10-Q 1 cstl-20220930.htm 10-Q cstl-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________ 

Commission File Number: 001-38984
CASTLE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)

Delaware77-0701774
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
505 S. Friendswood Drive, Suite 401, Friendswood, Texas
77546
(Address of principal executive offices)
(Zip Code)
(866) 788-9007
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareCSTLThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 26, 2022, there were 26,351,576 shares of common stock, $0.001 par value per share, issued and outstanding.


Table of Contents
Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

i

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
September 30, 2022December 31, 2021
ASSETS(unaudited)
Current Assets  
Cash and cash equivalents$134,180 $329,633 
Marketable investment securities131,802  
Accounts receivable, net22,835 17,282 
Inventory3,802 2,021 
Prepaid expenses and other current assets6,795 4,807 
Total current assets299,414 353,743 
Long-term accounts receivable, net1,187 1,308 
Property and equipment, net13,054 9,501 
Operating lease assets12,604 7,383 
Goodwill and other intangible assets, net130,357 88,922 
Other assets – long-term1,195 1,715 
Total assets$457,811 $462,572 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable$5,768 $2,546 
Accrued compensation19,532 15,483 
Operating lease liabilities1,535 1,179 
Other accrued and current liabilities5,107 5,678 
Total current liabilities31,942 24,886 
Noncurrent portion of contingent consideration1,798 18,287 
Noncurrent operating lease liabilities11,900 6,900 
Deferred tax liability614 635 
Other liabilities124 124 
Total liabilities46,378 50,832 
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Preferred stock, $0.001 par value per share; 10,000,000 shares authorized as of September 30, 2022 and December 31, 2021; no shares issued and outstanding as of September 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value per share; 200,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 26,350,530 and 25,378,520 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
26 25 
Additional paid-in capital551,883 505,482 
Accumulated deficit(140,287)(93,767)
Accumulated other comprehensive loss(189) 
Total stockholders’ equity411,433 411,740 
Total liabilities and stockholders’ equity$457,811 $462,572 

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

1

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
NET REVENUES$37,011 $23,475 $98,701 $69,046 
OPERATING EXPENSES AND OTHER OPERATING INCOME
Cost of sales (exclusive of amortization of acquired intangible assets)8,859 4,500 22,489 11,225 
Research and development10,907 7,500 33,594 20,201 
Selling, general and administrative36,626 22,595 104,577 61,578 
Amortization of acquired intangible assets2,306 694 6,051 950 
Change in fair value of contingent consideration(151) (17,987) 
Total operating expenses, net58,547 35,289 148,724 93,954 
Operating loss(21,536)(11,814)(50,023)(24,908)
Interest income1,293 23 1,693 51 
Interest expense(6) (13) 
Loss before income taxes(20,249)(11,791)(48,343)(24,857)
Income tax (benefit) expense  (1,823)5 
Net loss$(20,249)$(11,791)$(46,520)$(24,862)
Loss per share, basic and diluted$(0.77)$(0.47)$(1.79)$(0.99)
Weighted-average shares outstanding, basic and diluted26,316 25,287 25,938 25,072 




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

2

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net loss$(20,249)$(11,791)$(46,520)$(24,862)
Other comprehensive loss:
Net unrealized loss on available-for-sale securities(189) (189) 
Comprehensive loss$(20,438)$(11,791)$(46,709)$(24,862)

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

3

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other Comprehensive Loss
Total
Stockholders’
Equity
SharesAmountSharesAmount
BALANCE, JANUARY 1, 2021 $ 24,812,487 $25 $478,162 $(62,496)$ $415,691 
Adoption of ASU No. 2016-02— — — — — 21 — 21 
Stock-based compensation expense— — — — 4,913 — — 4,913 
Exercise of common stock options— — 171,315 — 991 — — 991 
Issuance of common stock under the employee stock purchase plan— — 70,711 — 1,233 — — 1,233 
Public offering of common stock, adjustment to offering costs— — — — 39 — — 39 
Net loss— — — — — (4,280)— (4,280)
BALANCE, MARCH 31, 2021 $ 25,054,513 $25 $485,338 $(66,755)$ $418,608 
Stock-based compensation expense— — — — 4,766 — — 4,766 
Exercise of common stock options— — 109,540 — 1,354 — — 1,354 
Net loss— — — — — (8,791)— (8,791)
BALANCE, JUNE 30, 2021 $ 25,164,053 $25 $491,458 $(75,546)$ $415,937 
Stock-based compensation expense— — — — 5,210 — — 5,210 
Exercise of common stock options— — 82,756 — 1,523 — — 1,523 
Issuance of common stock under the employee stock purchase plan— — 39,737 — 855 — — 855 
Net loss— — — — — (11,791)— (11,791)
BALANCE, SEPTEMBER 30, 2021 $ 25,286,546 $25 $499,046 $(87,337)$ $411,734 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other Comprehensive Loss
Total
Stockholders’
Equity
SharesAmountSharesAmount
BALANCE, JANUARY 1, 2022 $ 25,378,520 $25 $505,482 $(93,767)$ $411,740 
Stock-based compensation expense— — — — 8,419 — — 8,419 
Exercise of common stock options— — 62,102 — 399 — — 399 
Issuance of common stock from vested restricted stock units and payment of employees’ taxes        — — 2,466 — (56)— — (56)
Issuance of common stock under the employee stock purchase plan— — 42,332 — 1,457 — — 1,457 
Net loss— — — — — (24,623)— (24,623)
BALANCE, MARCH 31, 2022 $ 25,485,420 $25 $515,701 $(118,390)$ $397,336 
Stock-based compensation expense— — — — 8,783 — — 8,783 
Exercise of common stock options— — 36,634 — 110 — — 110 
Issuance of common stock from vested restricted stock units and payment of employees’ taxes— — 6,358 — (32)— — (32)
Issuance of common stock in acquisition of business— — 763,887 1 17,110 — — 17,111 
Net loss— — — — — (1,648)— (1,648)
BALANCE, JUNE 30, 2022 $ 26,292,299 $26 $541,672 $(120,038)$ $421,660 
Stock-based compensation expense— — — — 9,196 — — 9,196 
Exercise of common stock options— — 17,093 — 166 — — 166 
Issuance of common stock from vested restricted stock units and payment of employees’ taxes— — 4,818 — (46)— — (46)
Issuance of common stock under the employee stock purchase plan— — 36,320 — 895 — — 895 
Unrealized loss on marketable investment securities— — — — — — (189)(189)
Net loss— — — — — (20,249)— (20,249)
BALANCE, SEPTEMBER 30, 2022 $ 26,350,530 $26 $551,883 $(140,287)$(189)$411,433 


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

5

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Nine Months Ended
September 30,
 20222021
OPERATING ACTIVITIES  
Net loss$(46,520)$(24,862)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization7,702 1,956 
Stock-based compensation expense26,398 14,889 
Change in fair value of contingent consideration(17,987) 
Deferred income taxes(1,839) 
Accretion of discounts on marketable investment securities(184) 
Other186 (99)
Change in operating assets and liabilities:
Accounts receivable(5,678)(6,087)
Prepaid expenses and other current assets(1,870)(734)
Inventory(1,502)(28)
Operating lease assets694 641 
Other assets533 (193)
Accounts payable2,155 673 
Operating lease liabilities(559)(638)
Accrued compensation3,669 3,012 
Medicare advance payment (5,351)
Other accrued liabilities(853)619 
Net cash used in operating activities(35,655)(16,202)
INVESTING ACTIVITIES
Purchases of property and equipment(3,845)(2,590)
Asset acquisition547 (33,184)
Acquisition of business, net of cash and cash equivalents acquired(26,966) 
Proceeds from sale of property and equipment9 6 
Purchases of marketable investment securities(131,808) 
Net cash used in investing activities(162,063)(35,768)
FINANCING ACTIVITIES
Payment of common stock offering costs (336)
Proceeds from exercise of common stock options675 3,868 
Payment of employees’ taxes on vested restricted stock units(134) 
Proceeds from contributions to the employee stock purchase plan1,812 1,763 
Repayment of principal portion of finance lease liabilities(88) 
Net cash provided by financing activities2,265 5,295 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

CASTLE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(in thousands)
 Nine Months Ended
September 30,
 20222021
NET CHANGE IN CASH AND CASH EQUIVALENTS(195,453)(46,675)
Beginning of period329,633 409,852 
End of period$134,180 $363,177 
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued purchases of property and equipment$1,131 $190 
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$5,912 $427 
Property and equipment acquired with tenant improvement allowance$51 $54 


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

7

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Organization and Description of Business
Castle Biosciences, Inc. (the ‘‘Company,’’ “we,” “us” or “our”) was incorporated in the state of Delaware on September 12, 2007. We are a commercial-stage diagnostics company focused on providing physicians and their patients with personalized, clinically actionable information to inform treatment decisions and improve health outcomes. We are based in Friendswood, Texas (a suburb of Houston, Texas) and our laboratory operations are conducted at our facilities located in Phoenix, Arizona, Pittsburgh, Pennsylvania and San Diego, California.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Castle Biosciences, Inc. and our wholly owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of September 30, 2022; the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2022 and 2021; and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated financial position as of September 30, 2022, the results of our consolidated operations for the three and nine months ended September 30, 2022 and 2021 and our consolidated cash flows for the nine months ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are also unaudited. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the unaudited interim consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 28, 2022.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include revenue recognition, the valuation of stock-based compensation, assessing future tax exposure and the realization of deferred tax assets, the useful lives and recoverability of long-lived assets, the valuation of acquired intangible assets, the valuation of contingent consideration and other contingent liabilities. We base these estimates on historical and anticipated results, trends, and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions. We have considered the potential impact of the COVID-19 pandemic on our estimates and assumptions. The extent to which the COVID-19 pandemic may impact our estimates in future periods is uncertain and subject to change.
Cash and Cash Equivalents including Concentrations of Credit Risk
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Our cash equivalents consist of money market funds, which are not insured by the Federal Deposit Insurance Corporation (“FDIC”), that are primarily invested in short-term U.S. government obligations. Cash deposits at financial institutions may exceed the amount of insurance provided by the FDIC. Management believes that we are not exposed to significant credit risk on our cash deposits due to the financial position of the institutions in which deposits are held. We have not experienced any losses on our cash or cash equivalents.
8

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Marketable Investment Securities
All debt securities are recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 320, Investments-Debt Securities (‘‘ASC 320’’). Management determines the appropriate classification of securities at the time of purchase and re-evaluates such determination at each balance sheet date. All debt securities are classified as available-for-sale and are recorded at fair value in accordance with ASC 320. We recognize the unrealized gains and losses related to changes in fair value as a separate component of accumulated other comprehensive loss within total stockholders’ equity, net of related deferred income tax effects on our condensed consolidated balance sheets. Premiums or discounts from par value are amortized to interest income over the life of the underlying investment. Realized gains and losses on available-for-sale securities are calculated at the individual security level and included in interest income in the condensed consolidated statements of operations. Impairments on available-for-sale debt securities, if any, are recorded in condensed consolidated statements of operations. See Notes 5 and 11 for further details.
Revenue Recognition
In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), we follow a five-step process to recognize revenues: (1) identify the contract with the customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenues when the performance obligations are satisfied. We have determined that we have a contract with the patient when the treating clinician orders the test. Our contracts generally contain a single performance obligation, which is the delivery of the test report, and we satisfy our performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point we can bill for the report. The amount of revenue recognized reflects the amount of consideration to which we expect to be entitled, or the transaction price, and considers the effects of variable consideration. See Note 3 for further details.
Accounts Receivable and Allowance for Credit Losses
We classify accounts receivable balances that are expected to be paid more than one year from the consolidated balance sheet date as noncurrent assets. The estimated timing of payment utilized as a basis for classification as noncurrent is determined by analyses of historical payor-specific payment experience, adjusted for known factors that are expected to change the timing of future payments.
We accrue an allowance for credit losses against our accounts receivable based on management’s current estimate of amounts that will not be collected. Management’s estimates are typically based on historical loss information adjusted for current conditions. We generally do not perform evaluations of customers’ financial condition and generally do not require collateral. Historically, our credit losses have not been significant. The allowance for credit losses was zero as of September 30, 2022 and December 31, 2021. Adjustments for implicit price concessions attributable to variable consideration, as discussed above, are incorporated into the measurement of the accounts receivable balances and are not part of the allowance for credit losses.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. In accordance with ASC Topic 350, Intangibles—Goodwill and Other, our goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that it may be impaired. We perform annual impairment reviews of our goodwill balance during the fourth quarter of each year. We may perform a qualitative assessment to determine if it is necessary to perform a quantitative impairment test. If we determine that a quantitative impairment test is necessary, we apply the guidance in Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, by comparing the fair value of the reporting unit to its carrying value, including the goodwill. If the carrying value exceeds the fair value, we recognize an impairment loss for the amount by which the carrying value exceeds fair value, up to the total amount of goodwill allocated to the reporting unit. We did not incur any goodwill impairment losses in any of the periods presented.
9

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Acquisitions
We assess acquisitions under ASC Topic 805, Business Combinations (“ASC 805”) to determine whether a transaction represents the acquisition of assets or a business combination. Under this guidance, we apply a two-step model. The first step involves a screening test where we evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or a group of similar assets. If the screening test is met, we account for the set as an asset acquisition. If the screening test is not met, we apply the second step of the model to determine if the set meets the definition of a business based on the guidance in ASC 805. If so, the transaction is treated as a business combination. Otherwise, it is treated as an asset acquisition. Asset acquisitions are accounted for by allocating the cost of the acquisition, including transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis without recognition of goodwill. Business combinations are accounted for using the acquisition method. Under the acquisition method, goodwill is measured as a residual amount equal to the fair value of the consideration transferred less the net recognized fair value of the identifiable assets acquired and the liabilities assumed, as of the acquisition date, and transaction costs are expensed as incurred.
Contingent Consideration
Under the terms of business combinations or asset acquisitions, we may be required to pay additional consideration if specified future events occur or if certain conditions are met.
In a business combination, in accordance with ASC 805, contingent consideration is recorded at fair value as of the acquisition date and classified as liabilities or equity based on applicable U.S. GAAP. For contingent consideration classified as liabilities, we remeasure the contingent consideration at fair value each period with changes in fair value recorded in the statements of operations each period.
For contingent consideration in transactions that are not business combinations, we apply applicable U.S. GAAP. With respect to the additional consideration that may be payable in connection with the acquisitions of Cernostics, Inc. (“Cernostics”), an asset acquisition we completed on December 3, 2021, we account for the contingent consideration as a liability in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), under the guidance for obligations that must or may be settled by issuance of a variable number of shares. In accordance with ASC 480, we record the contingent consideration initially and subsequently at fair value with changes in fair value recorded in the statements of operations each period.
Contingent consideration is classified as current or noncurrent in our condensed consolidated balance sheets based on the contractual timing of future settlement. For additional information on contingent consideration, see Notes 6 and 11.
Accrued Compensation
We accrue for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by our board of directors, compensation levels of eligible individuals, and target bonus percentage levels. Our board of directors reviews and evaluates the performance against these objectives and ultimately determines the actual achievement levels attained. We also accrue for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets. As of September 30, 2022 and December 31, 2021, we accrued $13,667,000 and $12,071,000, respectively, for liabilities associated with these bonus plans. These amounts are classified as current or noncurrent accrued liabilities in the condensed consolidated balance sheets based on the expected timing of payment.
Comprehensive Loss
Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is made up of net loss plus other comprehensive loss, if any.
3. Revenue
All of our revenues from contracts with customers are associated with the provision of diagnostic and prognostic testing services. Most of our revenues are attributable to our DecisionDx®-Melanoma test for cutaneous melanoma. We also provide a test for uveal melanoma, DecisionDx®-UM, 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, and a test for patients diagnosed with Barrett’s esophagus (“BE”), the TissueCypher® Barrett’s Esophagus Assay. 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.
10

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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. Most of the payments for our services are made by third-party payors, including Medicare and commercial health insurance carriers. Certain contracts contain a contractual commitment of a reimbursement rate that differs from our list prices. However, absent a positive coverage policy, with or without a contractually committed reimbursement rate, with a commercial carrier or governmental program, our diagnostic tests may or may not be paid by these entities. In addition, patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse us. We may pursue, on a case-by-case basis, reimbursement from such patients in the form of co-payments and co-insurance, in accordance with the contractual obligations that we have with the insurance carrier or health plan. These situations may result in a delay in the collection of payments.
The Medicare claims that are covered by policy under a Local Coverage Determination (“LCD”) or otherwise are generally paid at a rate established on Medicare’s Clinical Laboratory Fee Schedule or by the respective Medicare contractor within 30 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). A successful appeal at any of these levels may result in prompt payment.
In the absence of LCD coverage, contractually established reimbursements rates or other coverage, we have concluded that our contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than our standard rates or not paid at all, with such differences considered implicit price concessions. Variable consideration attributable to these price concessions is measured at the expected value using the ‘‘most likely amount’’ method under ASC 606. The amounts are determined by historical average collection rates by test type and payor category taking into consideration the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as the judgment and actions of third parties. Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. Variable consideration may be constrained and excluded from the transaction price in situations where there is no contractually agreed upon reimbursement coverage or in the absence of a predictable pattern and history of collectability with a payor. Accordingly, in such situations revenues are recognized on the basis of actual cash collections. Variable consideration for Medicare claims that are not covered by an LCD or otherwise, including those claims undergoing appeal, is deemed to be fully constrained due to factors outside our influence (e.g., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time. Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues. Included in revenues for the three months ended September 30, 2022 and 2021 were $(277,000) and $(92,000), respectively, of net positive (negative) revenue adjustments associated with changes in estimated variable consideration related to performance obligations satisfied in previous periods. Such amounts of variable consideration for the nine months ended September 30, 2022 and 2021 were $(1,850,000) and $4,130,000, respectively, of net (negative) positive revenue adjustments. These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.
Because our contracts with customers have an expected duration of one year or less, we have elected the practical expedient in ASC 606 to not disclose information about our remaining performance obligations. Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of our contracts. Contract balances consisted solely of accounts receivable (both current and noncurrent) as of September 30, 2022 and December 31, 2021.
11

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Disaggregation of Revenues
The table below provides the disaggregation of revenue by type (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Dermatologic$33,924 $21,593 $90,160 $62,881 
Other3,087 1,882 8,541 6,165 
Total net revenues$37,011 $23,475 $98,701 $69,046 
Payor Concentration
We rely upon reimbursements from third-party government payors (primarily Medicare) and private-payor insurance companies to collect accounts receivable related to sales of our diagnostic and prognostic tests.
Our significant third-party payors and their related revenues as a percentage of total revenues and accounts receivable balances are as follows:
 Percentage of Revenues
 Nine Months Ended
September 30,
Percentage of
 Accounts Receivable
 (current)
Percentage of
 Accounts Receivable
 (noncurrent)
 20222021September 30, 2022December 31, 2021September 30, 2022December 31, 2021
Medicare52 %57 %26 %24 % % %
Medicare Advantage plans33 %27 %44 %40 % % %
BlueCross BlueShield plans6 %7 %16 %22 %55 %58 %
4. Loss Per Share
Basic loss per share is computed by dividing net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the additional dilution from potential issuances of common stock, such as stock issuable pursuant to the exercise of stock options or purchases under the 2019 Employee Stock Purchase Plan (“ESPP”). The treasury stock method is used to calculate the potential dilutive effect of these common stock equivalents. However, potentially dilutive shares are excluded from the computation of diluted loss per share when their effect is antidilutive.
Because we reported a net loss for all periods presented, all potentially dilutive securities are antidilutive and are excluded from the computation of diluted loss per share for such periods.
The table below provides the weighted-average number of potential common shares associated with outstanding securities not included in our calculation of diluted loss per share for the three and nine months ended September 30, 2022 and 2021 because to do so would be antidilutive (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Stock options and restricted stock units (“RSUs”)5,285 3,369 4,982 3,401 
ESPP168 58 124 63 
Total5,453 3,427 5,106 3,464 
In addition, in connection with the acquisitions of Cernostics and AltheaDx, Inc. (“AltheaDx”), we may issue, or may be required to issue, shares of our common stock to satisfy our contingent consideration obligations, pending the outcome of certain commercial and regulatory milestones, as required by the respective definitive agreements. See Notes 6 and 11 for additional information.
12

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. Marketable Investment Securities
The following table presents our available-for-sale debt securities (in thousands):
Amortized CostUnrealizedEstimated Fair Value
GainsLosses
As of September 30, 2022
U.S. Government Securities$131,991 $ $(189)$131,802 
Total$131,991 $ $(189)$131,802 
We had no available-for-sale debt securities as of December 31, 2021.
Although available to be sold to meet operating needs or otherwise, securities are generally held through maturity. We classify all investments as current assets, as these are readily available for use in current operations. The cost of securities sold is determined based on the specific identification method for purposes of recording gains and losses.
There were no realized gains or losses on sales of investments for the three and nine months ended September 30, 2022 and 2021.
We evaluated our investment portfolio under the available-for-sale debt securities impairment model guidance and determined our investment portfolio is comprised of low-risk, investment grade securities. As of September 30, 2022, unrealized losses on available-for-sale investments are not attributed to credit risk. We believe that an allowance for credit losses is unnecessary because the unrealized losses on certain of our marketable investment securities are due to market factors. No credit-related or noncredit-related impairment losses were recorded for the three and nine months ended September 30, 2022 and 2021. The allowance for credit losses was zero as of September 30, 2022 and December 31, 2021.
As of September 30, 2022, all of our available-for-sale debt securities had contractual maturities of one year or less. Accrued interest receivable is included in prepaid expenses and other current assets in our condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021 the accrued interest receivable balance was immaterial and zero, respectively.
Additional information relating to fair value of marketable investment securities can be found in Note 11.


13

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
6. Acquisitions
Myriad myPath, LLC
On May 28, 2021, we completed the acquisition of all of the equity of Myriad myPath, LLC, a laboratory in Salt Lake City, for a cash purchase price of $32,500,000. 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, the developed technology, and therefore the transaction represents an asset acquisition rather than a business combination.
Cernostics, Inc.
On December 3, 2021, we completed the acquisition of Cernostics, which offers the TissueCypher Barrett’s Esophagus Assay for patients with BE, for total consideration of $49,019,000, consisting of cash consideration of $30,732,000 and contingent consideration with an acquisition date fair value of $18,287,000. In connection with the acquisition, we recorded a receivable as of the acquisition date for the post-closing purchase price adjustment, representing the difference between actual and estimated cash and working capital. During the nine months ended September 30, 2022, we received cash of $547,000 in settlement of this receivable.
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 enables us to expand upon our existing portfolio of testing solutions in support of our growth strategy. We have concluded that the transaction represents a business combination under ASC 805. The financial results of AltheaDx have been included in our unaudited condensed consolidated financial statements since the date of the acquisition. The amount of revenue from AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was not material. The loss attributable to AltheaDx included in the unaudited consolidated statements of operations from the acquisition date was approximately $8,199,000. This amount does not reflect transaction costs from the acquisition or the effects of the valuation allowance reduction discussed in Note 14. Transaction costs associated with the acquisition were $1,711,000 for the nine months ended September 30, 2022 and were recognized as expenses in the unaudited condensed consolidated statements of operations.
The preliminary acquisition-date fair value of the consideration transferred consisted of the following (in thousands, except shares):
April 26, 2022
Cash$30,502 
Common stock (763,887 shares)
17,111 
Contingent consideration1,528 
Total $49,141 
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.
With respect to the contingent consideration, we may be required to pay up to $75.0 million in cash and common stock in connection with the achievement of certain milestones based on 2022, 2023 and 2024 performance and expanded Medicare coverage for the IDgenetix test (the “AltheaDx Earnout Payments”). Upon achievement of each relevant milestone event, each milestone will be paid 50% in cash and 50% in shares of our common stock based on a price per share equal to the volume-weighted-average price of our common stock for the 20 trading days as of the applicable milestone determination date. In accordance with the terms of the definitive agreement governing the acquisition of AltheaDx, the maximum number of shares of our common stock issuable to former AltheaDx security holders may not exceed 1,271,718 shares. Therefore, taking into consideration the number of shares already issued at closing, a maximum of 507,831 additional shares of our common stock remain issuable with respect to the AltheaDx Earnout Payments. In the event a number of shares in excess of 507,831 would otherwise be issuable in connection with the AltheaDx Earnout Payments, we will issue shares up to the maximum number permitted and pay cash for the remaining portion of the obligation. See Note 11 for additional information on the measurement of the contingent consideration.
14

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table summarizes the preliminary allocation of the fair values of assets acquired and liabilities assumed in the acquisition of AltheaDx at the date of acquisition (in thousands):
April 26, 2022
Cash and cash equivalents$3,536 
Accounts receivable302 
Inventory279 
Prepaid expenses and other current assets262 
Property and equipment314 
Intangible asset37,000 
Other assets – long-term12 
Accounts payable(231)
Accrued compensation(380)
Other accrued and current liabilities(532)
Deferred tax liabilities(1,819)
Other liabilities(88)
Net identifiable assets acquired38,655 
Goodwill10,486 
Total consideration transferred$49,141 
The intangible asset is comprised of developed technology with an estimated useful life of 15 years and is being amortized on a straight-line basis. The goodwill, which is not expected to be deductible for income tax purposes, was primarily attributable to potential future growth opportunities and the organized workforce.
Our calculations of the consideration transferred and the purchase price allocation for the acquisition of AltheaDx are based on a preliminary valuation and are subject to revision as the valuation is finalized and additional information about the fair value of the assets and liabilities becomes available. The primary areas that are not yet finalized are income taxes, intangible assets, contingent consideration and the resulting goodwill. The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date. During the three months ended September 30, 2022, the Company recognized an immaterial measurement period adjustment to cash consideration transferred with a corresponding adjustment to goodwill.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information for the three and nine months ended September 30, 2022 and 2021, respectively combines our historical financial results and the results of AltheaDx, assuming that the companies were combined as of January 1, 2021, and includes adjustments for amortization expense from the acquired intangible assets and additional stock-based compensation expense. Nonrecurring pro forma adjustments consist of acquisition-related transaction costs of $1,711,000 and an income tax benefit of $1,769,000, both assumed to have been recognized during the nine months ended September 30, 2021 and therefore removed from the nine months ended September 30, 2022. The following unaudited pro forma financial information (in thousands) is for informational purposes only and is not necessarily indicative of (i) the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2021 or (ii) the results of operations that are expected in future periods:
Pro Forma Data
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net revenues$37,011 $23,665 $99,253 $69,341 
Net loss$(20,211)$(14,577)$(52,313)$(31,664)
15

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Related Party Transaction
Derek J. Maetzold, our President and Chief Executive Officer, and a member of our board of directors, and Daniel M. Bradbury, the Chairperson of our board of directors, each served on the board of directors of AltheaDx until the acquisition of AltheaDx was completed, were direct or indirect beneficial owners of AltheaDx securities and received consideration in the transaction. Further, Frank Stokes, our Chief Financial Officer; Tobin W. Juvenal, our Chief Commercial Officer; Kristen Oelschlager, our Chief Operating Officer and certain immediate family members of Mr. Maetzold and Ms. Oelschlager were direct or indirect beneficial owners of AltheaDx securities and received consideration in the transaction. These individuals may receive additional consideration in the form of AltheaDx Earnout Payments if the relevant commercial and regulatory milestone events occur. Our entry into the definitive agreement to acquire AltheaDx was approved by our board of directors based upon the unanimous recommendation of a special transaction committee comprised entirely of independent members of our board of directors without any financial interest in AltheaDx or any conflict of interest with respect to the acquisition of AltheaDx.
7. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 September 30, 2022December 31, 2021
Lab equipment(1)
$8,326 $3,727 
Leasehold improvements5,145 5,044 
Computer equipment4,306 2,457 
Furniture and fixtures1,654 1,288 
Construction in progress879 27 
Total20,310 12,543 
Less accumulated depreciation(1)
(7,256)(3,042)
Property and equipment, net$13,054 $9,501 
(1)    Includes lab equipment under a finance lease of $369 thousand and accumulated depreciation of $101 thousand as of September 30, 2022 and $237 thousand and accumulated depreciation of $8 thousand as of December 31, 2021.
Depreciation expense was recorded in the unaudited condensed consolidated statements of operations as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Cost of sales (exclusive of amortization of acquired intangible assets)$267 $120 $621 $333 
Research and development85 67 255 175 
Selling, general and administrative265 208 775 498 
Total$617 $395 $1,651 $1,006 
8. Goodwill and Other Intangible Assets, Net
Goodwill
Information on the change in carrying value of our goodwill is presented below (in thousands):
Goodwill
Balance, December 31, 2021$ 
Acquisition of AltheaDx10,486 
Balance, September 30, 2022$10,486 
There were no accumulated impairments of goodwill as of September 30, 2022 or December 31, 2021.
16

CASTLE BIOSCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other Intangible Assets, Net
Our other intangible assets, net consists of the following (in thousands):
September 30, 2022
 Gross carrying valueAccumulated amortizationNetWeighted-Average Remaining Life (in years)
Developed technology$127,318 $(7,916)$119,402 13.5
Assembled workforce563 (94)469 4.3
Total intangible assets, net$127,881 $(8,010)$119,871 
December 31, 2021
 Gross carrying valueAccumulated amortizationNetWeighted-Average Remaining Life (in years)
Developed technology$90,317 $(1,949)$88,368 13.2
Assembled workforce563 (9)554 4.9
Total intangible assets, net$90,880 $(1,958)$88,922 
The estimated future aggregate amortization expense as of September 30, 2022 is as follows (in thousands):
Years Ending December 31,
2022 (remainder of year)$2,305 
20239,147 
20249,172 
20259,147 
20269,137 
Thereafter80,963 
Total$119,871 
Amortization expense of intangible assets was $2.3 million and $6.1 million for the three and nine months ended September 30, 2022, respectively. Amortization expense of intangible assets was $0.7 million and $1.0 million for the three and nine months ended September 30, 2021.
9. Other Accrued and Current Liabilities
Other accrued and current liabilities consisted of the following (in thousands):
 September 30, 2022December 31, 2021
Accrued service fees$2,564 $1,905 
Clinical studies1,725 1,655 
Payroll-related liabilities317 695 
Employee stock purchase plan contributions220 760 
Other281 663 
Total$5,107 $5,678 
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CASTLE BIOSCIENCES, INC.