in Term Loans under the terms and provisions of the 2024 LSA.

We are obligated to make a final payment of $ 200,000 under the terms of the 2024 LSA final payment provisions.

A discount on debt equal to this obligation was recorded on the draw date and is being amortized as additional interest expense using the effective interest method over the term of the debt.

As of March 31, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 9.03 %.

2024 Credit Line

We have a $ 25.0 million line of credit under the terms and provisions of the 2024 LSA available from the Closing Date until March 31, 2025.

Amounts repaid under the 2024 Credit Line may not be reborrowed.

As of March 31, 2024, no draws had been made on the line of credit.

Interest Expense on Long-Term Debt

During the three months ended March 31, 2024, we recorded interest expense of $ 12,000 on long-term debt.

During the three months ended March 31, 2023, no long-term debt was outstanding and no interest expense incurred.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

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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.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below provides information, by level within the fair value hierarchy, of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):

As of September 30, 2023

The table below provides information, by level within the fair value hierarchy, of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):

As of March 31, 2024

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

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

Contingent Consideration

In connection with our acquisition of Cernostics, Inc.

(“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.

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 acquisition of Cernostics did no t change for the three months ended September 30, 2022 and decreased by $ 18.3 million for the nine months ended September 30, 2022 with no similar activity for the same periods in 2023 .

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

The portion of the AltheaDx Earnout Payments associated with the commercial milestones for the year ended December 31, 2022 was not paid since the applicable commercial milestones were not met.

This portion represented $ 35.0 million of the $ 75.0 million total potential payment obligation, exclusive of the catch-up payment in 2023 of $ 17.5 million, which will become payable if all 2023 commercial milestones are fully met.

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contingent Consideration

In connection with our acquisition of AltheaDx, we agreed to pay contingent consideration of up to $ 75.0 million of commercial milestone payments based on the achievement of certain net revenue targets relating to the years ending December 31, 2022, 2023 and 2024 (“AltheaDx Earnout Payments”).

The portion of the AltheaDx Earnout Payments associated with the commercial milestones for the year ended December 31, 2023 was $ 37.5 million and was not paid since the applicable commercial milestones were not met.

The AltheaDx Earnout Payments included a 2022 catch-up provision for additional payment of up to $ 17.5 million that expired in 2023.

Therefore, as of March 31, 2024, we have a 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 March 31, 2024, 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.

We recognized a gain of $ 0.2 million and a loss of $ 0.3 million during the three and nine months ended September 30, 2022, respectively, associated with the change in fair value of the preliminary AltheaDx contingent consideration.

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

The valuation of the AltheaDx contingent consideration was zero as of March 31, 2024 and December 31, 2023, and no gains or losses were recorded associated with changes in fair value during the three months ended March 31, 2024 and 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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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 the Department of Health and Human Services, Office of Inspector General, seeking documents and information concerning claims submitted for payment under federal healthcare programs.

The Subpoena requested that we produce documents relating primarily to interactions with medical providers and billing to government-funded healthcare programs for our tests.

The time period covered by the Subpoena is January 1, 2015 through February 1, 2024.

We are continuing to cooperate with the government’s request and are in the process of responding to the Subpoena.

We are unable to predict what action, if any, might be taken in the future by the Department of Health and Human Services, Office of Inspector General, or any other governmental authority as a result of the matters related to this Subpoena.

No claims have been made against us at this time.

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.

Stock Incentive Plans and Stock-Based Compensation

2 unchanged sentences

The 2019 Plan provides for automatic annual increases to the number of shares authorized for issuance, equal to 5 % of our common shares outstanding as of the immediately preceding year end, through January 1, 2029.

As of September 30, 2023, 124,383 shares remained available for grant under the 2019 Plan.

As of March 31, 2024, 386,932 shares remained available for grant under the 2019 Plan.

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

Our Inducement Plan provides for the grant of RSU awards and other stock awards made as an inducement material to the grantee’s entering into employment with us to the extent such grantee was not previously an employee of ours or is entering into employment following a bona fide period of non-employment with us.

As of September 30, 2023, there were 164,306 shares available for grant under the Inducement Plan.

As of March 31, 2024, there were 414,842 shares available for grant under the Inducement Plan.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options

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

Stock option activity under our stock plans for the three months ended March 31, 2024 is set forth below:

Weighted-Average

8 unchanged sentences

Forfeited/Cancelled ( 17,783 ) $ 42.09

Balance as of September 30, 2023 3,276,434 $ 35.29 6.8 $ 7,087

Exercisable at September 30, 2023

Balance as of March 31, 2024 3,172,130 $ 35.54 6.3 $ 9,814

Exercisable at March 31, 2024

2,703,995 $ 33.70 6.1 $ 9,764

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock Units

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

The following table summarizes our RSU activity for the nine months ended September 30, 2023:

The following table summarizes our RSU activity for the three months ended March 31, 2024:

Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value

4 unchanged sentences

Forfeited/Cancelled ( 39,547 ) $ 21.80

Balance as of September 30, 2023

Balance as of March 31, 2024

3,938,307 $ 24.08

(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 53,646 for the nine months ended September 30, 2023.

(1) The aggregate number of shares withheld upon vesting for employee tax obligations was 22,656 for the three months ended March 31, 2024.

Performance-Based Restricted Stock Units

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

The following table summarizes our PSU activity for the nine months ended September 30, 2023:

The following table summarizes our PSU activity for the three months ended March 31, 2024:

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

3 unchanged sentences

Forfeited/Cancelled — $ —

Balance as of September 30, 2023

Balance as of March 31, 2024

373,546 $ 22.28

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Retirement Policy

3 unchanged sentences

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

In connection with the Retirement Policy, we accelerated the recognition of compensation expense of $ 0.5 million and $ 1.6 million during the three and nine months ended September 30, 2023, respectively.

In connection with the Retirement Policy, we accelerated the recognition of compensation expense of $ 0.2 million and $ 0.7 million during the three months ended March 31, 2024 and 2023, respectively.

Employee Stock Purchase Plan

The ESPP provides for certain automatic increases in the number of shares of common stock reserved for issuance, which resulted in an additional 274,105 shares becoming available under the ESPP effective January 1, 2024.

During the nine months ended September 30, 2023, we issued 139,872 shares of common stock pursuant to scheduled purchases under the ESPP.

As of September 30, 2023, 940,263 shares remained available for issuance under the ESPP.

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the three months ended March 31, 2024, we issued 111,241 shares of common stock pursuant to scheduled purchases under the ESPP.

As of March 31, 2024, 1,103,127 shares remained available for issuance under the ESPP.

Determining Fair Value - Summary of Assumptions

1 unchanged sentence

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

Nine Months Ended

September 30,

Three Months Ended

Average expected term (years) 5.0 5.8

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

Nine Months Ended

September 30,

Three Months Ended

Average expected term (years) 1.3 1.3

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Compensation Expense

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Cost of sales (exclusive of amortization of acquired intangible assets) $ 1,314 $ 1,272

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Total stock-based compensation expense $ 12,675 $ 13,525

For the nine months ended September 30, 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 $ 11.51 and $ 16.79 per share, respectively.

As of September 30, 2023, the total unrecognized stock-based compensation cost related to outstanding awards was $ 96,424,000 , which is expected to be recognized over a weighted-average period of 2.4 years.

For the three months ended March 31, 2023, the weighted-average grant date fair value of stock options granted was $ 17.39 per option.

There were no stock options granted for the same period in 2024.

For the three months ended March 31, 2024 and 2023, the weighted-average grant date fair value of the purchase rights granted under the ESPP was $ 11.17 and $ 11.00 per share, respectively.

As of March 31, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $ 103,100,000 , which is expected to be recognized over a weighted-average period of 2.5 years.

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

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

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

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Subsequent Event

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

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.

The option period is being used to complete initial suitability diligence.

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

Our effective income tax rate was 11.0 % for the three months ended March 31, 2024, and was immaterial for the three months ended March 31, 2023.

The effective rate for the the three months ended March 31, 2024

differed from our federal statutory rate of 21% primarily due to t he tax impact from the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.

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

What changed 10-Q

Item 1. Financial Statements