Castle Biosciences, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Castle is a commercial-stage dermatological cancer diagnostics company. Its principal products are DecisionDx-Melanoma and DecisionDx-UM.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Revenue | $17.4 million | $8.7 million; up 99.8% |
| Gross margin | $15.0 million; 86.3% | $7.1 million; 81.7% |
| Operating income (loss) | $1.0 million | $(0.3) million |
| Net income (loss) | $0.6 million; $0.03 diluted EPS | $(1.4) million; $(1.22) per share attributable to common stockholders |
| Operating expenses | $14.0 million | $7.4 million; up 88.0% |
| Operating cash flow | $(0.3) million | $1.3 million |
| Cash and cash equivalents | $98.7 million | $98.8 million at December 31, 2019 |
| Debt, net carrying value | $25.3 million | $25.1 million at December 31, 2019 |
| Current assets / current liabilities | $116.6 million / $15.3 million | $116.7 million / $15.3 million at December 31, 2019 |
Revenue growth reflected a 37.4% increase in test volume and higher per-test revenue, including the DecisionDx-Melanoma Medicare rate associated with its new ADLT status. The company recorded $3.2 million of positive revenue adjustments for tests delivered in prior periods, versus $0.6 million in Q1 2019. Cost of sales rose 49.6%; higher revenue and operating leverage lifted gross margin percentage. R&D rose 109.0% to $2.9 million, and SG&A rose 83.2% to $11.1 million, reflecting increased staffing, commercial expansion, professional fees, and other costs.
Cash declined by $0.2 million during the quarter: operating activities used $0.3 million, investing activities used $0.5 million, and financing activities provided $0.6 million. The company reported $87.9 million of stockholders’ equity and an accumulated deficit of $51.6 million at quarter-end. Debt carries an 8.55% floating rate; principal installments of $833,333 were scheduled to begin June 1, 2020, with maturity on November 1, 2022.
Material changes and business developments
- Reports delivered totaled 4,935 in Q1 2020, up from 3,592 in Q1 2019: 4,574 DecisionDx-Melanoma reports versus 3,232, and 361 DecisionDx-UM reports versus 360. New ordering clinicians for DecisionDx-Melanoma increased 43% year over year.
- After quarter-end, the company reported DecisionDx-Melanoma orders from April 1 through May 6 were down 43% year over year. It said operations and report turnaround times remained uninterrupted, but DecisionDx-UM orders also softened.
- On March 12, 2020, OMHA denied payment on all 2,698 DecisionDx-Melanoma claims in a consolidated appeal covering 2013 through spring 2017. The company plans to appeal and has recognized no revenue for these claims pending resolution.
- On May 10, 2020, lenders amended the debt covenant: quarterly compliance may be met through either the revenue target or a minimum 2.00-to-1 liquidity ratio. The company sought the amendment because it anticipated missing the revenue covenant at June 30 due to COVID-19. The stated ratio would have been 3.66-to-1 at March 31.
Outlook, risks, and unusual items
- Management said cash on hand and anticipated product-sale collections should fund operations for the foreseeable future, while cautioning that estimates depend on assumptions and there is no committed external funding source. No specific earnings or revenue guidance was provided.
- The company expected to launch DecisionDx-SCC in Q3 2020 and its suspicious-pigmented-lesion test in the second half of 2020. These plans are subject to development, validation, commercialization, and reimbursement risks.
- COVID-19’s effect on test demand, patient visits, reimbursement, and cash flows remained uncertain. Management observed stabilization in the decline in melanoma orders beginning in the second week of April, but said the timing of rescheduled visits could not be predicted.
- After quarter-end, Castle received a $1.9 million HHS payment under the CARES Act, which HHS determined did not need to be repaid, and an $8.3 million CMS advance payment. CMS was to recoup the advance against future claims beginning August 14, 2020; any remaining balance was subject to further recoupment arrangements after November 12, 2020.
- Key risks include dependence on a limited number of payors, reimbursement and revenue-estimation uncertainty, the adverse Medicare appeal decision, COVID-related demand weakness, covenant compliance and potential debt acceleration, and the company’s reliance on a single laboratory site. The company stated it was in covenant compliance at March 31 and that disclosure controls were effective; no material litigation was identified.
Important facts for investors to verify
- Subsequent-quarter order and report trends, including whether postponed patient visits recover and how COVID-19 affects DecisionDx-Melanoma and DecisionDx-UM demand.
- The outcome and timing of the appeal of the 2,698 denied claims, and any revenue or cash-flow effects.
- Quarterly compliance with the amended debt covenant, the location and availability of cash counted toward the liquidity test, and scheduled principal repayments.
- Actual CMS recoupment of the $8.3 million advance and the accounting and permitted use of the $1.9 million HHS payment.
- Whether new products launch on schedule and obtain physician adoption, payor coverage, and adequate reimbursement; also assess the impact of prior-period revenue adjustments on reported growth.