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, 2020

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)

Delaware	77-0701774
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
820 S. Friendswood Drive, Suite 201, 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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	CSTL	The 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 filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller 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 30, 2020, there were 19,911,225 shares of common stock, $0.001 par value per share, issued and outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Condensed Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	1
	Unaudited Condensed Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2020 and 2019	2
	Unaudited Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	7
	Notes to the Unaudited Condensed Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	78
SIGNATURES		80

i

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CASTLE BIOSCIENCES, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2020		December 31, 2019
ASSETS	(unaudited)
Current Assets
Cash and cash equivalents	$	183,050	$	98,845
Accounts receivable, net	12,618		14,648
Inventory	1,679		1,237
Prepaid expenses and other current assets	3,718		1,951
Total current assets	201,065		116,681
Long-term accounts receivable, net	1,045		870
Property and equipment, net	6,646		2,060
Other assets – long-term	1,638		135
Total assets	$	210,394	$	119,746
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	2,101	$	1,865
Accrued compensation	6,354		5,779
Medicare advance payment	8,350		—
Other accrued liabilities	3,435		1,812
Current portion of long-term debt	10,000		5,833
Total current liabilities	30,240		15,289
Long-term debt	12,455		19,289
Deferred rent and other liabilities	1,140		55
Total liabilities	43,835		34,633
Commitments and Contingencies (Note 9)
Stockholders’ Equity
Preferred stock, $0.001 par value; 10,000,000 shares authorized as of September 30, 2020 and December 31, 2019; no shares issued and outstanding as of September 30, 2020 and December 31, 2019.	—		—
Common stock, $0.001 par value; 200,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 19,844,426 and 17,130,907 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.	20		17
Additional paid-in capital	224,146		137,308
Accumulated deficit	(57,607)		(52,212)
Total stockholders’ equity	166,559		85,113
Total liabilities and stockholders’ equity	$	210,394	$	119,746

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

1

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(in thousands, except per share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
NET REVENUES	$	15,217	$	14,774	$	45,350	$	34,230
COST OF SALES	2,475		1,708		7,012		5,299
Gross margin	12,742		13,066		38,338		28,931
OPERATING EXPENSES AND OTHER OPERATING LOSS
Research and development	3,058		1,515		8,675		4,226
Selling, general and administrative	11,703		7,122		33,173		19,990
Other operating loss	1,882		—		—		—
Total operating expenses	16,643		8,637		41,848		24,216
Operating (loss) income	(3,901)		4,429		(3,510)		4,715
Interest income	18		6		354		32
Interest expense	(706)		(1,088)		(2,239)		(3,805)
Gain on extinguishment of debt (Note 6)	—		5,213		—		5,213
Other expense, net	—		(2,711)		—		(2,933)
(Loss) income before income taxes	(4,589)		5,849		(5,395)		3,222
Income tax expense	—		—		—		—
Net (loss) income and comprehensive (loss) income	(4,589)		5,849		(5,395)		3,222
Convertible preferred stock cumulative dividends	—		289		—		2,156
Accretion of redeemable convertible preferred stock to redemption value	—		17		—		130
Net (loss) income and comprehensive (loss) income attributable to common stockholders	$	(4,589)	$	5,543	$	(5,395)	$	936
(Loss) earnings per share attributable to common stockholders:
Basic	$	(0.23)	$	0.43	$	(0.29)	$	0.17
Diluted	$	(0.23)	$	0.05	$	(0.29)	$	(0.67)
Weighted-average shares outstanding:
Basic	19,936		12,758		18,290		5,649
Diluted	19,936		14,302		18,290		5,747

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

2

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(in thousands, except share data)

	Convertible  Preferred Stock Series C			Redeemable  Convertible Preferred Stock Series A, B, D, E-1,  E-2, E-2A, E-3 and F			Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
BALANCE, JULY 1, 2019	503,056	$	1,501	9,456,775	$	45,108	—	$	—	2,192,461	$	2	$	9,910	$	(60,116)	$	(50,204)
Stock compensation expense	—	—		—	—		—	—		—	—		229		—		229
Exercise of common stock options	—	—		—	—		—	—		411,283	—		747		—		747
Accretion of redeemable convertible preferred stock to redemption value:
Series E-3	—	—		—	1		—	—		—	—		(1)		—		(1)
Series F	—	—		—	16		—	—		—	—		(16)		—		(16)
Exercise of redeemable convertible preferred stock warrants:
Series E-1	—	—		12,999	107		—	—		—	—		—		—		—
Series F	—	—		1,054	10		—	—		—	—		—		—		—
Extinguishment of beneficial conversion feature on convertible promissory notes	—	—		—	—		—	—		—	—		(15,265)		—		(15,265)
Public offering of common stock, net of underwriting discounts, commissions and offering costs	—	—		—	—		—	—		4,600,000	5		65,926		—		65,931
Conversion of convertible promissory notes	—	—		—	—		—	—		1,661,106	2		26,576		—		26,578
Conversion of convertible preferred stock	(503,056)	(1,501)		(9,470,828)	(45,242)		—	—		8,181,992	8		46,735		—		46,743
Reclassification of preferred stock warrant liability and net exercise of certain warrants for common stock in connection with initial public offering	—	—		—	—		—	—		27,207	—		1,745		—		1,745
Net income	—	—		—	—		—	—		—	—		—		5,849		5,849
BALANCE, SEPTEMBER 30, 2019	—	$	—	—	$	—	—	$	—	17,074,049	$	17	$	136,586	$	(54,267)	$	82,336

3

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(UNAUDITED)

(in thousands, except share data)

	Convertible  Preferred Stock Series C			Redeemable  Convertible Preferred Stock Series A, B, D, E-1,  E-2, E-2A, E-3 and F			Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
BALANCE, JULY 1, 2020	—	$	—	—	$	—	—	$	—	19,373,869	$	19	$	210,621	$	(53,018)	$	157,622
Stock compensation expense	—	—		—	—		—	—		—	—		2,118		—		2,118
Exercise of common stock options	—	—		—	—		—	—		129,090	1		291		—		292
Issuance of common stock under the employee stock purchase plan	—	—		—	—		—	—		41,467	—		693		—		693
Public offering of common stock, net of underwriting discounts, commissions and offering costs	—	—		—	—		—	—		300,000	—		10,423		—		10,423
Net loss	—	—		—	—		—	—		—	—		—		(4,589)		(4,589)
BALANCE, SEPTEMBER 30, 2020	—	$	—	—	$	—	—	$	—	19,844,426	$	20	$	224,146	$	(57,607)	$	166,559

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

4

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(UNAUDITED)

(in thousands, except share data)

	Convertible  Preferred Stock Series C			Redeemable  Convertible Preferred Stock Series A, B, D, E-1,  E-2, E-2A, E-3 and F			Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
BALANCE, JANUARY 1, 2019	503,056	$	1,501	9,456,775	$	44,995	—	$	—	1,916,224	$	2	$	921	$	(57,489)	$	(56,566)
Stock compensation expense	—	—		—	—		—	—		—	—		536		—		536
Exercise of common stock options	—	—		—	—		—	—		687,520	—		1,164		—		1,164
Accretion of redeemable convertible preferred stock to redemption value:
Series E-1	—	—		—	2		—	—		—	—		(2)		—		(2)
Series E-3	—	—		—	7		—	—		—	—		(7)		—		(7)
Series F	—	—		—	121		—	—		—	—		(121)		—		(121)
Exercise of redeemable convertible preferred stock warrants:
Series E-1	—	—		12,999	107		—	—		—	—		—		—		—
Series F	—	—		1,054	10		—	—		—	—		—		—		—
Recognition of beneficial conversion feature on convertible promissory notes	—	—		—	—		—	—		—	—		8,378		—		8,378
Extinguishment of beneficial conversion feature on convertible promissory notes	—	—		—	—		—	—		—	—		(15,265)		—		(15,265)
Public offering of common stock, net of underwriting discounts, commissions and offering costs	—	—		—	—		—	—		4,600,000	5		65,926		—		65,931
Conversion of convertible promissory notes	—	—		—	—		—	—		1,661,106	2		26,576		—		26,578
Conversion of convertible preferred stock	(503,056)	(1,501)		(9,470,828)	(45,242)		—	—		8,181,992	8		46,735		—		46,743
Reclassification of preferred stock warrant liability and net exercise of certain warrants in connection with initial public offering	—	—		—	—		—	—		27,207	—		1,745		—		1,745
Net income	—	—		—	—		—	—		—	—		—		3,222		3,222
BALANCE, SEPTEMBER 30, 2019	—	$	—	—	$	—	—	$	—	17,074,049	$	17	$	136,586	$	(54,267)	$	82,336

5

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(UNAUDITED)

(in thousands, except share data)

	Convertible  Preferred Stock Series C			Redeemable  Convertible Preferred Stock Series A, B, D, E-1,  E-2, E-2A, E-3 and F			Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
BALANCE, JANUARY 1, 2020	—	$	—	—	$	—	—	$	—	17,130,907	$	17	$	137,308	$	(52,212)	$	85,113
Stock compensation expense	—	—		—	—		—	—		—	—		5,348		—		5,348
Exercise of common stock options	—	—		—	—		—	—		332,065	1		692		—		693
Issuance of common stock under the employee stock purchase plan	—	—		—	—		—	—		81,454	—		1,296		—		1,296
Public offering of common stock, net of underwriting discounts, commissions and offering costs	—	—		—	—		—	—		2,300,000	2		79,502		—		79,504
Net loss	—	—		—	—		—	—		—	—		—		(5,395)		(5,395)
BALANCE, SEPTEMBER 30, 2020	—	$	—	—	$	—	—	$	—	19,844,426	$	20	$	224,146	$	(57,607)	$	166,559

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

6

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2020		2019
OPERATING ACTIVITIES
Net (loss) income	$	(5,395)	$	3,222
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation	312		254
Stock compensation expense	5,348		536
Amortization of intangibles	—		4
Amortization of debt discounts and issuance costs	666		1,691
Other non-cash interest	—		442
Gain on extinguishment of debt	—		(5,213)
Change in fair value of preferred stock warrant liability	—		619
Change in fair value of embedded derivative	—		237
Change in fair value of convertible promissory note accounted for under the fair value option	—		2,077
Other	3		—
Change in operating assets and liabilities:
Accounts receivable	1,855		801
Prepaid expenses and other current assets	(1,767)		(1,522)
Inventory	(442)		61
Other assets	(1,503)		(20)
Accounts payable	211		(47)
Accrued compensation	575		(895)
Medicare advance payment	8,350		—
Other accrued liabilities	1,709		263
Deferred rent and other liabilities	373		12
Net cash provided by operating activities	10,295		2,522
INVESTING ACTIVITIES
Purchases of property and equipment	(4,162)		(590)
Proceeds from sale of property and equipment	2		—
Net cash used in investing activities	(4,160)		(590)
FINANCING ACTIVITIES
Proceeds from public offerings of common stock, net of underwriting discounts, commissions and offering costs	79,504		65,935
Proceeds from issuance of preferred stock and preferred stock warrants (including exercised warrants)	—		49
Proceeds from issuance of convertible promissory notes (including $4,756 from related parties for the nine months ended September 30, 2019), net of issuance costs	—		11,695
Proceeds from issuance of convertible promissory note and common stock warrant, net of issuance costs	—		9,236
Proceeds from issuance of term debt, net of issuance costs	—		1,776
Repayments on term debt	(3,333)		—

7

CASTLE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2020		2019
Repayments on line of credit	—		(1,791)
Proceeds from exercise of common stock options	692		1,164
Proceeds from contributions to the employee stock purchase plan	1,207		—
Net cash provided by financing activities	78,070		88,064
NET CHANGE IN CASH AND CASH EQUIVALENTS	84,205		89,996
Beginning of period	98,845		4,479
End of period	$	183,050	$	94,475
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued purchases of property and equipment	$	32	$	17
Property and equipment acquired with tenant improvement allowance	$	714	$	—
Common stock and debt issuance costs incurred but not paid	$	—	$	4
Issuance of common stock upon conversion of convertible preferred stock	$	—	$	46,743
Conversion of preferred stock warrants to common stock warrants	$	—	$	1,745
Issuance of common stock upon conversion of convertible promissory notes	$	—	$	26,578

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

8

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Description of Business

Castle Biosciences, Inc. (the ‘‘Company’’) was incorporated in the state of Delaware on September 12, 2007. The Company is a commercial-stage dermatological cancer company focused on providing physicians and their patients with personalized, clinically actionable genomic information to make more accurate treatment decisions. The Company is based in Friendswood, Texas (a suburb of Houston, Texas) and its laboratory operations are conducted at the Company’s facility located in Phoenix, Arizona.

Impact of COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. To date, the Company has maintained uninterrupted business operations with normal turnaround times for its delivery of test reports. The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state and local guidelines, including those regarding social distancing.

The Company experienced a decline in total test report volume in the second quarter of 2020 compared to the second quarter of 2019, which it believes was linked to delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma in response to COVID-19. While the Company experienced improvements in total test report volume in the third quarter of 2020 compared to the third quarter of 2019, the extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence.

In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic. Refer to Note 2 for information on certain payments received by the Company in April 2020 as a result of these actions. The Company intends to fund planned operations for the next 12 months using a portion of its cash and cash equivalents on hand, which totaled $183.1 million at September 30, 2020, and collections from test report sales.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). The Company has no subsidiaries and all operations are conducted by the Company.

Unaudited Interim Financial Information

The accompanying condensed balance sheet as of September 30, 2020; the condensed statements of operations and comprehensive (loss) income, the condensed statements of convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019; and the condensed statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited. The unaudited interim 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 the Company’s financial position as of September 30, 2020 and the results of its operations and its cash flows for the three and nine months ended September 30, 2020 and 2019. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2020 and 2019 are also unaudited. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period. The balance sheet as of December 31, 2019 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial statements. These financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 10, 2020.

9

CASTLE BIOSCIENCES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Use of Estimates

The preparation of 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 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 property and equipment, and contingent liabilities. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes 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. The Company has considered the potential impact of the COVID-19 pandemic on its estimates and assumptions. The extent to which the COVID-19 pandemic may impact the Company’s estimates in future periods is uncertain and subject to change.

Operating Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as one operating segment. All revenues are attributable to U.S.-based operations and all assets are held in the United States.

Cash and Cash Equivalents including Concentrations of Credit Risk

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. The Company’s 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 the Company is not exposed to significant credit risk on its cash deposits due to the financial position of the institutions in which deposits are held. The Company has not experienced any losses on its cash or cash equivalents.

Revenue Recognition

Revenue is recognized in accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codification (‘‘ASC’’) Topic 606, Revenue from Contracts with Customers (‘‘ASC 606’’). In accordance with ASC 606, the Company follows 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.

All of the Company’s revenues from contracts with customers are associated with the provision of diagnostic and prognostic cancer testing services. Most of the Company’s revenues are attributable to DecisionDx®-Melanoma for cutaneous melanoma. The Company also provides a test for uveal melanoma, DecisionDx®-UM. The Company launched a test for patients with squamous cell carcinoma, DecisionDx®-SCC in August 2020 and launched a test for use in patients with suspicious pigmented lesions, DecisionDx® DiffDx™-Melanoma in November 2020. Information on the disaggregation of revenues by the Company’s significant third-party payors is included under Payor Concentration below. The Company has determined that it has a contract with the patient when the treating clinician orders the test. The Company’s contracts generally contain a single performance obligation, which is the delivery of the test report, and the Company satisfies its performance obligation at a point in time upon the delivery of the test report to the treating physician, at which point the Company can bill for the report. The amount of revenue recognized reflects the amount of consideration to which the Company expects to be entitled (the ‘‘transaction price’’) and considers the effects of variable consideration, which is discussed further below.

Once the Company satisfies its performance obligations and bills 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 the Company’s 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 the Company’s list prices. However, absent a contractually committed reimbursement rate with a commercial carrier or governmental program, the Company’s diagnostic tests may or may not be covered by these entities’ existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance provider declines to reimburse the Company. The Company may pursue, on a case-by-case basis,

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reimbursement from such patients in the form of co-payments and co-insurance, in accordance with the contractual obligations that the Company has 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’’) are generally paid at the established rate by the Company’s Medicare contractor within 30 days from receipt. Medicare claims that were either submitted to Medicare prior to the LCD coverage commencement date or are not covered by the terms of the LCD 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 (“ALJ”)). A successful appeal at any of these levels results in payment.

In the absence of LCD coverage or contractually established reimbursements rates, the Company has concluded that its contracts include variable consideration because the amounts paid by Medicare or commercial health insurance carriers may be paid at less than the Company’s 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 the Company’s past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence, such as the judgment and actions of third parties. 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. Variable consideration for Medicare claims that are not covered by an LCD, including those claims subject to approval by an ALJ at an appeal hearing, is deemed to be fully constrained due to factors outside the Company’s influence (i.e., 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, 2020 and 2019 were $1,450,000 and $3,203,000, respectively, of revenue increases 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, 2020 and 2019 were revenue increases of $223,000 and $2,394,000, 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.

Because the Company’s contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606 to not disclose information about its 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 the Company’s contracts. Contract balances consisted of accounts receivable (both current and noncurrent) and the Medicare advance payment (discussed further below) as of September 30, 2020. Contract balances consisted solely of accounts receivable (both current and noncurrent) as of December 31, 2019.

Medicare Advance Payment

On April 16, 2020, the Company received an advance payment of $8.3 million (the “Advance Payment”) from the Centers for Medicare & Medicaid Services (“CMS”) under its Accelerated and Advance Payment Program, which was expanded to provide increased cash flow to service providers during the COVID-19 pandemic. The Company has recorded the Advance Payment as a current liability on its balance sheet as of September 30, 2020. The Company will reduce the balance of the Advance Payment as it is applied to claims or is otherwise recouped by CMS. Originally, CMS was to recoup the Advance Payment from August 2020 through November 2020. However, the enactment on October 1, 2020 of the Continuing Appropriations Act, 2021 and Other Extensions Act (the “Appropriations Act”) modified the repayment terms such that recoupment will now commence in April 2021. For the first eleven months of recoupment, CMS will apply 25% of the Medicare payments otherwise owed to the Company against the balance of the Advance Payment. After that eleven-month period, CMS will recoup at a rate of 50% of the Medicare payments otherwise owed to the Company for an additional six months. If the Advance Payment is not fully recovered by CMS after this recoupment period, the Company will be required to repay any remaining balance. The classification of the Advance Payment on the Company’s balance sheet at September 30, 2020 does not consider the effect of

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the Appropriations Act. As of September 30, 2020, no revenue has been recognized related to any portion of the Advance Payment.

DecisionDx-Melanoma Claims Consolidation

In June 2017, the Company submitted to the Office of Medicare Hearings and Appeals (‘‘OMHA’’) a formal request to participate in a program that OMHA developed with the intent of providing appellants a means to have large volumes of claim disputes adjudicated at an accelerated rate. The program consolidates outstanding claims at the ALJ level and uses a statistical-sampling approach where five ALJs will determine reimbursement results for a sample of claims which are then extrapolated to the universe of claims. The consolidation includes 2,698 DecisionDx-Melanoma claims dating from 2013 through spring 2017. Hearings were held in April 2019 with a supplemental hearing in May 2019. On March 12, 2020, OMHA issued a decision denying payment on all claims in the consolidation. The Company has filed an appeal to the decision, although no ruling on such appeal has been issued to date. In accordance with ASC 606 and consistent with prior periods, the Company has not recognized (fully constrained the variable consideration) any revenues attributable to these claims in its financial statements pending the outcome of this matter.

Payor Concentration

The Company relies upon reimbursements from third-party government payors (primarily Medicare) and private-payor insurance companies to collect accounts receivable related to sales of its diagnostic tests.

The Company’s 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  (non-current)
	2020		2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Medicare	54	%	47	%	11	%	7	%	—	%	—	%
Medicare Advantage plans	28	%	28	%	41	%	41	%	18	%	18	%
United Healthcare	2	%	7	%	1	%	9	%	—	%	—	%
BlueCross BlueShield plans	8	%	6	%	27	%	25	%	47	%	46	%

Accounts Receivable and Allowance for Doubtful Accounts

The Company classifies accounts receivable balances that are expected to be paid more than one year from the balance sheet date as non-current assets. The estimated timing of payment utilized as a basis for classification as non-current is determined by analyses of historical payor-specific payment experience, adjusted for known factors that are expected to change the timing of future payments.

The Company accrues an allowance for doubtful accounts against its accounts receivable when it is probable that an account is not collectible, based on write off history, credit risk of specific accounts, aging analysis and other information available on specific accounts. The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are written off when all efforts to collect the balance have been exhausted. Historically, the Company’s bad debt expense has not been significant. The allowance for doubtful accounts was zero as of September 30, 2020 and December 31, 2019. 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 doubtful accounts.

Other Operating Loss

On April 10, 2020, the Company received an automatic payment of $1.9 million from the U.S. Department of Health and Human Services (“HHS”) pursuant to the Coronavirus Aid, Relief and Economic Security Act enacted on March 27, 2020, also known as the CARES Act, out of relief funds allocated by HHS to healthcare providers to reimburse healthcare related expenses or lost revenues attributable to COVID-19. This automatic payment was calculated by HHS in proportion to the

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providers’ share of Medicare fee-for-service reimbursements in 2019 and was applicable to all facilities and providers that received Medicare fee-for-service reimbursements in 2019. In the second quarter of 2020, based on guidance issued by HHS at the time that stated any reasonable method could be used to calculate lost revenues attributable to COVID-19, the Company concluded it would qualify to retain the relief funds and recognized the funds received as other operating income during the three months ended June 30, 2020. On September 19, 2020, HHS issued a notice of reporting requirements that changed the methodology for determining lost revenues to be based on a patient care operating income metric, as defined by HHS. Due to this change in methodology and uncertainty in its application, the Company determined that it was no longer reasonably assured of keeping the funds. Therefore, in the three months ended September 30, 2020, the Company reversed the previously recognized income. As of September 30, 2020, the provider relief funds are reflected on the balance sheet as other accrued liabilities. On October 22, 2020, HHS again revised the methodology for calculating lost revenues, which is now calculated as a negative change, if any, in calendar year 2020 revenues compared to calendar year 2019 revenues.

Fair Value of Financial Instruments

The carrying amount of the Company’s long-term debt approximates fair value due to its variable market interest rate and management’s opinion that current rates and terms that would be available to the Company with the same maturity and security structure would be essentially equivalent to that of the Company’s long-term debt. This estimated fair value is a ‘‘Level 3’’ fair value measurement, as defined in Note 8.

Accrued Compensation

The Company accrues for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by the Company’s board of directors, compensation levels of eligible individuals, and target bonus percentage levels. The board of directors reviews and evaluates the performance against these objectives and ultimately determines what discretionary payments are made. The Company also accrues for liabilities under employee sales incentive bonus plans with accruals based on performance achieved to date compared to established targets. As of September 30, 2020 and December 31, 2019, the Company accrued $4,611,000 and $4,785,000, respectively, for liabilities associated with these bonus plans. These amounts are classified as current or noncurrent accrued liabilities in the balance sheets based on the expected timing of payment.

CARES Act Payroll Tax Deferral

The CARES Act permits employers to defer the payment of the employer share of social security taxes due for the period beginning March 27, 2020 and ending December 31, 2020. Of the amounts deferred, 50% are required to be paid by December 31, 2021 and the remaining 50% are required to be paid by December 31, 2022. The Company began deferring payment of the employer share of social security taxes in May 2020. As of September 30, 2020, the Company had deferred payment of $378,000 of such taxes, which are classified as noncurrent liabilities in the balance sheet.

Comprehensive (Loss) Income

Comprehensive (loss) income is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive (loss) income was the same as its reported net (loss) income for all periods presented.

Accounting Pronouncements Yet to be Adopted

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes FASB ASC Topic 840, Leases, and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. For companies that are not emerging growth companies (‘‘EGCs’’), ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019. However, in November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019-10”), which included a one-year deferral of the effective date of ASU

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2016-02 for certain entities. In June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which further defers the effective date for certain entities. As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company expects to adopt the new standard in the fourth quarter of 2022 using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company anticipates that the adoption will not have a material impact on its statements of operations and comprehensive (loss) income or its statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses, which included an amendment of the effective date for nonpublic entities. For non-EGCs, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. For EGCs, the standard was to be effective for fiscal years beginning after December 15, 2021. However, in November 2019, the FASB issued ASU 2019-10, which included a one-year deferral of the effective date of ASU 2016-13 for certain entities. As a result, ASU is now effective for EGCs for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not currently believe the adoption of this standard will have a significant impact on its financial statements, given its history of minimal bad debt expense relating to trade accounts receivable.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions to the general principles in Topic 740 and simplifies other areas of the existing guidance. For non-EGCs, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For EGCs, the standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2019-12 on its financial statements.

3. (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net (loss) income attributable to common stockholders for the period by the weighted-average number of common shares outstanding during the period. The weighted-average number of common shares outstanding includes shares associated with an outstanding warrant, issued in July 2019, to purchase 209,243 shares of common stock, which are deemed to have been issued for purposes of calculating basic and diluted (loss) earnings per share, due to the nominal exercise price. On July 29, 2019, the Company completed the initial public offering of its common stock (the “IPO”), in which it issued and sold 4,600,000 shares of common stock. Also on that date, all of the Company’s outstanding convertible preferred stock and convertible promissory notes automatically converted into 8,181,992 and 1,661,106 shares, respectively, of common stock and certain outstanding warrants to purchase Series F convertible redeemable preferred stock were net exercised for an aggregate of 27,207 shares of common stock. On June 29, 2020 and July 2, 2020, the Company issued and sold 2,000,000 and 300,000 shares, respectively, of common stock in a follow-on public offering, as discussed further in Note 10. The foregoing shares are included in the Company’s weighted-average number of common shares outstanding starting on the respective issuance/conversion dates.

Diluted (loss) earnings 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”), as well as from the possible conversion of the Company’s convertible preferred stock, convertible promissory notes and exercise of outstanding warrants. The treasury stock and if-converted methods are used to calculate the potential dilutive effect of these common stock equivalents. However, potentially dilutive shares are excluded from the computation of diluted (loss) earnings per share when their effect is antidilutive.

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The following table shows the computation of basic and diluted (loss) earnings per share for the three and nine months ended September 30, 2020 and 2019 (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net (loss) income attributable to common stockholders	$	(4,589)	$	5,543	$	(5,395)	$	936
Assumed conversion of convertible promissory notes(1):
Subtract: Extinguishment gain	—		(5,213)		—		(5,213)
Add: Interest expense and change in fair value of embedded derivative	—		420		—		420
Numerator for diluted (loss) earnings per share	$	(4,589)	$	750	$	(5,395)	$	(3,857)
Denominator:
Weighted-average common shares outstanding, basic	19,936		12,758		18,290		5,649
Assumed conversion of convertible promissory notes(1)	—		290		—		98
Assumed exercise of common stock warrants	—		67		—		—
Assumed exercise of stock options	—		1,187		—		—
Weighted-average common shares outstanding, diluted	19,936		14,302		18,290		5,747
(Loss) earnings per share attributable to common stockholders:
Basic	$	(0.23)	$	0.43	$	(0.29)	$	0.17
Diluted	$	(0.23)	$	0.05	$	(0.29)	$	(0.67)

(1)For both the three and nine months ended September 30, 2019, these figures reflect the assumed conversion of the Q1 2019 Notes (as defined in Note 6) into shares of common stock beginning July 1, 2019, in accordance with the requirements in ASC Topic 260, Earnings per Share, for contingently issuable shares due to the contingency not being met until the third quarter of 2019. Accordingly, the associated numerator adjustments for the nine months ended September 30, 2019 exclude activity from the first two quarters of 2019. The July 2019 Note (as defined in Note 6), was excluded from the computation of diluted (loss) earnings per share prior to its conversion on July 29, 2019 in connection with the IPO, as disclosed below.

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Due to the Company reporting a net loss attributable to common stockholders for the three and nine months ended September 30, 2020, all potentially dilutive securities are antidilutive and are excluded from the computations 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 the Company’s calculation of diluted (loss) earnings per share for the three and nine months ended September 30, 2020 and 2019 because to do so would be antidilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Convertible preferred stock	—	2,489	—	6,256
Convertible promissory note(1)	—	131	—	44
Stock options	2,767	139	2,732