424B3 1 d759407d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-232181

 

 

 

 

LOGO    LOGO

PROPOSED BUSINESS COMBINATION

YOUR VOTE IS VERY IMPORTANT

 

 

To the Shareholders of Constellation Alpha Capital Corp. and Stockholders of DermTech, Inc.:

Constellation Alpha Capital Corp., a British Virgin Islands corporation, or Constellation, DT Merger Sub, Inc., a wholly-owned subsidiary of Constellation incorporated in the State of Delaware, or Merger Sub, and DermTech, Inc., a Delaware corporation, or DermTech, have entered into an Agreement and Plan of Merger, as amended, or the Merger Agreement, pursuant to which (a) Merger Sub will merge with and into DermTech, with DermTech surviving the merger and becoming a wholly-owned direct subsidiary of Constellation, or collectively with the other transactions described in the Merger Agreement, the business combination. Approximately two business days prior to the closing of the business combination, Constellation will domesticate from the British Virgin Islands and continue as a Delaware corporation. At the closing of the business combination, all of the outstanding shares of DermTech common stock and preferred stock will be cancelled and automatically converted into the right to receive an aggregate amount of 16,000,000 shares of common stock of Constellation, or the common stock consideration, less the total number of shares of common stock consideration that can be acquired or received pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019. See the section entitled “The Business Combination – Merger Consideration” on page 108 of the attached proxy statement/prospectus/information statement for further information on the consideration being paid to the stockholders of DermTech.

On the effective date of Constellation’s domestication from the British Virgin Islands to Delaware, the currently issued and outstanding ordinary shares, no par value, of Constellation will automatically convert by operation of law, on a one-for-one basis, into shares of common stock, par value $0.0001 per share, of Constellation. Similarly, all of Constellation’s outstanding warrants will become warrants to acquire the corresponding shares of Constellation’s common stock and no other changes will be made to the terms of any outstanding warrants as a result of the domestication. In addition, all of Constellation’s outstanding units (less the number of units that have been separated into the underlying ordinary shares, rights and warrants upon the request of the holder thereof) will become units of the domesticated Delaware corporation.

This proxy statement/prospectus/information statement covers the following securities of Constellation: (a) 20,141,378 shares of common stock which is based upon the sum of (i) 5,342,532 ordinary shares of Constellation, less 2,694,779 shares, which will be forfeited by Constellation’s sponsor in connection with the proposed business combination, which will be converted into shares of common stock of Constellation on a one-for-one basis in connection with the proposed business combination, (ii) rights to receive 1,493,625 ordinary shares of Constellation, which will convert into 1,493,625 shares of common stock of Constellation in connection with the proposed business combination, and (iii) 16,000,000 shares of common stock of Constellation which is the maximum number of shares of common stock that can be issued to the equity holders of DermTech in connection with the closing of the proposed business combination; (b) 14,936,250 warrants to purchase shares of common stock of Constellation which is based upon 14,936,250 warrants to purchase 7,468,125 of Constellation’s ordinary shares that will be converted into warrants to purchase shares of Constellation’s common stock upon the closing of the proposed business combination; and (c) 7,468,125 shares of Constellation’s common stock underlying the warrants, which amounts do not reflect the one-for-two reverse stock split of all of Constellation’s issued and outstanding shares of common stock subsequent to the closing of the business combination.

Constellation’s ordinary shares, rights, units and warrants are currently listed on the Nasdaq Capital Market, under the symbols “CNAC,” “CNACR,” “CNACU” and “CNACW,” respectively. Constellation intends to apply to list the shares of common stock and warrants of the combined company on the Nasdaq Capital Market under the symbols “DMTK” and “DMTKW,” respectively, upon the closing of the business combination. At the closing of the business combination, each unit will separate into its components consisting of one share of Constellation common stock, one right to receive one-tenth of one share of Constellation common stock and one warrant (each warrant entitling the holder thereof to purchase one-half of one share of Constellation common stock). After the closing of the business combination, the holders of Constellation’s rights will receive the shares of Constellation common stock underlying such rights.

Constellation is holding a special meeting of its shareholders in order to obtain the shareholder approvals necessary to complete the business combination. At the Constellation special meeting which will be held on Tuesday, August 27, 2019, at 10:00 a.m., Eastern time, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, NY 10166, unless postponed or adjourned to a later date, Constellation will ask its shareholders to adopt the Merger Agreement thereby approving the business combination and approve the other proposals described in this proxy statement/prospectus/information statement.

As described in this proxy statement/prospectus/information statement, certain stockholders of DermTech, who in the aggregate own a majority of the outstanding shares of DermTech capital stock and 70% of the outstanding shares of DermTech preferred stock are parties to a support agreement with Constellation whereby such stockholders agreed to vote their shares of DermTech common and preferred stock in favor of approving the business combination contemplated by the Merger Agreement. In addition, Constellation’s sponsor, who owns approximately 72.7% of the issued and outstanding Constellation ordinary shares, has separately agreed to vote in favor of the business combination contemplated by the Merger Agreement.

In addition, DermTech will seek the irrevocable written consent of DermTech’s stockholders as is required to approve and adopt the Merger Agreement and the business combination contemplated thereunder. Such approval requires the holders of (i) a majority of the outstanding shares of DermTech capital stock and (ii) seventy percent (70%) of the outstanding shares of DermTech preferred stock, to each affirmatively vote in favor of the approval and adoption of the Merger Agreement and the business combination. No additional approval or vote from any holders of any class or series of stock of DermTech will be necessary to adopt and approve the Merger Agreement and the business combination.

After careful consideration, the respective Constellation and DermTech boards of directors have unanimously approved the Merger Agreement and the board of directors of Constellation has approved the other proposals described in this proxy statement/prospectus/information statement, and each of the Constellation and DermTech board of directors has determined that it is advisable to consummate the business combination. The board of directors of Constellation recommends that its shareholders vote “FOR” the proposals described in this proxy statement/prospectus/information statement, and the board of directors of DermTech recommends that its stockholders sign and return to DermTech the written consent indicating their approval of the business combination, the Merger Agreement and related transactions.

 

 


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More information about Constellation, DermTech and the proposed transaction is contained in this proxy statement/prospectus/information statement. Constellation and DermTech urge you to read the accompanying proxy statement/prospectus/information statement, including the Annexes and other documents referred to herein, carefully and in their entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 39 OF THIS PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT.

 

 

Constellation and DermTech are excited about the opportunities the business combination brings to both Constellation and Dermtech stockholders, and thank you for your consideration and continued support.

 

Rajiv Shukla    John Dobak, M.D.
Chief Executive Officer    Chief Executive Officer
Constellation Alpha Capital Corp.    DermTech, Inc.

Neither the Securities and Exchange Commission nor any state securities commission regulatory agency has approved or disapproved the transactions described in this proxy statement/prospectus/information statement, passed upon the merits or fairness of the business combination or related transactions or passed upon the adequacy or accuracy of the disclosure in this proxy statement/prospectus. Any representation to the contrary constitutes a criminal offense.

The accompanying proxy statement/prospectus/information statement is dated August 8, 2019, and is first being mailed to Constellation and DermTech stockholders on or about August 9, 2019.


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LOGO

CONSTELLATION ALPHA CAPITAL CORP.

Emerald View, Suite 400

2054 Vista Parkway

West Palm Beach, FL 33411

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

OF CONSTELLATION ALPHA CAPITAL CORP.

To Be Held On August 27, 2019

To the Shareholders of Constellation Alpha Capital Corp.:

NOTICE IS HEREBY GIVEN that a special meeting of shareholders, or the special meeting, of Constellation Alpha Capital Corp., a British Virgin Islands corporation, or Constellation, will be held on Tuesday, August 27, 2019, at 10:00 a.m., Eastern time, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, NY 10166. You are cordially invited to attend the special meeting for the following purposes:

 

(1)

The Business Combination Proposal: to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of May 29, 2019, as amended, or the Merger Agreement, attached to this proxy statement/prospectus/information statement as Annex A, by and among Constellation, DT Merger Sub, Inc., a wholly owned subsidiary company of Constellation incorporated in Delaware and DermTech, Inc., a Delaware corporation, or DermTech, and the transactions contemplated thereby, or the Business Combination Proposal;

 

(2)

The Domestication Proposal: to consider and vote upon a proposal to: (a) re-domicile out of the British Virgin Islands and continue as a company incorporated in the State of Delaware, prior to the closing of the business combination; (b), adopt upon the domestication taking effect, the certificate of incorporation, attached to this proxy statement/prospectus/information statement as Annex B, or the Interim Charter, in place of our memorandum and articles of association, or the Current Charter, currently registered by the Registrar of Corporate Affairs in the British Virgin Islands and which will remove or amend those provisions of our Current Charter that terminate or otherwise cease to be applicable as a result of the domestication and provide for a majority of the stockholders to act by written consent; (c) file a notice of continuation out of the British Virgin Islands with the British Virgin Islands Registrar of Corporate Affairs under Section 184 of the BVI Business Companies Act of 2004, or the BVI Companies Act; and (d) file the Interim Charter with the Secretary of State of Delaware, under which we will be domesticated from the British Virgin Islands and continue as a Delaware corporation, or the Domestication Proposal;

 

(3)

The Charter Amendment Proposal: to approve and adopt, subject to and conditional on the Domestication and the closing of the business combination (but with immediate effect upon the closing of the business combination), separate proposals to adopt Constellation’s bylaws attached to this proxy statement/prospectus/information statement as Annex C, or the Proposed Bylaws, and amendments to Constellation’s Interim Charter, as set out in the draft amended and restated certificate of incorporation attached to this proxy statement/prospectus/information statement as Annex D, or the Proposed Amended and Restated Charter, to (a) change the name of Constellation to DermTech, Inc., (b) remove or amend those provisions of our Interim Charter which terminate or otherwise cease to be applicable following the closing of the business combination, and (c) add new provisions to our Interim Charter which will be applicable following the closing of the business combination;

 

(4)

The Incentive Plan Proposal: to consider and vote upon a proposal to approve and assume the DermTech Amended and Restated 2010 Stock Plan, or the DermTech Plan, attached to this proxy statement/prospectus/information statement as Annex E, and all outstanding DermTech equity awards granted thereunder;


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(5)

The Reverse Stock Split Proposal: to consider and vote upon a proposal to effect a one-for-two reverse stock split of all of Constellation’s issued and outstanding shares of common stock, subsequent to the closing of the business combination;

 

(6)

The Nasdaq Proposal: to consider and vote upon a proposal to approve, for purposes of complying with applicable listing rules of The Nasdaq Stock Market, or Nasdaq Listing Rules, the issuance of more than 20% of the current total issued and outstanding ordinary shares of Constellation, which Nasdaq may deem to be a change of control pursuant to the business combination, or the Nasdaq Proposal; and

 

(7)

The Adjournment Proposal: to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, there are not sufficient votes to approve one or more proposals presented to shareholders for vote, or the Adjournment Proposal.

Only holders of record of our ordinary shares at the close of business on July 25, 2019 are entitled to notice of the special meeting and to vote at the special meeting and any adjournments or postponements of the special meeting. A complete list of our shareholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at our principal executive offices for inspection by shareholders during ordinary business hours for any purpose germane to the special meeting.

Pursuant to our memorandum and articles of association, we are providing our public shareholders with the opportunity to redeem their ordinary shares issued as part of the units sold in our initial public offering, or the public shares, for cash equal to their pro rata share of the aggregate amount on deposit in the trust account which holds the proceeds of our initial public offering, or the Trust Account, as of two business days prior to the consummation of the business combination, including interest earned on the funds held in the trust account and not previously released to us to pay taxes, upon the consummation of the business combination. For illustrative purposes, based on funds in the trust account of approximately $12.4 million on May 28, 2019, the estimated per share redemption price would have been approximately $10.45. Shareholders may elect to redeem their public shares even if they vote for the Business Combination Proposal or are not a shareholder as of the record date. A shareholder, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, will be restricted from redeeming his, her or its public shares with respect to more than an aggregate of 20% of the public shares. Holders of our outstanding rights and warrants do not have redemption rights with respect to such rights or warrants in connection with the business combination. Currently, Centripetal, LLC, or our sponsor, owns approximately 97% of our ordinary shares issued prior to our initial public offering, or the Founder Shares, which account for approximately 72.7% of our issued and outstanding ordinary shares. Our sponsor has agreed to (i) waive its redemption rights in connection with the completion of the business combination with respect to its Founder Shares and any public shares acquired by it and (ii) vote its Founder Shares and any public shares acquired by it in favor of the Business Combination Proposal. The Founder Shares will be excluded from the pro rata calculation used to determine the per-share redemption price.

In addition, Constellation has entered into separate subscription agreements, or Subscription Agreements, with new health care focused institutional investors as well as certain existing investors in DermTech, or Subscribers, pursuant to which the Subscribers agreed to purchase, and Constellation agreed to sell to the Subscribers, an aggregate of 6,153,847 shares of Constellation common stock for a purchase price of $3.25 per share and 1,231 shares of Constellation Series A Convertible Preferred Stock for a purchase price of $3,250 per share (equal to $3.25 per share of common stock on an as-converted basis), collectively referred to as the PIPE Shares, in a private placement in which Constellation will raise an aggregate of approximately $24,000,000, less certain offering related expenses payable by Constellation, or the PIPE. The shares of Constellation common stock to be issued pursuant to the PIPE will be identical to the shares of Constellation common stock that will be held by Constellation’s public stockholders at the time of the closing of the business combination. The shares of Constellation Series A Convertible Preferred Stock to be issued pursuant to the PIPE will be governed by a Certificate of Designation that will be filed in connection with the closing of the PIPE, or the PIPE Closing. The PIPE Closing will be contingent upon the substantially concurrent consummation of the business combination. The PIPE Closing will occur on the date of, and substantially concurrent with, the consummation of the business combination and will be subject to customary conditions.


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The purpose of the sale of the PIPE Shares is to raise additional capital for working capital following the consummation of the business combination.

The business combination will be consummated only if a majority of the outstanding ordinary shares of Constellation that are voted at the special meeting are voted in favor of the Business Combination Proposal. We have no specified maximum redemption threshold under our memorandum and articles of association. Each redemption of public shares by our shareholders will decrease the amount in our trust account available to us to consummate the business combination. In no event, however, will we redeem public shares in an amount that would cause our net tangible assets to be less than $5,000,001.

Your attention is directed to the proxy statement/prospectus/information statement accompanying this notice (including the annexes thereto) for a more complete description of the proposed business combination and each of our proposals. We encourage you to read this proxy statement carefully. If you have any questions or need assistance voting your shares, please call us at (561) 404-9034. This notice of meeting and the accompanying proxy statement/prospectus/information statement are available at https://www.cstproxy.com/constellationalpha/sm2019.

 

  

By Order of the Board of Directors,

August 8, 2019   

LOGO

Rajiv Shukla

Chief Executive Officer


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Constellation that is not included in or delivered with this document. You may obtain this information without charge through the Securities and Exchange Commission, or the SEC, website (www.sec.gov) or upon your written or oral request by contacting the Chief Executive Officer of Constellation Alpha Capital Corp., Emerald View, Suite 400, 2054 Vista Parkway, West Palm Beach, FL 33411, or by calling (561) 404-9034.

To ensure timely delivery of these documents, any request should be made no later than August 20, 2019 to receive them before the special meeting.

For additional details about where you can find information about Constellation, please see the section entitled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.


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Questions and Answers About the Proposal for Shareholders

     1  

Prospectus Summary

     19  

Selected Historical and Unaudited Pro Forma Condensed Consolidated Financial Information and Data

     30  

Market Price and Dividend Information

     34  

Cautionary Note Regarding Forward-Looking Statements

     36  

Risk Factors

     39  

The Special Meeting of Constellation Stockholders

     86  

The Business Combination

     96  

The Merger Agreement

     118  

Agreements Related to the Business Combination

     132  

Matters Being Submitted to a Vote of Constellation Stockholders

     134  

Proposal No. 1 – The Business Combination Proposal

     134  

Proposal No. 2 – The Domestication Proposal

     135  

Proposal No. 3 – Charter Amendment Proposal

     145  

Proposal No. 4 – Incentive Plan Proposal

     152  

Proposal No. 5 – The Reverse Stock Split Proposal

     158  

Proposal No. 6 – Nasdaq Proposal

     163  

Proposal No. 7 – The Adjournment Proposal

     165  

DermTech Business

     166  

Constellation Business

     191  

DermTech Management’s Discussion and Analysis of Financial Condition and Results of Operations

     203  

Constellation Management’s Discussion and Analysis of Financial Condition and Results of Operations

     219  

Management Following the Business Combination

     225  

Certain Relationships And Related Transactions of DermTech

     237  

Unaudited Pro Forma Condensed Combined Financial Information

     239  

Comparison of Rights of Holders of DermTech Capital Stock and Constellation Capital Stock

     246  

Description of Constellation Capital Stock

     256  

Principal Stockholders of DermTech

     266  

Principal Stockholders of Constellation

     270  

Legal Matters

     271  

Experts

     271  

Where You Can Find More Information

     271  

Trademark Notice

     272  

Other Matters

     272  

Index to Financial Statements

     F-1  

Annex A – Agreement and Plan of Merger, as amended

  

Annex B – Proposed Interim Certificate of Incorporation of the Registrant

  

Annex C – Proposed Bylaws of the Registrant

  

Annex D – Proposed Amended and Restated Certificate of Incorporation of the Registrant

  

Annex E – Amended and Restated 2010 Stock Plan of DermTech, Inc.

  

Annex F  – Certificate of Amendment to the Proposed Amended and Restated Certificate of Incorporation of the Registrant

  

Annex G – Section 262 of the General Corporation Law of the State of Delaware

  

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS

The following questions and answers briefly address some commonly asked questions about the proposals to be presented at the special meeting of Constellation’s shareholders, or the special meeting, including with respect to the proposed business combination. The following questions and answers do not include all the information that may be important to you. You should read carefully this entire proxy statement/prospectus/information statement, including the annexes and the other documents referred to herein. Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Constellation Proposal No. 5.

 

  Q:

Why am I receiving this proxy statement/prospectus/information statement?

 

  A:

Constellation Alpha Capital Corp., or Constellation, DermTech, Inc., or DermTech and DT Merger Sub, Inc., or Merger Sub, have entered into an Agreement and Plan of Merger, dated as of May 29, 2019 (as amended, or the Merger Agreement), pursuant to which Merger Sub will merge into DermTech with DermTech surviving the merger as a wholly-owned subsidiary of Constellation, or collectively with all of the transactions contemplated by the Merger Agreement, the business combination. A copy of the Merger Agreement is attached to this proxy statement/prospectus/information statement as Annex A. In connection with the business combination, Constellation will be domesticated from the British Virgin Islands and continue as a Delaware corporation. All shares of common stock and preferred stock of DermTech will be cancelled and automatically converted into the right to receive an aggregate of sixteen million (16,000,000) shares of common stock of Constellation, less the total number of shares of Constellation common stock that can be acquired or received pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019.

Constellation shareholders are being asked to consider and vote upon a proposal to approve and adopt the business combination, including the Merger Agreement and the transactions contemplated thereby, among other proposals.

Constellation’s ordinary shares, rights, units and warrants are currently listed on The Nasdaq Capital Market, or Nasdaq, under the symbols “CNAC,” “CNACR,” “CNACU” and “CNACW,” respectively. Constellation intends to apply to list the shares of common stock and warrants of the combined company on Nasdaq under the symbols “DMTK” and “DMTKW,” respectively, upon the completion of the business combination, or the Closing. In connection with the Closing, each unit that remains outstanding will separate into its components consisting of one share of Constellation common stock, one right to receive one-tenth of one share of Constellation common stock and one warrant (each warrant entitling the holder thereof to purchase one-half of one share of Constellation common stock). After the Closing, the holders of Constellation’s rights will receive the shares of Constellation common stock underlying such rights.

This proxy statement/prospectus/information statement and its annexes contain important information about the business combination and the other matters to be acted upon at the special meeting. You should read this proxy statement/prospectus/information statement and its annexes carefully and in their entirety.

Your vote is important. You are encouraged to submit your proxy as soon as possible after carefully reviewing this proxy statement/prospectus/information statement and its annexes.

 

  Q:

When and where is the special meeting?

 

  A:

The special meeting will be held at 10:00 a.m. Eastern time, on Tuesday, August 27, 2019, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, NY 10166, or such other date, time and place to which such special meeting may be adjourned or postponed, to consider and vote upon the proposals.


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  Q:

What is being voted on at the special meeting?

 

  A:

Below are the proposals as to which Constellation’s shareholders are being asked to vote:

 

  (1)

The Business Combination Proposal – to approve the Merger Agreement providing for the merger of Merger Sub into DermTech, with DermTech being the surviving company and a wholly-owned subsidiary of Constellation, or the combined company. Pursuant to the Merger Agreement, at the Closing, Constellation will issue an aggregate of 16,000,000 shares of common stock, subject to certain adjustments provided for in the Merger Agreement, in exchange for 100% equity capital of DermTech, resulting in DermTech becoming a wholly-owned subsidiary of Constellation.

 

  (2)

The Domestication Proposal – to consider and vote upon a proposal to: (a) re-domicile Constellation out of the British Virgin Islands and continue as a company incorporated in the State of Delaware, prior to the Closing, which we refer to as the Domestication; (b) adopt, upon the Domestication taking effect, the certificate of incorporation, attached to this proxy statement/prospectus as Annex B, or the Interim Charter in place of Constellation’s amended and restated memorandum and articles of association, or the Current Charter, and which will remove or amend those provisions of the Current Charter that terminate or otherwise cease to be applicable as a result of the Domestication and provide for a majority of the stockholders to act by written consent; (c) file a notice of continuation out of the British Virgin Islands with the British Virgin Islands Registrar of Corporate Affairs under Section 184 of the BVI Companies Act; and (d) file the Interim Charter with the Secretary of State of the State of Delaware, under which Constellation will be domesticated from the British Virgin Islands and continue as a Delaware corporation;

 

  (3)

The Charter Amendment Proposal to approve and adopt, subject to and conditional on the Domestication and the closing of the business combination (but with immediate effect upon the closing of the business combination), separate proposals to adopt Constellation’s bylaws attached to this proxy statement/prospectus/information statement as Annex C, or the Proposed Bylaws, and amendments to Constellation’s Interim Charter, as set out in the draft amended and restated certificate of incorporation attached to this proxy statement/prospectus/information statement as Annex D, or the Proposed Amended and Restated Charter, to (a) change the name of Constellation to DermTech, Inc., (b) remove or amend those provisions of our Interim Charter which terminate or otherwise cease to be applicable following the closing of the business combination, and (c) add new provisions to our Interim Charter which will be applicable following the closing of the business combination;

 

  (4)

The Incentive Plan Proposal to consider and vote upon a proposal to approve and assume the DermTech Plan attached to the accompanying proxy statement/prospectus as Annex E and all outstanding DermTech equity awards granted thereunder;

 

  (5)

The Reverse Stock Split Proposal – to consider and vote upon a proposal to effect a one-for-two reverse stock split of all of Constellation’s issued and outstanding shares of common stock, subsequent to the closing of the business combination;

 

  (6)

The Nasdaq Proposal – to consider and vote upon a proposal to approve, for purposes of complying with applicable Nasdaq Listing Rules, the issuance of more than 20% of the current total issued and outstanding ordinary shares of Constellation, which Nasdaq may deem to be a change of control pursuant to the business combination; and

 

  (7)

The Adjournment Proposal – to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, there are not sufficient votes to approve the Business Combination Proposal, the Domestication Proposal, the Charter Amendment Proposal, the Incentive Plan Proposal, the Reverse Stock Split Proposal or the Nasdaq Proposal, or the Constellation Proposals.

 

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  Q:

Why is Constellation proposing the Business Combination Proposal?

Constellation was incorporated for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more businesses or entities. Constellation is not limited to any particular industry or sector.

Constellation received $145,187,500 of the proceeds from its initial public offering and the private placement of its private units, which were consummated on June 23, 2017. The proceeds of Constellation’s initial public offering and the private placement were placed in a trust account, or the trust account, immediately following the initial public offering and, in accordance with Constellation’s Current Charter, will be released upon the consummation of the business combination. See the question entitled “What happens to the funds held in the trust account upon consummation of the business combination?”

Constellation currently has 5,342,532 ordinary shares issued and outstanding, consisting of 1,187,532 ordinary shares originally sold as part of the units in Constellation’s initial public offering, after redemptions of 13,187,468 ordinary shares in connection with the shareholder vote and special meeting held on March 21, 2019 to extend the date by which Constellation must complete a business combination, and 3,593,750 Founder Shares that were issued to Constellation’s sponsor prior to Constellation’s initial public offering (a total of 136,250 Founder Shares of which were subsequently transferred to Cowen Investments LLC, a Delaware limited liability company, or Cowen Investments) and 561,250 ordinary shares originally sold to Constellation’s sponsor and Cowen Investments as part of the private units in a private sale simultaneously with Constellation’s initial public offering. There currently are 14,936,250 rights to receive ordinary shares issued and outstanding, consisting of 14,375,000 rights to receive ordinary shares originally sold as part of the units in Constellation’s initial public offering and 561,250 rights to receive ordinary shares that were sold as part of the private units. Each right entitles the holder to receive one-tenth of one ordinary share upon the closing of Constellation’s initial business combination. There currently are 14,936,250 warrants to purchase ordinary shares issued and outstanding, consisting of 14,375,000 warrants to purchase ordinary shares originally sold as part of the units in Constellation’s initial public offering and 561,250 warrants to purchase ordinary shares that were sold as part of the private units. Each warrant entitles the holder thereof to purchase one-half of one ordinary share of at a price of $11.50 per share. The warrants will become exercisable 30 days after the completion of Constellation’s initial business combination, and expire at 5:00 p.m., New York City time, five years after the completion of Constellation’s initial business combination or earlier upon redemption or liquidation. Once the warrants become exercisable, Constellation may redeem the outstanding warrants (except as otherwise described in this proxy statement/prospectus/information statement with respect to the private warrants) in whole and not in part at a price of $0.01 per warrant, if the last sale price of the ordinary shares equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period. The private warrants, however, are non-redeemable so long as they are held by Constellation’s sponsor or its permitted transferees.

Under Constellation’s Current Charter, Constellation must provide all holders of public shares with the opportunity to have their public shares redeemed in connection with the consummation of Constellation’s initial business combination either in conjunction with a tender offer or in conjunction with a shareholder vote.

Based on its due diligence investigations of DermTech and the industry in which it operates, including the financial and other information provided by DermTech in the course of their negotiations in connection with the Merger Agreement, Constellation’s board of directors believes that (i) DermTech’s unique diagnostic technology offers attractive unit economics as it provides a significant cost saving per melanoma detected compared to surgical biopsy; and (ii) based upon Constellation’s analyses and due diligence, DermTech has unrecognized value and other positive characteristics, such as competitive advantages in its industry. As a result, Constellation believes that a business combination

 

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with DermTech has significant potential to create meaningful shareholder value following the consummation of the business combination. See the section entitled “The Business Combination – Constellation Reasons for the Business Combination.”

 

  Q:

Who is DermTech?

DermTech is an emerging growth molecular genomics company developing and marketing novel non-invasive diagnostic tests that seek to transform the practice of dermatology and related fields. DermTech’s initial focus is skin cancer. DermTech currently has two commercial tests, with a third in development, that facilitate the diagnosis of skin cancer and related conditions. DermTech’s scalable genomics platform has been designed to work with a proprietary adhesive patch sample collection kit that provides a skin sample collected non-invasively. DermTech processes its tests in a high complexity molecular laboratory that is Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified and has applicable laboratory licenses in all 50 states in the United States and is certified by the College of American Pathologists.

 

  Q:

Are the proposals conditioned on one another?

 

  A:

The Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal and Nasdaq Proposal are conditioned on the approval of the Business Combination Proposal. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in the proxy statement/prospectus/information statement.

It is important for you to note that in the event that the Business Combination Proposal does not receive the requisite vote for approval, then Constellation will not consummate the business combination. If Constellation does not consummate the business combination and fails to complete an initial business combination by September 23, 2019, it will be required to dissolve and liquidate its trust account by returning the then remaining funds in such account to Constellation’s public shareholders, unless a further extension is approved by Constellation’s shareholders.

 

  Q:

Why is Constellation providing shareholders with the opportunity to vote on the business combination?

 

  A:

Under Constellation’s Current Charter and Interim Charter, as applicable, Constellation must provide all holders of its public shares with the opportunity to have their public shares redeemed in connection with the consummation of Constellation’s initial business combination either in conjunction with a tender offer or in conjunction with a shareholder vote. Constellation is seeking to obtain the approval of its shareholders of the Business Combination Proposal in order to allow its public shareholders to effectuate redemptions of their public shares in connection with the Closing.

 

  Q:

What will happen in the business combination?

 

  A:

Constellation will domesticate from the British Virgin Islands and continue as a Delaware corporation approximately two business days prior to the Closing. Immediately prior to the Closing, Constellation will consummate the PIPE in which it will sell to the Subscribers 6,153,847 shares of Constellation common stock and 1,231 shares of Constellation Series A Convertible Preferred Stock for gross proceeds of approximately $24,000,000, less certain offering-related expenses payable by Constellation. At the Closing, Merger Sub will merge into DermTech, following which Merger Sub will cease existence and DermTech will continue as the surviving entity and become a direct wholly-owned subsidiary of Constellation. The merger will have the effects specified in Delaware law. As the consideration for the business combination, all the issued and outstanding shares of DermTech will be exchanged for 16,000,000 shares of Constellation common stock, less the total number of shares of Constellation common stock that can be acquired pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019.

 

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  Q:

What will be the common stock holdings of Constellation’s sponsor, directors and officers and their affiliates in the combined company after the Closing?

 

  A:

In connection with the business combination, Constellation’s sponsor will forfeit for no consideration 2,694,779 Founder Shares, which will be cancelled. It is anticipated that, upon completion of the business combination, Constellation’s sponsor, directors and officers and their affiliates, will own approximately 4.7% of the outstanding shares of common stock of the combined company. This percentage is calculated based on a number of assumptions and is subject to adjustment based on actual events. This percentage assumes that: (a) all of Constellation’s issued and outstanding rights are converted into shares of common stock of the combined company upon consummation of the business combination; (b) 6,153,847 shares of Constellation common stock are sold in the PIPE; (c) none of Constellation’s public shareholders exercise their redemption rights; (d) none of Constellation’s warrants are exercised to purchase shares of common stock of the combined company; and (e) 16,000,000 shares of common stock of the combined company are issued to current DermTech stockholders upon Closing. If the actual facts are different than these assumptions, the percentage ownership retained by Constellation’s sponsor, directors and officers and their affiliates will be different. These percentages also do not take into account 14,936,250 warrants to purchase ordinary shares of Contellation and or any of DermTech’s currently outstanding stock options, warrants or restricted stock units that will remain outstanding immediately following the business combination.

 

  Q:

Who will be the directors and officers of Constellation if the Business Combination is consummated?

 

  A:

All of Constellation’s directors and officers will resign effective as of the effective time of the business combination. Pursuant to the Merger Agreement, the combined company’s board of directors immediately after the effective time of the business combination will consist of eight members designated by DermTech. It is anticipated that the combined company’s board of directors will include the following DermTech appointees: Matt Posard, Gary Jacobs, Scott R. Pancoast, Herm Rosenman, Gene Salkind, M.D., Cynthia Collins, Enrico Picozza and John Dobak, M.D. Effective as of the effective time of the business combination, it is also expected that DermTech will direct the combined company’s board of directors to appoint each of the following individuals as executive officers of the combined company:

 

Name

  

Title

John Dobak, M.D.    Chief Executive Officer and Director
Steven Kemper, CPA, MBA    Chief Financial Officer, Treasurer, and Secretary
Burkhard Jansen, M.D.    Chief Medical Officer
Todd Wood    Chief Commercial Officer
Zuxu Yao, Ph.D.    Chief Scientific Officer

See the section entitled “The Business CombinationDirectors and Officers of the Combined Company Following the Business Combination” for additional information.

 

  Q:

Following the business combination, will Constellation’s securities continue to trade on a stock exchange?

 

  A:

Yes. Constellation intends to apply to continue the listing of its common stock and warrants on Nasdaq under the new symbols “DMTK” and “DMTKW,” respectively, upon the Closing. Constellation’s public units will automatically separate into the component securities upon the Closing and, as a result, will no longer trade as a separate security. Constellation’s rights will be converted into shares of common stock of the combined company after the Closing.

 

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  Q:

What will the business of the combined company be like following the business combination, assuming that the business combination is approved?

 

  A:

Assuming the business combination is approved, following the Closing, the combined company’s business will be that of DermTech. The combined company will change its corporate name from “Constellation Alpha Capital Corp.” to “DermTech, Inc.” For more information about DermTech and its business, see the section entitled “DermTech Business.”

 

  Q:

What conditions must be satisfied to complete the business combination?

 

  A:

There are a number of closing conditions in the Merger Agreement, including that Constellation’s shareholders have approved the Business Combination Proposal and the rest of the Constellation Proposals. For a summary of the conditions that must be satisfied or waived prior to completion of the business combination, see the section entitled “The Merger Agreement – Conditions to the Completion of the Business Combination.

 

  Q:

Are there any arrangements to help ensure that Constellation will have sufficient funds, together with the proceeds in its trust account, to consummate the business combination?

 

  A:

Yes. Under the Merger Agreement, none of Constellation, DermTech or Merger Sub is required to consummate the business combination if Constellation does not have at least $15,000,000 in cash, after giving effect to redemptions. Between May 22, 2019 and August 1, 2019, Constellation entered into separate subscription agreements, or Subscription Agreements, with new health care focused institutional investors as well as certain existing investors in DermTech, or the Subscribers, pursuant to which the Subscribers agreed to purchase, and Constellation agreed to sell to the Subscribers, an aggregate of 6,153,847 shares of Constellation common stock for a purchase price of $3.25 per share and 1,231 shares of Constellation Series A Convertible Preferred Stock for a purchase price of $3,250 per share (equal to $3.25 per share of common stock on an as-converted basis), collectively referred to as the PIPE Shares, in a private placement in which Constellation will raise an aggregate of approximately $24,000,000, less certain offering related expenses payable by Constellation, or the PIPE. The shares of Constellation common stock to be issued pursuant to the PIPE will be identical to the shares of Constellation common stock that will be held by Constellation’s public stockholders at the time of the closing of the business combination. The shares of Constellation Series A Convertible Preferred Stock to be issued pursuant to the PIPE will be governed by a Certificate of Designation that will be filed in connection with the closing of the PIPE, or the PIPE Closing. The PIPE Closing, will be contingent upon the substantially concurrent consummation of the business combination. The PIPE Closing will occur on the date of, and substantially concurrent with, the consummation of the business combination and will be subject to customary conditions.

 

  Q:

Why is Constellation proposing the Domestication Proposal?

 

  A:

The Domestication Proposal allows Constellation to re-domicile as a Delaware entity. Constellation believes that the Domestication will, among other things, provide legal, administrative, and other similar efficiencies; relocate its jurisdiction of organization to one that is the choice of domicile for many publicly traded corporations, as there is an abundance of case law to assist in interpreting the Delaware General Corporation Law, or the DGCL, and the Delaware legislature frequently updates the DGCL to reflect current technology and legal trends; and provide a favorable corporate environment which will help the combined company compete more effectively with other publicly traded companies in raising capital and in attracting and retaining skilled and experienced personnel. Additionally, the Domestication will avoid certain tax inefficiencies to the combined company. In connection with the Domestication, Constellation will be filing the Interim Charter with the Secretary of State of the State of Delaware prior to the Closing, which amends and removes the provisions of Constellation’s Current Charter that terminate or otherwise become inapplicable because of the Domestication and provides

 

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  Constellation’s shareholders with the same or substantially the same rights in connection with the business combination; provided that the Interim Charter will also permit a majority of the Constellation stockholders to act by written consent.

 

  Q:

What are the federal income tax consequences of the Domestication?

 

  A:

The Domestication will constitute a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or the Code. As a result of the Domestication, Constellation will be changing its place of incorporation from the British Virgin Islands to Delaware and will be treated as a U.S. corporation for federal income tax purposes. U.S. Holders (as defined in “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal – Material U.S. Federal Income Tax Consequences of the Domestication” below) of Constellation ordinary shares will be subject to Section 367(b) of the Code and, as a result:

Subject to the discussion below concerning passive foreign investment companies, or PFICs, a U.S. Holder that beneficially owns (directly, indirectly or constructively) Constellation ordinary shares that have a fair market value of less than $50,000 on the date of the Domestication and that does not beneficially own (directly, indirectly or constructively) 10% or more (by vote or value) of Constellation, or a 10% Shareholder, will not recognize any gain or loss and will not be required to include any part of Constellation’s earnings in income.

Subject to the discussion below concerning PFICs, a U.S. Holder that beneficially owns (directly, indirectly or constructively) Constellation ordinary shares that have a fair market value of $50,000 or more on the date of the Domestication, but who is not a 10% Shareholder will generally recognize gain (but not loss) on the deemed receipt of common stock in the Domestication. As an alternative to recognizing gain, such U.S. Holder may file an election to include in income, as a dividend, the “all earnings and profits amount” (as defined in the Treasury Regulations under Section 367 of the Code) attributable to their Constellation ordinary shares provided certain requirements are satisfied.

Subject to the discussion below concerning PFICs, a U.S. Holder of Constellation ordinary shares who on the date of the Domestication is a 10% Shareholder will generally be required to include in income, as a dividend, the “all earnings and profits amount” (as defined in the Treasury Regulations under Section 367 of the Code) attributable to its Constellation ordinary shares.

As discussed further under the section entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal Material U.S. Federal Income Tax Consequences of the Domestication – PFIC Considerations” below, Constellation believes that it has been considered a PFIC since its inception. The determination of whether a foreign corporation is a PFIC is primarily factual, and there is little administrative or judicial authority on which to rely to make a determination. If Constellation is considered a PFIC for U.S. federal income tax purposes, proposed Treasury Regulations, if finalized in their current form, would generally require U.S. Holders of Constellation ordinary shares to recognize gain on the deemed receipt of Constellation common stock in the Domestication unless such U.S. Holder has made certain tax elections with respect to such U.S. Holder’s Constellation ordinary shares. The tax on any such gain would be imposed at the highest rate applicable to ordinary income and an interest charge would apply based on complex rules designed to offset the tax deferral to such U.S. Holder on the undistributed earnings, if any, of Constellation. It is not possible to determine at this time whether, in what form, and with what effective date, final Treasury Regulations under Section 1291(f) of the Code will be adopted. For a more complete discussion of the potential application of the PFIC rules to U.S. Holders as a result of the Domestication, see the section entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal Material U.S. Federal Income Tax Consequences of the Domestication.”

If you are a non-U.S. Holder (as defined in the section entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal Material U.S. Federal

 

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Income Tax Consequences of the Domestication” below) of Constellation ordinary shares, you may become subject to withholding tax on any dividends paid on the Constellation common stock subsequent to the Domestication.

For a more detailed description of the material U.S. federal income tax consequences associated with the Domestication, please read the section entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal Material U.S. Federal Income Tax Consequences of the Domestication” of this proxy statement/prospectus/information statement.

WE STRONGLY URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR.

 

  Q:

What changes are being made to Constellation’s Current Charter in connection with the business combination?

 

  A:

In connection with the Domestication, Constellation will be filing the Interim Charter with the Secretary of State of the State of Delaware prior to the Closing, which amends and removes the provisions of Constellation’s Current Charter that terminate or otherwise become inapplicable because of the Domestication and provides Constellation’s shareholders with the same or substantially the same rights in connection with the business combination. However, the Interim Charter will provide that Constellation’s stockholders may act by written consent of the stockholders holding a majority of the issued and outstanding shares of Constellation common stock, which is not permitted under the Current Charter. The Amended and Restated Charter, which will be effective as of the Closing and will provide for the following: (1) change the name of Constellation to DermTech, Inc., (2) remove or amend those provisions of our Interim Charter which terminate or otherwise cease to be applicable following the Closing, and (3) add new provisions to our Interim Charter which will be applicable following the Closing. For a summary of the differences between the Current Charter and Interim Charter and the Interim Charter and the Amended and Restated Charter, see the sections entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 2 – The Domestication Proposal” and Proposal No. 3 – The Charter Amendment Proposal.”

 

  Q:

Why is Constellation proposing the Charter Amendment Proposal?

 

  A:

We are asking our shareholders to approve in connection with the business combination separate proposals for amendments to Constellation’s bylaws attached to this proxy statement/prospectus/information statement as Annex C and amendments to Constellation’s Interim Charter, as set out in the draft amended and restated certificate of incorporation attached to this proxy statement/prospectus/information statement as Annex D, to (1) change the name of the Constellation to DermTech, Inc., (2) remove or amend those provisions of our Interim Charter which terminate or otherwise cease to be applicable following the closing of the business combination, and (3) add new provisions to our Interim Charter which will be applicable following the closing of the business combination.

 

  Q:

Why is Constellation proposing the Incentive Plan Proposal?

 

  A:

The DermTech Plan will allow us to grant equity awards (including stock options, restricted stock units, and performance share awards) to our employees, officers, directors, and advisors. We believe our success is due to our highly talented employee base and that future success depends on the ability to attract and retain high caliber personnel. We compete with many companies for a limited pool of talented people. The ability to grant equity awards is a necessary and powerful recruiting and retention tool for us to obtain the quality personnel we need to move our business forward.

 

  Q:

What is the Reverse Stock Split Proposal and why is it necessary?

 

  A:

Following the effective time of the merger, all of the combined company’s issued and outstanding shares of common stock will be reclassified to effect a one-for-two reverse stock split, or the Reverse

 

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  Stock Split. The Constellation board of directors believes that the Reverse Stock Split is desirable for a number of reasons, including the following: (i) an increase in the combined company’s stock price may make the combined company’s common stock more attractive to investors; (ii) brokerage firms may be reluctant to recommend lower-priced securities to their clients, particularly lower-priced securities of healthcare companies; (iii) many institutional investors have policies prohibiting them from holding lower-priced stocks in their portfolios, which reduces the number of potential purchasers of the combined company’s common stock; (iv) investment funds may be reluctant to invest in lower-priced stocks; (v) investors may be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks; and (vi) the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower-priced stocks. Constellation also believes increasing the share price of the combined company’s common stock could improve the perception of its common stock as an investment security. Lower-priced stocks have a perception in the investment community as being risky and speculative, which may negatively impact not only the price of the combined company’s common stock, but also the combined company’s market liquidity. Additionally, following the completion of the business combination, the combined company’s common stock is expected to be listed on the Nasdaq Capital Market. According to applicable Nasdaq rules, in order for the combined company’s common stock to continue to be listed on Nasdaq, the combined company must satisfy certain requirements established by Nasdaq, including with regard to its market price. The Constellation board of directors expects that the Reverse Stock Split will increase the market price of the combined company’s common stock so that the combined company will be better able to maintain compliance with the relevant Nasdaq listing requirements.

 

  Q:

How will the Reverse Stock Split Proposal affect warrants to acquire the combined company’s common stock?

 

  A:

As of the effective time of the Reverse Stock Split, the combined company will adjust and proportionately decrease the number of shares of Constellation common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of all warrants to acquire the combined company’s common stock.

 

  Q:

What are the material U.S. federal income tax consequences of the Reverse Stock Split Proposal to U.S. holders of the combined company’s common stock?

 

  A:

U.S. holders of the combined company’s common stock generally will not recognize gain or loss upon the Reverse Stock Split. Please review the information in the section entitled “Proposal No. 5 – The Reverse Stock Split Proposal – Material Federal Income Tax Consequences” for a more complete description of the material U.S. federal income tax consequences of the Reverse Stock Split to U.S. holders of the combined company’s common stock. The tax consequences to you of the Reverse Stock Split will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you

 

  Q:

Why is Constellation proposing the Nasdaq Proposal?

 

  A:

Constellation is proposing the Nasdaq Proposal in order to comply with Nasdaq Listing Rules 5635(a), (b), and (d), which require shareholder approval of the issuance of securities in certain transactions that result in (1) the issuance of 20% or more of the voting power outstanding or ordinary shares outstanding before such issuance of securities, (2) a change of control and (3) the sale or issuance of common stock (or securities convertible into or exercisable for common stock) at a price that is less than the greater of book or market value of the stock if the number of shares of common stock to be issued is or may be equal to 20% or more of the common stock, or 20% or more of the voting power, outstanding before the issuance. Pursuant to the Merger Agreement and Subscription Agreements, we

 

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  will issue up to an aggregate of 26,295,225 shares of Constellation common stock, subject to adjustment as described in this proxy statement/prospectus/information statement. This assumes that: (a) all of Constellation’s issued and outstanding rights are converted into shares of common stock of the combined company upon consummation of the business combination; (b) 6,153,847 shares of Constellation common stock are sold in the PIPE; (c) none of Constellation’s public shareholders exercise their redemption rights; (d) none of Constellation’s warrants are exercised to purchase shares of common stock of the combined company; and (e) 16,000,000 shares of common stock of the combined company are issued to current DermTech stockholders upon Closing. If the actual facts are different than these assumptions, this number will be different. We anticipate that the shares of Constellation common stock to be issued pursuant to the Merger Agreement and Subscription Agreements (1) will constitute more than 20% of the Constellation common stock outstanding and more than 20% of the voting power of Constellation outstanding prior to such issuance, (2) will result in a change of control of Constellation and (3) with respect to the 6,153,847 shares of Constellation common stock and 1,231 shares of Constellation Series A Convertible Preferred Stock sold pursuant to the Subscription Agreements, will in each case be sold for a purchase price of $3.25 per share of common stock (on an as-converted basis), which will be less than the greater of the book or market value of the shares. As a result, we are required to obtain shareholder approval of such issuances pursuant to Nasdaq Listing Rules 5635(a), (b) and (d). For more information, see the section entitled “Matters Being Submitted to a Vote of Constellation Shareholders – Proposal No. 6Nasdaq Proposal.” The Nasdaq Proposal is conditioned on the approval of the Business Combination Proposal.

 

  Q:

What happens if I sell my Constellation ordinary shares before the special meeting?

 

  A:

The record date for the special meeting is earlier than the date that the business combination is expected to be completed. If you transfer your Constellation ordinary shares after the record date, but before the special meeting, unless the transferee obtains from you a proxy to vote those shares, you will retain your right to vote at the special meeting. However, you will not be able to seek redemption of your shares because you will no longer be able to deliver them for cancellation upon the Closing. If you transfer your Constellation ordinary shares prior to the record date, you will have no right to vote those shares at the special meeting or redeem those shares for a pro rata portion of the proceeds held in our trust account.

 

  Q:

What vote is required to approve the proposals presented at the special meeting?

 

  A:

Approval of each Constellation Proposal requires the affirmative vote of a majority of the votes entitled to vote thereon which are cast by shareholders present in person or represented by proxy at the special meeting. As each of the Proposals is made for the purposes of approving or is in conjunction with the consummation of the business combination and that none would in any event substantively affect the rights attaching to the Constellation ordinary shares (even as they become common stock following the Domestication), the directors of Constellation are of the view that the higher 65% voting threshold, as would apply in certain circumstances under Constellation’s Current Charter, would not apply in respect of the Constellation Proposals. With particular regard to the Domestication, it is further noted that not only will the Interim Charter preserve the existing rights of the ordinary shares unchanged, but also that the existing provisions of the Current Charter (including Regulation 23 of Constellation’s Current Charter and those others which cannot be amended prior to the consummation of a business combination or made subject to certain restrictions on amendment) will be replicated or substantively replicated in Constellation’s Interim Charter; provided that the Interim Charter will provide that Constellation’s stockholders following the Domestication may act by written consent of the stockholders holding a majority of the issued and outstanding shares of Constellation common stock, which is not permitted under the Current Charter.

Failure of a Constellation shareholder to vote by proxy or to vote in person at the special meeting or the failure of a Constellation shareholder who holds his or her shares in “street name” through a broker or other nominee to give voting instructions to such broker or other nominee, or a broker non-vote, will result in that shareholder’s shares not being counted towards the number of Constellation ordinary shares required to validly establish a quorum, but if a valid quorum is otherwise established, it will have no effect on the outcome of any vote on the proposals. Abstentions will be counted in connection

 

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with the determination of whether a valid quorum is established and broker non-votes will not be counted for purposes of establishing a quorum.

Additionally, you are not required to affirmatively vote for or against the Business Combination Proposal in order to exercise your redemption rights.

 

  Q:

May Constellation or Constellation’s sponsor, directors, officers, advisors or their affiliates purchase shares in connection with the business combination?

 

  A:

In connection with the shareholder vote to approve the proposed business combination, Constellation’s sponsor, directors, officers or advisers or their respective affiliates may privately negotiate transactions to purchase ordinary shares from shareholders who would have otherwise elected to have their ordinary shares redeemed in conjunction with a proxy solicitation pursuant to the proxy rules for a per-share pro rata portion of the trust account. None of Constellation’s sponsor, directors, officers or advisors or their respective affiliates will make any such purchases when they are in possession of any material non-public information not disclosed to the seller. Such a purchase would include a contractual acknowledgement that such shareholder, although still the record holder of the ordinary shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. In the event that Constellation’s sponsor, directors, officers or advisors or their affiliates purchase shares in privately negotiated transactions from public shareholders who have already elected to exercise their redemption rights, such selling shareholders would be required to revoke their prior elections to redeem their ordinary shares. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per-share pro rata portion of the trust account. The purpose of these purchases would be to increase the number of ordinary shares voted in favor of the proposals to be voted on by the shareholders.

 

  Q:

Will Constellation issue additional equity securities in connection with the business combination?

 

  A:

Constellation may enter into equity financings in addition to the PIPE in connection with the business combination with its affiliates or any third parties if Constellation determines that the issuance of additional equity is necessary or desirable in connection with the consummation of the business combination. Any equity issuances could result in dilution of the relative ownership interest of the non-redeeming public shareholders. As the amount of any such equity issuances is not currently known, if any, Constellation cannot provide specific information as to percentage ownership that may result therefrom. If Constellation enters into a binding commitment in respect of any such additional equity financing, Constellation will file a Current Report on Form 8-K with the SEC to disclose details of any such equity financing.

 

  Q:

How many votes do I have at the special meeting?

 

  A:

Constellation shareholders are entitled to one vote at the special meeting for each ordinary share held of record at the close of business on July 25, 2019 the record date for the special meeting. As of the close of business on the record date, there were 5,342,532 ordinary shares outstanding.

 

  Q:

What constitutes a quorum at the special meeting?

 

  A:

Holders of 50% of the votes of Constellation’s issued and outstanding ordinary shares as of the record date that are entitled to vote on the Constellation Proposals at the special meeting, present in person or represented by proxy, constitute a quorum. In the absence of a quorum, the Chairman has the power to adjourn the special meeting. As of the record date for the special meeting, 50% of 5,342,532 ordinary shares would be required to achieve a quorum.

 

  Q:

How will Constellation’s sponsor vote?

 

  A:

In connection with Constellation’s initial public offering, Constellation entered into an agreement with its sponsor pursuant to which its sponsor agreed to vote its Founder Shares and any other shares acquired during and after the initial public offering in favor of the Business Combination Proposal. Currently, Constellation’s sponsor owns approximately 72.7% of Constellation’s issued and outstanding ordinary shares.

 

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  Q:

Did Constellation’s board of directors obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the business combination?

 

  A:

Constellation’s board of directors did not obtain a third-party valuation or fairness opinion in connection with its determination to approve the business combination. Constellation’s board of directors believes that based upon the financial skills and background of its directors, it was qualified to conclude that the business combination was fair from a financial perspective to its shareholders. The board of directors also determined, without seeking a valuation from a financial advisor, that DermTech’s fair market value was at least 80% of Constellation’s net assets (excluding deferred underwriting discounts and commissions). Accordingly, investors will be relying on the judgment of Constellation’s board of directors as described above in valuing the DermTech business, and assuming the risk that the board of directors may not have properly valued such business.

 

  Q:

What interests do Constellation’s current officers and directors have in the business combination?

 

  A:

Constellation’s directors and executive officers may have interests in the business combination that are different from, in addition to or in conflict with, yours. These interests include:

 

   

the beneficial ownership of Constellation’s sponsor and directors of an aggregate of 3,882,500 ordinary shares, which shares would become worthless if Constellation does not complete a business combination within the applicable time period, as Constellation’s initial shareholders have waived any right to redemption with respect to these ordinary shares. Such shares have an aggregate market value of approximately $40,378,000 based on the closing price of the ordinary shares of $10.40 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of warrants to purchase 212,500 ordinary shares, which warrants would expire and become worthless if Constellation does not complete a business combination within the applicable time period. Such warrants have an aggregate market value of approximately $12,750 based on the closing price of Constellation’s warrants of $0.06 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of rights to receive 42,500 ordinary shares, which rights will become worthless if Constellation does not complete a business combination within the applicable time period. Such rights have an aggregate market value of approximately $8,725 based on the closing price of Constellation’s rights of $0.2053 on Nasdaq on July 31, 2019; and

 

   

as of July 31, 2019, Constellation’s initial shareholders have advanced approximately $94,559 to Constellation for operating expenses. Such advances will be repaid only if Constellation completes a business combination.

These interests may influence Constellation’s directors in making their recommendation that you vote in favor of the approval of the business combination.

 

  Q:

What happens if I vote against the Business Combination Proposal?

 

  A:

If the Business Combination Proposal is not approved and Constellation does not consummate a business combination by September 23, 2019, Constellation will be required to dissolve and liquidate its trust account, unless a further extension is approved by Constellation’s shareholders.

 

  Q:

Do I have redemption rights?

 

  A:

If you are a holder of public shares, you may redeem your public shares for cash equal to their pro rata share of the aggregate amount on deposit in the trust account which holds the proceeds of

 

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  Constellation’s initial public offering as of two business days prior to the consummation of the business combination, including interest earned on the funds held in the trust account and not previously released to Constellation to pay taxes, upon the consummation of the business combination. You may redeem your public shares regardless of whether you held such public shares as of the record date. The per-share amount Constellation will distribute to holders who properly redeem their public shares will not be reduced by the deferred underwriting commissions Constellation will pay to the underwriters of its initial public offering if the business combination is consummated. Holders of Constellation’s outstanding rights and warrants do not have redemption rights with respect to such rights or warrants in connection with the business combination. All of the holders of Founder Shares, including our sponsor, have agreed to waive their redemption rights with respect to their Founder Shares and Constellation’s initial shareholders have agreed to waive their redemption rights with respect to any public shares that they may have acquired during or after our initial public offering in connection with the completion of the business combination. The Founder Shares will be excluded from the pro rata calculation used to determine the per-share redemption price. For illustrative purposes, based on funds in the trust account of approximately $12.4 million on May 28, 2019, the estimated per share redemption price would have been approximately $10.45. Additionally, public shares properly tendered for redemption will only be redeemed if the business combination is consummated; otherwise, holders of such public shares will only be entitled to a pro rata portion of the trust account including interest earned on the funds held in the trust account and not previously released to Constellation to pay taxes (less up to $50,000 of interest to pay dissolution expenses) in connection with the liquidation of the trust account.

 

  Q:

Is there a limit on the number of shares I may redeem?

 

  A:

A public shareholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act) will be restricted from seeking redemption rights with respect to 20% or more of the public shares without Constellation’s prior written consent. Accordingly, all public shares in excess of 20% owned by a public shareholder will not be redeemed. On the other hand, a public shareholder who holds less than 20% of the public shares may redeem all of its public shares for cash.

 

  Q:

Will how I vote affect my ability to exercise redemption rights?

 

  A:

No. You may exercise your redemption rights whether you vote your Constellation ordinary shares for or against the Business Combination Proposal or any other proposal described by this proxy statement/prospectus/information statement or fail to vote at all. As a result, the Business Combination Proposal can be approved by shareholders who will redeem their shares and no longer remain shareholders, leaving shareholders who choose not to redeem their shares holding shares in a company with a less liquid trading market, fewer shareholders, less cash, and the potential inability to meet the listing standards of the Nasdaq Capital Market.

 

  Q:

How do I exercise my redemption rights?

 

  A:

In order to exercise your redemption rights, you must, prior to 4:30 p.m. Eastern time on August 23, 2019 (two business days before the special meeting), (i) submit a written request to Constellation’s transfer agent that Constellation redeem your public shares for cash, and (ii) deliver your public shares to Constellation’s transfer agent physically or electronically through the Depository Trust Company, or DTC. The address of Continental Stock Transfer & Trust Company, Constellation’s transfer agent, is listed under the question “Who can help answer my questions?” below. Constellation requests that any requests for redemption include the identity of the beneficial owner making such request. Electronic delivery of your public shares generally will be faster than delivery of physical share certificates.

 

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A physical share certificate will not be needed if your shares are delivered to Constellation’s transfer agent electronically. In order to obtain a physical share certificate, a shareholder’s broker and/or clearing broker, DTC and Constellation’s transfer agent will need to act to facilitate this request. It is Constellation’s understanding that shareholders should generally allot at least one week to obtain physical certificates from the transfer agent. However, because Constellation does not have any control over this process or over the brokers or DTC, it may take significantly longer than one week to obtain a physical share certificate. If it takes longer than anticipated to obtain a physical certificate, shareholders who wish to redeem their shares may be unable to obtain physical certificates by the deadline for exercising their redemption rights and thus will be unable to redeem their shares.

Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with Constellation’s consent, until the vote is taken with respect to the business combination. If you delivered your shares for redemption to Constellation’s transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request that Constellation’s transfer agent return the shares (physically or electronically). You may make such request by contacting Constellation’s transfer agent at the phone number or address listed under the question “Who can help answer my questions?

 

  Q:

What are the federal income tax consequences of exercising my redemption rights?

 

  A:

U.S. Holders of Constellation’s public shares who exercise their redemption rights to receive cash from the trust account in exchange for all of their public shares generally will be required to treat the transaction as a sale of such shares and recognize gain or loss upon the redemption in an amount equal to the difference, if any, between the amount of cash received and the tax basis of the public shares redeemed. Subject to the passive foreign investment company rules, such gain or loss should be treated as capital gain or loss if such shares were held as a capital asset on the date of the redemption. Under certain circumstances a redemption may not qualify as a sale for tax purposes, in which case the amount of cash received by a U.S. Holder may be treated as a dividend, to the extent of Constellation’s current and accumulated earnings and profits. For a more detailed discussion, please see the section entitled “The Special Meeting of Constellation Shareholders – Material U.S. Federal Income Tax Consequences of the Exercise of Redemption Rights.

WE STRONGLY URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF THE REDEMPTION.

 

  Q:

If I am a Constellation rights holder or warrant holder, can I exercise redemption rights with respect to my rights or warrants?

 

  A:

No. The holders of our warrants have no redemption rights with respect to our rights or warrants.

 

  Q

If I am a Constellation right holder, how do I convert my rights into common stock of the combined company?

 

  A

Each holder of Constellation rights will receive one-tenth of one share of Constellation common stock after the Closing. No additional consideration will be required to be paid by a holder of rights in order to receive his, her or its additional ordinary shares upon the Closing. No fractional shares will be issued upon conversion of the rights. For example, if you hold less than 10 rights, you will not receive any shares of Constellation common stock after the Closing. Please see the section entitled “Description of Constellation Capital Stock – Rights” for more information.

 

  Q:

If I am a Constellation unit holder, can I exercise redemption rights with respect to my units?

 

  A:

No. You can only exercise redemption rights with respect to your Constellation public shares (excluding the Constellation shares upon the automatic conversion of the rights include in the units).

 

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  Holders of outstanding units must separate the underlying public shares, public rights, and public warrants prior to exercising redemption rights with respect to the public shares.

If you hold units registered in your own name, you must deliver the certificate for such units to Continental Stock Transfer &Trust Company, Constellation’s transfer agent, with written instructions to separate such units into public shares, public rights, and public warrants. This must be completed far enough in advance to permit the mailing of the public share certificates back to you so that you may then exercise your redemption rights upon the separation of the public shares from the units. See “How do I exercise my redemption rights?” above. The address of Continental Stock Transfer & Trust Company is listed under the question “Who can help answer my questions?” below.

If a broker, dealer, commercial bank, trust company, or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must send written instructions by facsimile to Continental Stock Transfer & Trust Company, Constellation’s transfer agent. Such written instructions must include the number of units to be separated and the nominee holding such units. Your nominee must also initiate electronically, using DTC’s deposit withdrawal at custodian (DWAC) system, a withdrawal of the relevant units and a deposit of an equal number of public shares, public rights, and public warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights upon the separation of the public shares from the units. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your public shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.

 

  Q:

Do I have appraisal rights if I object to the proposed business combination?

 

  A:

There are no appraisal rights available to holders of Constellation ordinary shares in connection with the business combination. DermTech stockholders are entitled to appraisal rights in connection with the merger under Delaware law. For more information about such rights, see the provisions of Section 262 of the DGCL, attached hereto as Annex G, and the section entitled “The Business Combination – Appraisal Rights and Dissenters Rights” in this proxy statement/prospectus/information statement.

 

  Q:

What happens to the funds held in the trust account upon the Closing?

 

  A:

If the business combination is consummated, any funds remaining in the trust account will be released to pay (i) Constellation shareholders who properly exercise their redemption rights and (ii) fees, costs and expenses that were incurred by Constellation in connection with the business combination. Any remaining funds available for release from the trust account will be used for general corporate purposes of the combined company following the Closing.

 

  Q:

What happens if the business combination is not consummated?

 

  A:

There are certain circumstances under which the Merger Agreement may be terminated. See the section entitled “The Merger Agreement – Termination of the Merger Agreement” for information regarding the parties’ specific termination rights.

If, as a result of the termination of the Merger Agreement or otherwise, Constellation is unable to complete a business combination by September 23, 2019, Constellation’s Current Charter provides that Constellation will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than five business days thereafter, redeem 100% of the outstanding public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned (net of taxes payable and less interest to pay dissolution expenses up to $50,000), divided by the number of then outstanding public shares, which redemption will completely extinguish public shareholders’ rights as shareholders (including the right to receive

 

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further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and Constellation’s board of directors, proceed to commence a voluntary liquidation and thereby a formal dissolution of Constellation, subject in each case to its obligations to provide for claims of creditors and the requirements of applicable law. See the sections entitled “Risk Factors – Risks Related to Constellations Business and the Business Combination – Constellations public shareholders will not have any rights or interests in funds from the Trust Account, except under certain limited circumstances. To liquidate their investment, therefore, Constellations public shareholders may be forced to sell their public shares, rights or warrants, potentially at a loss.” and “Risk Factors – Risks Related to Constellations Business and the Business Combination – If third parties bring claims against Constellation, the proceeds held in the Trust Account could be reduced and the per-share redemption amount received by shareholders may be less than $10.10 per share.” Holders of Constellation’s Founder Shares have waived any right to any liquidation distribution with respect to those shares.

In the event of liquidation, there will be no distribution with respect to Constellation’s outstanding rights or warrants. Accordingly, the rights and warrants will expire worthless.

 

  Q:

When is the business combination expected to be completed?

 

  A:

It is currently anticipated that the business combination will be consummated promptly but at least two business days following the special meeting, provided that all other conditions to the Closing have been satisfied or waived. For a description of the conditions to the completion of the business combination, see the section entitled “The Merger Agreement – Conditions to the Completion of the Business Combination.

 

  Q:

What do I need to do now?

 

  A:

You are urged to read carefully and consider the information contained in this proxy statement/prospectus/information statement, including the annexes, and to consider how the business combination will affect you as a shareholder. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus/information statement and on the enclosed proxy card or, if you hold Constellation shares through a brokerage firm, bank, or other nominee, on the voting instruction form provided by the broker, bank, or nominee.

 

  Q:

How do I vote?

 

  A:

If you were a holder of record of Constellation ordinary shares at the close of business on July 25, 2019, the record date for the special meeting, you may vote with respect to the proposals in person at the special meeting, or by completing, signing, dating, and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank, or other nominee, you should contact your broker, bank, or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the special meeting and vote in person, obtain a legal proxy from your broker, bank, or nominee.

 

  Q:

What will happen if I abstain from voting or fail to vote at the special meeting?

 

  A:

At the special meeting, Constellation will count a properly executed proxy marked “ABSTAIN” with respect to a particular proposal as present for purposes of determining whether a quorum is present. A failure to vote or an abstention will have no effect on the outcome of any vote on the proposals.

 

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  Q:

What will happen if I sign and return my proxy card without indicating how I wish to vote?

 

  A:

Signed and dated proxies received by us without an indication of how the shareholder intends to vote on a proposal will be voted “FOR” each proposal described herein.

 

  Q:

If I am not going to attend the special meeting in person, should I return my proxy card instead?

 

  A:

Yes. Whether you plan to attend the special meeting or not, please read the enclosed proxy statement/prospectus/information statement carefully, and vote your shares by completing, signing, dating, and returning the enclosed proxy card in the postage-paid envelope provided.

 

  Q:

If my shares are held in “street name,” will my broker, bank, or nominee automatically vote my shares for me?

 

  A:

No. Under the rules of various national and regional securities exchanges, your broker, bank, or nominee cannot vote your shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank, or nominee. Constellation believes the proposals presented to the shareholders at the special meeting will be considered non-discretionary and therefore your broker, bank, or nominee cannot vote your shares without your instruction. If you do not provide instructions with your proxy, your bank, broker, or other nominee may deliver a proxy card expressly indicating that it is NOT voting your shares; this indication that a bank, broker, or nominee is not voting your shares is referred to as a “broker non-vote.” Broker non-votes will not be counted for the purpose of determining the existence of a quorum or for purposes of determining the number of votes cast at the special meeting. Your bank, broker, or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares in accordance with directions you provide. However, in no event will a broker non-vote have the effect of exercising your redemption rights for a pro rata portion of the Trust Account, and therefore no shares as to which a broker non-vote occurs will be redeemed in connection with the proposed business combination.

 

  Q:

May I change my vote after I have mailed my signed proxy card?

 

  A:

Yes. You may change your vote by sending a later-dated, signed proxy card to our acting secretary for the business combination or Constellation’s proxy solicitor so that it is received by Constellation prior to the special meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Constellation’s acting secretary or proxy solicitor, which must be received by them prior to the special meeting. You can find the address of Constellation’s acting secretary and proxy solicitor in the question “Who can help answer my questions?” below.

 

  Q:

What should I do if I receive more than one set of voting materials?

 

  A:

You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus/information statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date, and return each proxy card and voting instruction card that you receive in order to cast your vote with respect to all of your shares.

 

  Q:

Who will solicit and pay the cost of soliciting proxies?

 

  A:

Constellation will reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of Constellation ordinary shares for their expenses in forwarding

 

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  soliciting materials to beneficial owners of Constellation ordinary shares and in obtaining voting instructions from those owners. Constellation’s directors, officers and employees may solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

  Q:

Who can help answer my questions?

 

  A:

If you have questions about the proposals or if you need additional copies of the proxy statement/prospectus/information statement or the enclosed proxy card, you should contact us at:

Constellation Alpha Capital Corp.

Attention: Rajiv Shukla

Emerald View, Suite 400

2054 Vista Parkway

West Palm Beach, FL 33411

Tel: (561) 404-9034

Email: info@constellationalpha.com

To obtain timely delivery, our shareholders must request the materials no later than five business days prior to the special meeting.

You may also obtain additional information about us from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find More Information.

If you intend to seek redemption of your public shares, you will need to send a letter demanding redemption and deliver your stock (either physically or electronically) to Constellation’s transfer agent prior to the special meeting. If you have questions regarding the certification of your position or delivery of your stock, please contact:

Continental Stock Transfer & Trust Company

One State Street, 30th Floor

New York, NY 10004-1561

Attn: Mark Zimkind

Email: mzimkind@continentalstock.com

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the business combination, the proposals being considered at the Constellation special meeting and the DermTech stockholder actions that are the subject of the written consent, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement and the other annexes to which you are referred herein. For more information, please see the section entitled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.

The Companies

Constellation Alpha Capital Corp.

Emerald View, Suite 400

2054 Vista Parkway

West Palm Beach, FL 33411

(561) 404-9034

Constellation Alpha Capital Corp., or Constellation, is a blank check company incorporated in the British Virgin Islands on July 31, 2015 as a business company with limited liability for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation, purchasing all or substantially all of the assets of, entering into contractual arrangements, or engaging in any other similar business combination with one or more businesses or entities.

DermTech, Inc.

11099 N. Torrey Pines Road, Suite, 100

La Jolla, CA 92037

(858) 291-7505

DermTech, Inc., or DermTech, is an emerging growth molecular genomics company developing and marketing novel non-invasive diagnostic tests that seek to transform the practice of dermatology and related fields. DermTech’s initial focus is skin cancer. DermTech currently has two commercial tests, with a third in development, that facilitate the diagnosis of skin cancer and related conditions. DermTech’s scalable genomics platform has been designed to work with a proprietary adhesive patch sample collection kit that provides a skin sample collected non-invasively. DermTech processes its tests in a high complexity molecular laboratory that is Clinical Laboratory Improvement Amendments of 1988 certified and has applicable laboratory licenses in all 50 states in the United States and is certified by the College of American Pathologists. DermTech’s technology platform is easy to use and integrates seamlessly into the current clinical diagnostic pathway by providing (i) simple and rapid tissue collection and shipping via standard express mail, (ii) sample processing via quantitative polymerase chain reaction, or qPCR, or other technologies and (iii) physician reporting within 48 to 72 hours.

The Business Combination (see page 96)

If the business combination is completed, Merger Sub will merge with and into DermTech, with DermTech surviving as a wholly-owned subsidiary of Constellation.

At the closing of the business combination, all of the outstanding shares of DermTech common stock and preferred stock will be cancelled and automatically converted into the right to receive an aggregate amount of



 

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16,000,000 shares of common stock of Constellation (subject to adjustment for any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market), less the total number of shares of Constellation common stock that can be acquired or received pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019, or the In The Money Securities. It is currently anticipated that, at the closing of the business combination, the above exchange ratio will be approximately 1.16 shares of Constellation common stock for each share of DermTech capital stock outstanding (including any DermTech shares issued pursuant to promissory notes converting into DermTech common stock immediately prior to the closing of the business combination) or issuable upon exercise of the In The Money Securities (prior to giving effect to any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market), or the Exchange Ratio. The Exchange Ratio is subject to change due to, among other items, the actual closing date of the business combination, the number of outstanding shares of DermTech capital stock as of the closing date, the number of In The Money Securities as of the closing date and any reverse split or other adjustment to the Constellation common stock prior to the closing of the business combination.

Also at the closing of the business combination, Constellation will assume the DermTech Plan and all DermTech stock options, warrants and restricted stock units that are outstanding as of immediately prior to the closing of the business combination.

The business combination will be completed as soon as practicable after all the conditions to completion of the business combination are satisfied or waived, including the approval of the stockholders of DermTech and Constellation. DermTech and Constellation are working to complete the business combination as quickly as practicable. However, DermTech and Constellation cannot predict the exact timing of the completion of the business combination because it is subject to various conditions. Upon completion of the business combination, assuming Constellation receives the required stockholder approval of Constellation Proposal No. 1, Constellation will be renamed “DermTech, Inc.”

Reasons for the Business Combination (see pages 99 and 100)

Each of the DermTech board of directors and the Constellation board of directors considered several reasons for the business combination, as described herein. For example, the Constellation board of directors approved the business combination based on a number of factors, including the following:

 

   

Experienced Management Team. Constellation’s management and board of directors believe that DermTech has an experienced management team poised to execute on DermTech’s commercialization plan after CMS approval of PLA. DermTech’s Chief Executive Officer, John Dobak, was previously the founder and chairman of 10xBio. DermTech’s Chief Financial Officer, Steven Kemper, was previously Chief Financial Officer of GenMark (Nasdaq: GNMK), Dexcom (Nasdaq: DXCM) and Cryogen. DermTech’s Chief Commercial Officer, Todd Wood, was recently hired by DermTech and was previously the Vice President of US sales at Allergan;

 

   

Terms of the Business Combination. The financial and other terms and conditions of the Merger Agreement, as reviewed by the board of directors, and the fact that such terms and conditions are reasonable and were the product of arm’s length negotiations between Constellation and DermTech;

 

   

Significant addressable market opportunity. With approximately 15 million surgical biopsies performed to diagnose 5.4 million cases of skin cancer annually, DermTech’s lead product, Pigmented Lesion Assessment, or PLA, for melanoma detection, will potentially provide a significant market opportunity and there are additional opportunities to apply DermTech’s PLA technology to inflammatory diseases with an available potential total market opportunity of greater than $5 billion per annum;



 

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Near Term Value. Constellation’s management and board of directors believe that DermTech provides near term value creating an inflection point with a line of sight to Medicare coverage policy. DermTech has received a draft favorable coverage decision from Medicare MolDX. The final policy is expected by DermTech management in the second half of 2019 and DermTech expects to experience a significant revenue increase after CMS approval because of the opportunity to approach private payors. DermTech believes that, if Medicare coverage is granted, PLA may generate significant revenues in the second and third years following such coverage grant;

 

   

Attractive Market Valuation of Comparable Post-Approval Companies.    Constellation management’s observation that the valuations of the Comparable Post-Approval Companies in the year following Center for Medicare and Medicaid Services (CMS) approval reflect enterprise values/revenue (based on data publicly available data from Bloomberg and Capital IQ as well as data provided by DermTech) ranging from 2.7x to 21.9x (with a median of 8.6x); and

 

   

Attractive Market Valuation of Comparable Listed Companies.    Constellation management’s observation that the public trading market valuations of the Comparable Listed Companies reflect enterprise values/sales multiples (based on public filings and Wall Street consensus estimates as of May 19, 2019) ranging from 2.9x to 15.1x projected FY2019 (with a median of 5.1x) and ranging from 2.7x to 10.5x projected FY2020 (with a median of 5.3x). Post-Closing, the anticipated post-money initial equity valuation of the combined company is expected to be approximately $81.6 million. Based on DermTech forecasts for the forward financial years, the various multiples for the combined company are expected to be at an attractive valuation relative to the Comparable Listed Companies and the Comparable Post-Approval Companies.

In addition, the DermTech board of directors considered, among other things:

 

   

the DermTech board of directors’ belief, after reviewing the various alternative transactions that were considered by the DermTech board of directors and the likelihood of achieving any of these alternative transactions, that currently no alternatives to the merger were reasonably likely to create greater value for DermTech’s stockholders than the merger;

 

   

the expectation that the merger would be a more time and cost effective means to access capital than other alternatives considered, including an initial public offering of DermTech’s common stock and additional financings of DermTech as a non-publicly traded entity;

 

   

the potential for access to public capital markets following the business combination, including sources of capital from a broader range of investors to support the continued development and commercialization of DermTech’s products than it could otherwise obtain if it continued to operate as a privately-held company;

 

   

historical and current information concerning DermTech’s business, including its financial performance and condition, recent publishing of the draft Medicare coverage policy and desire to scale the commercial effort around this coverage, operations, ongoing clinical trial efforts for its current product candidate, management and prospective competitive position;

 

   

the cash resources of the combined company expected to be available at the closing of the business combination relative to the anticipated burn rate of the combined company;

 

   

the potential to provide DermTech’s current stockholders with greater liquidity by owning stock in a public company; and

 

   

the terms and conditions of the Merger Agreement, including, without limitation, the following:

 

   

the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes, with the result that the DermTech stockholders will not generally recognize taxable gain



 

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or loss for U.S. federal income tax purposes upon the exchange of DermTech capital stock for Constellation common stock pursuant to the merger;

 

   

the Stockholder Support Agreement, pursuant to which certain stockholders of DermTech have agreed, solely in their capacity as stockholders of DermTech, to vote all of their shares of DermTech capital stock in favor of the adoption or approval, respectively, of the Merger Agreement and the transactions contemplated by the Merger Agreement; and

 

   

the belief that the other terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations in these agreements, were reasonable in light of the entire transaction.

Overview of the Merger Agreement and Agreements Related to the Business Combination (see pages 118 and 132)

Merger Consideration (see page 108)

The Merger Agreement provides that, at the effective time of the business combination, all of the outstanding shares of DermTech common stock and DermTech preferred stock will be cancelled and automatically converted into the right to receive an aggregate amount of 16,000,000 shares of Constellation common stock (subject to adjustment for any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market, and only to the extent necessary to meet such listing requirements), less the total number of shares of Constellation common stock that can be acquired or received pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019, or the In The Money Securities, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement. The Constellation common stock to be issued in connection with the Merger Agreement in accordance with its terms and as described herein is referred to as the Merger Consideration.

It is currently anticipated that, at the closing of the business combination, the above exchange ratio will be approximately 1.16 shares of Constellation common stock for each share of DermTech capital stock outstanding (including any DermTech shares issued pursuant to promissory notes converting into DermTech common stock immediately prior to the closing of the business combination) or issuable upon exercise of the In The Money Securities (prior to giving effect to any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market), or the Exchange Ratio. The Exchange Ratio is subject to change due to, among other items, the actual closing date of the business combination, the number of outstanding shares of DermTech capital stock as of the closing date, the number of In The Money Securities as of the closing date and any reverse split or other adjustment to the Constellation common stock prior to the closing of the business combination.

Treatment of Stock Options/Warrants/Restricted Stock Units/Convertible Notes (see page 107)

All stock options and warrants of DermTech, whether vested or unvested, and the stock option plan of DermTech will be assumed by Constellation, and each such option or warrant of DermTech will become an option or warrant to acquire, respectively, on the same terms and conditions as were applicable under such option of DermTech or warrant of DermTech, the same number of shares of Constellation common stock multiplied by the Exchange Ratio, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement.

All restricted stock units of DermTech, whether vested or unvested, will be assumed by Constellation and will have the right to receive on the same terms and conditions as were applicable under such restricted stock units of DermTech, the same number of shares of Constellation common stock multiplied by the Exchange Ratio, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement.



 

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The outstanding principal and accrued but unpaid interest of outstanding convertible promissory notes issued by DermTech prior to June 5, 2019 will convert into shares of DermTech common stock immediately prior to the consummation of the business combination at a price per share equal to 70% of the lesser of (i) $3.75 and (ii) the offering price per share of the PIPE, which is $3.25, multiplied by the quotient resulting from dividing 16,000,000 by the number of fully diluted shares of DermTech as of immediately after the conversion of all then outstanding DermTech bridges notes and immediately prior to the consummation of the business combination. The aggregate principal amount of such notes as of the date hereof is $6,800,000.

The outstanding principal and accrued but unpaid interest of outstanding convertible promissory notes issued by DermTech between June 5, 2019 and June 10, 2019 will convert into shares of DermTech common stock immediately prior to the consummation of the business combination. The price per share at which such convertible promissory notes will convert depends on whether the consummation of the business combination occurs before or after September 25, 2019. If the consummation of the business combination occurs prior to September 25, 2019, the price per share at which such notes will convert will equal the lesser of (i) $3.37 and (ii) 90% of the offering price per share of the PIPE, which is $3.25, multiplied by the quotient resulting from dividing 16,000,000 by the number of fully diluted shares of DermTech as of immediately prior to the consummation of the business combination (including any DermTech shares to be issued pursuant to outstanding promissory notes converting immediately prior to the consummation of the business combination and any DermTech shares underlying all outstanding options, restricted stock unit awards and warrants). If the consummation of the business combination occurs after September 25, 2019, the price per share at which such notes will convert will equal the lesser of (i) $2.62 and (ii) 70% of the offering price per share of the PIPE multiplied by the quotient described in the preceding sentence. Constellation would be able to complete the business combination after September 23, 2019 if it obtained the requisite shareholder approval to its memorandum and articles of association to extend the deadline for completing the business combination to a later date after calling a special meeting of its shareholders to vote on the proposed amendment to its memorandum and articles of association. The aggregate principal amount of the outstanding convertible promissory notes issued by DermTech between June 5, 2019 and June 10, 2019 is $2,600,000.

Conditions to the Completion of the Business Combination (see page 122)

Consummation of the business combination is subject to various closing conditions set forth in the Merger Agreement. Included among the closing conditions are the following:

 

   

The Domestication occurred and Constellation delivered to DermTech reasonably sufficient evidence of such;

 

   

A registration statement on Form S-4 has been declared effective by the SEC, no order suspending the effectiveness of the registration statement has been issued, and no proceeding for that purpose was initiated by the SEC;

 

   

DermTech received the requisite stockholder approval of the business combination;

 

   

The proposals presented at the special meeting of Constellation’s shareholders were approved and adopted;

 

   

Immediately prior to or at the effective time of the business combination, Constellation has at least $15,000,000 of cash;

 

   

Constellation common stock continues to be listed on the Nasdaq Capital Market as of the closing of the business combination.

 

   

Certain DermTech stockholders, on or prior to the closing of the business combination, have entered into, executed and delivered a registration rights agreement; and



 

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Certain DermTech stockholders, on or prior to the closing of the business combination, have entered into, executed and delivered a lock-up agreement.

No Solicitation (see pages 124 and 126)

Each of Constellation and DermTech agreed that, subject to limited exceptions, Constellation and DermTech will not, and will direct each of their respective subsidiaries and each of their respective officers, directors, employees, accountants, consultants, legal counsel, agents, and representatives not to, directly or indirectly:

 

   

initiate, solicit, encourage or take any action to facilitate any Constellation Acquisition Proposal or DermTech Acquisition Proposal (as applicable, and as each term is defined below);

 

   

engage in discussions or negotiations regarding, or provide access to properties, books and records or any confidential information or data of the other party to any person in connection with any Constellation Acquisition Proposal or DermTech Acquisition Proposal (as applicable);

 

   

engage in, cooperate with, assist or participate in or facilitate discussion, negotiation, inquiries, proposals or offers or other efforts that would reasonably be expected to lead to any Constellation Acquisition Proposal or DermTech Acquisition Proposal, as applicable;

 

   

amend or grant any waiver or release under any standstill or similar agreement with respect to any class of such party’s or such party’s affiliates’ equity securities;

 

   

approve, endorse or recommend, or propose publicly to approve, endorse or recommend, any Constellation Acquisition Proposal or DermTech Acquisition Proposal, as applicable;

 

   

approve, endorse, recommend, execute or enter into any agreement in principle, letter of intent, memorandum of understanding, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other written arrangement relating to any Constellation Acquisition Proposal or DermTech Acquisition Proposal, as applicable, or any proposal that would reasonably be expected to lead to any Constellation Acquisition Proposal or DermTech Acquisition Proposal, as applicable; or

 

   

resolve or agree to do any of the foregoing or otherwise authorize or permit any of its representatives to take any such action.

However, before obtaining the applicable Constellation or DermTech stockholders approvals required to adopt the business combination, each party, directly or indirectly, may do the following:

 

   

engage in negotiations or discussions with any third party that has made a bona fide unsolicited Constellation Acquisition Proposal or DermTech Acquisition Proposal, as applicable, that the board of directors of such party reasonably believes in good faith, after consultation with outside legal counsel, constitutes or would reasonably be expected to result in a Constellation Superior Proposal or a DermTech Superior Proposal (as applicable, and as each term is defined below); and

 

   

furnish non-public information regarding such party to such third party pursuant to an executed confidentiality agreement in a form reasonable acceptable to DermTech and Constellation (a copy of which is to be delivered to the other party within 24 hours); provided, that, such party will promptly provide notice to the other party any material non-public information provided to such third party.

Termination of the Merger Agreement (see page 129)

Either Constellation or DermTech can terminate the Merger Agreement under certain circumstances, which would prevent the merger from being consummated.



 

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Termination Fees (see page 130)

The Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances, each of Constellation and DermTech may be required to pay the other party a termination fee of $2,080,000.

Subscription Agreements (see page 132)

Between May 22, 2019 and August 1, 2019, Constellation entered into separate Subscription Agreements with certain subscribers pursuant to which such subscribers agreed to purchase, and Constellation agreed to sell to the Subscribers, an aggregate of 6,153,847 shares of Constellation common stock for a purchase price of $3.25 per share and 1,231 shares of Constellation Series A Convertible Preferred Stock for a purchase price of $3,250 per share (equal to $3.25 per share of common stock on an as-converted basis), in a private placement in which Constellation will raise an aggregate of approximately $24,000,000, less certain offering related expenses payable by Constellation. The shares of Constellation common stock to be issued pursuant to the PIPE will be identical to the shares of Constellation common stock that will be held by Constellation’s public stockholders at the time of the closing of the business combination. The shares of Constellation Series A Convertible Preferred Stock to be issued pursuant to the PIPE will be governed by a Certificate of Designation that will be filed in connection with the closing of the PIPE, or the PIPE Closing. The PIPE Closing will be contingent upon the substantially concurrent consummation of the business combination. The PIPE Closing will occur on the date of, and substantially concurrent with, the consummation of the business combination and will be subject to customary conditions.

DermTech Stockholder Support Agreement (see page 132)

On May 29, 2019, stockholders of DermTech representing the affirmative vote of (i) a majority of the outstanding shares of the capital stock of DermTech and (ii) 70% of the outstanding shares of preferred stock of DermTech, entered into a stockholder support agreement in which such stockholders agreed to vote all of their shares of stock of DermTech in favor of the approval and adoption of the business combination. Additionally, such stockholders have agreed not to (i) transfer any of their shares of capital stock of DermTech (or enter into any arrangement with respect thereto) or (ii) enter into any voting arrangement that is inconsistent with the such stockholder support agreement.

Forfeiture Agreement (see page 132)

On May 29, 2019, Constellation’s sponsor entered into a Forfeiture Letter pursuant to which Constellation’s sponsor will forfeit to Constellation an aggregate of 2,694,779 shares of Constellation common stock, effective as of immediately prior to the consummation of the business combination.

Lock-Up Agreement (see page 132)

In connection with, and as a condition to the closing of the business combination, the Merger Agreement provides that certain persons and entities which will hold Constellation common stock upon the consummation of the business combination will each enter into a lock-up agreement providing each such holder agrees that, during the period commencing on the closing of the business combination and continuing to and including the date 180 days after the date of the closing of the business combination, such holder will not sell, offer to sell, pledge, or transfer any Constellation securities held by such holder, subject to certain limited exceptions.

Registration Rights Agreement (see page 132)

In connection with, and as a condition to the closing of the business combination, the Merger Agreement provides that Constellation and certain persons and entities which will hold Constellation common stock upon



 

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the consummation of the business combination will enter into a registration rights agreement. Pursuant to the terms of such registration rights agreement, Constellation will be obligated to file a shelf registration statement on Form S-3 to register the resale by such holders of Constellation common stock issuable in connection with the business combination. The registration rights agreement will also provide such holders with demand, “piggy-back” and Form S-3 registration rights, subject to certain minimum requirements and customary conditions.

Deferred Underwriting Fee Assignment Agreement (see page 133)

In connection with the execution of the Merger Agreement, on May 29, 2019 Constellation, DermTech and Cowen entered into the Deferred Underwriting Fee Assignment Agreement, pursuant to which Constellation agreed to assign to DermTech and DermTech agreed to assume Constellation’s obligation pursuant to the Underwriting Agreement, dated as of June 19, 2017 by and among Constellation and Cowen, acting as representative of the underwriters named in Schedule A thereto to pay such underwriters the underwriting fee set forth therein of $4,375,000, subject to certain adjustments and pursuant to the full terms of the Deferred Underwriting Fee Assignment Agreement.

Management Following the Business Combination (see page 225)

Effective as of the closing of the business combination, Constellation’s executive officers are expected to be the current DermTech management team:

 

Name

  

Title

John Dobak, M.D.    Chief Executive Officer
Steven Kemper, CPA, MBA    Chief Financial Officer, Treasurer, and Secretary
Burkhard Jansen, M.D.    Chief Medical Officer
Todd Wood    Chief Commercial Officer
Zuxu Yao, Ph.D.    Chief Scientific Officer

Interests of Certain Directors, Officers and Affiliates of Constellation and DermTech (see pages 115 and 103)

In considering the recommendation of the Constellation board of directors with respect to the approval of the business combination, Constellation shareholders should be aware that certain members of the board of directors and executive officers of Constellation have interests in the business combination that may be different from, or in addition to, interests they may have as Constellation shareholders. The Constellation board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective decisions to approve the Merger Agreement, the business combination and related transactions, and to recommend that the Constellation shareholders approve the same.

None of Constellation’s directors and executive officers are expected to continue with the combined company following the business combination. However, Constellation’s sponsor has already agreed to vote its shares in favor of the business combination pursuant to a letter agreement. As of July 31, 2019, Constellation’s sponsor, directors and officers and their respective affiliates owned an aggregate of approximately 72.7% of Constellation’s outstanding ordinary shares. Constellation’s directors and executive officers own a controlling interest in Constellation’s sponsor.

In considering the recommendation of the DermTech board of directors with respect to the approval of the business combination, DermTech stockholders should be aware that certain members of the board of directors and executive officers of DermTech have interests in the business combination that may be different from, or in addition to, interests they may have as DermTech stockholders. The DermTech board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective



 

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decisions to approve the Merger Agreement, the business combination and related transactions, and to recommend that the DermTech stockholders sign and return the written consent as contemplated by this proxy statement/prospectus/information statement.

DermTech’s current directors and executive officers are expected to continue with the combined company following the business combination. In addition, certain key stockholders of DermTech, including Gary Jacobs, a DermTech director, have already agreed to vote their shares in favor of the business combination pursuant to the Stockholder Support Agreement. As of June 10, 2019, the directors and executive officers of DermTech, together with their affiliates, owned approximately 32.49% of the outstanding shares of capital stock of DermTech, on an as converted to common basis.

Material U.S. Federal Income Tax Consequences of the Business Combination (see page 109)

Each of Constellation and DermTech intend that the business combination qualify as a reorganization within the meaning of Section 368(a) of the Code. In general, and subject to the qualifications and limitations set forth in the section titled “The Business Combination – Material U.S. Federal Income Tax Consequences of the Business Combination,” if the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material tax consequences to U.S. Holders (as defined below) of DermTech common stock will be as follows:

 

   

a DermTech stockholder will not recognize gain or loss upon the exchange of DermTech common stock for Constellation common stock pursuant to the merger;

 

   

a DermTech stockholder’s aggregate tax basis for the shares of Constellation common stock received in the merger will equal the stockholder’s aggregate tax basis in the shares of DermTech common stock surrendered in the merger; and

 

   

the holding period of the shares of Constellation common stock received by a DermTech stockholder in the merger will include the holding period of the shares of DermTech common stock surrendered in exchange therefor.

Tax matters are very complicated, and the tax consequences of the business combination to a particular DermTech stockholder will depend on such stockholder’s circumstances. Accordingly, you are strongly urged to consult your tax advisor for a full understanding of the tax consequences of the business combination to you, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws.

Risk Factors (see page 39)

Both DermTech and Constellation are subject to various risks associated with their businesses and their industries. In addition, the business combination, including the possibility that the business combination may not be completed, poses a number of risks to each company and its respective stockholders, including the following risks:

 

   

If Constellation fails to consummate the PIPE (as defined below) to be consummated concurrently with the closing of the business combination, it may not have enough funds to complete the business combination.

 

   

There can be no assurance that the combined company’s common stock will be approved for listing on Nasdaq following the closing of the business combination or that the combined company will be able to comply with the continued listing standards of Nasdaq.

 

   

Constellation’s sponsor, executive officers and directors have potential conflicts of interest in recommending that shareholders vote in favor of approval of the Business Combination Proposal and approval of the other proposals described in this proxy statement/prospectus/information statement.



 

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If the business combination’s benefits do not meet the expectations of investors or securities analysts, the market price of the combined company’s securities may decline.

 

   

Following the consummation of the business combination, the combined company will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results of operations.

 

   

Subsequent to the consummation of the business combination, Constellation may be required to take writedowns or write-offs, restructuring and impairment or other charges that could have a significant negative effect on Constellation’s financial condition, results of operations and ordinary share price, which could cause you to lose some or all of your investment.

 

   

Future issuances of equity securities may dilute the interests of Constellation’s shareholders and reduce the price of Constellation’s securities.

 

   

There may be sales of a substantial amount of the combined company’s common stock after the business combination by Constellation’s and DermTech’s current shareholders, and these sales could cause the price of Constellation’s securities to fall.

 

   

Constellation’s ability to successfully effect the business combination and successfully operate the business thereafter will be largely dependent upon the efforts of certain key personnel of DermTech, all of whom Constellation expects to stay with the combined company following the business combination. The loss of such key personnel could negatively impact the operations and profitability of the combined business.

 

   

If a Constellation shareholder fails to comply with the procedures for tendering its public shares in connection with the business combination, such shares may not be redeemed.

 

   

An investor may be subject to adverse U.S. federal income tax consequences in the event the Internal Revenue Service was to disagree with the U.S. federal income tax consequences described herein.

 

   

The unaudited pro forma financial information included herein may not be indicative of what the combined company’s actual financial position or results of operations would have been.

 

   

DermTech’s management has limited experience in operating a public company.

These risks and other risks are discussed in greater detail under the section entitled “Risk Factors” in this proxy statement/prospectus/information statement. DermTech and Constellation both encourage you to read and consider all these risks carefully.

Regulatory Approvals (see pages 108 and 128)

Constellation must comply with applicable federal and state securities laws and the rules and regulations of the Nasdaq Capital Market in connection with the issuance of shares of Constellation common stock and the filing of this proxy statement/prospectus/information statement with the SEC.

Nasdaq Capital Market Listing (see page 111)

Prior to consummation of the business combination, Constellation intends to file an initial listing application for the combined company with the Nasdaq Capital Market. If such application is accepted, Constellation anticipates that its common stock and warrants will be listed on the Nasdaq Capital Market following the closing of the business combination under the trading symbols “DMTK” and “DMTKW,” respectively.

Anticipated Accounting Treatment (see page 112)

The business combination will be accounted for as a reverse merger in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Under this method of accounting, Constellation will be treated as the



 

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“acquired” company for financial reporting purposes. This determination was primarily based on DermTech’s stockholders expecting to have a majority of the voting power of the combined company, DermTech comprising the ongoing operations of the combined company, DermTech comprising a majority of the governing body of the combined company, and DermTech’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the business combination will be treated as the equivalent of DermTech issuing stock for the net assets of Constellation, accompanied by a recapitalization. The net assets of Constellation will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the business combination will be those of DermTech.

Appraisal Rights and Dissenters’ Rights (see page 112)

There are no appraisal rights available to holders of Constellation ordinary shares in connection with the business combination.

DermTech stockholders are entitled to appraisal rights in connection with the business combination under Delaware law. For more information about such rights, see the provisions of Section 262 of the DGCL, attached hereto as Annex G, and the section entitled “The Business Combination – Appraisal Rights and Dissenters’ Rights” in this proxy statement/prospectus/information statement.

Comparison of Stockholder Rights (see page 246)

DermTech is incorporated under the laws of the State of Delaware and, assuming Constellation receives the required stockholder approval of Constellation Proposal No. 2 to re-domicile and continue as a Delaware corporation, the rights of the stockholders of DermTech and Constellation will be governed by the DGCL. If the business combination is completed, DermTech stockholders will become stockholders of Constellation, and their rights will be governed by the DGCL, the Proposed Amended and Restated Charter and the Proposed Bylaws, assuming Constellation stockholder approval of Constellation Proposal No. 3. The rights of Constellation stockholders set forth in the Proposed Amended and Restated Charter and the Proposed Bylaws differ from the rights of DermTech stockholders under the DermTech amended and restated certificate of incorporation and the DermTech bylaws, as more fully described under the section titled “Comparison of Rights of Holders of DermTech Capital Stock and Constellation Capital Stock” in this proxy statement/prospectus/information statement.



 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED FINANCIAL INFORMATION AND DATA

The following tables present summary historical financial data for Constellation and DermTech, summary unaudited pro forma condensed consolidated financial data for DermTech and Constellation, and comparative historical and unaudited pro forma per share data for DermTech and Constellation. Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split described in Constellation Proposal No. 5.

Selected Historical Financial Data of DermTech

The following tables set forth selected historical financial information derived from DermTech’s (i) unaudited financial statements for the three months ended March 31, 2019, (ii) unaudited financial statements for the three months ended March 31, 2018, and (iii) audited financial statements included elsewhere in this proxy statement/prospectus/information statement for the years ended December 31, 2018 and December 31, 2017. You should read the following selected financial information in conjunction with the section entitled “DermTech Management’s Discussion and Analysis of Financial Condition and Results of Operations” and DermTech’s financial statements and the related notes appearing elsewhere in this proxy statement/prospectus/information statement

Condensed Statement of Operations

 

     Three Months Ended
March 31
    Twelve Months Ended
December 31
 
Statement of Operations Data    2019     2018     2018     2017  

Total revenues

     596,479       493,822       2,442,153       1,718,612  

Cost of revenues

     (634,590     (662,806     (2,626,930     (2,571,187

Total operating expenses

     (2,964,964     (2,108,182     (8,374,678     (7,498,847

Net loss and comprehensive loss

     (5,156,245     (2,281,038     (10,004,352     (8,369,049

Weighted average shares outstanding used in computing net loss per share, basic and diluted

     4,644,983       4,643,733       4,644,353       4,637,793  

Net loss per common share outstanding, basic and diluted

   $ (1.11   $ (0.49   $ (2.15   $ (1.80

Balance Sheet Data

 

Balance Sheet Data    As of
March 31,
2019
     As of
December 31,
2018
     As of
December 31,
2017
 

Cash and cash equivalents

     2,040,794        4,752,579        1,242,042  

Total assets

     2,707,188        5,663,532        2,066,901  

Deferred revenue

     1,303,785        1,552,229        1,312,227  

Convertible notes payable, net

     6,800,000        5,019,235        —    

Total liabilities

     13,005,932        11,019,075        2,872,492  

Additional paid-in capital

     66,271,946        66,014,324        60,560,797  

Accumulated deficit

     (76,577,959      (71,377,136      (61,372,784

Total stockholders’ (deficit) equity

     (10,301,368      (5,358,167      (807,343

Selected Historical Financial Data of Constellation

The following table sets forth selected historical financial information derived from Constellation’s audited financial statements included elsewhere in this proxy statement/prospectus/information statement for the years

 

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ended March 31, 2019 and 2018. You should read the following selected financial information in conjunction with the section entitled “Constellation Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Constellation’s financial statements and the related notes appearing elsewhere in this proxy statement/prospectus/information statement.

Selected Historical Financial Information – Constellation

(USD in thousands, except share and per share amounts)

 

Income Statement Data:

   Year
Ended
March 31,
2019
    Year
Ended
March 31,
2018
    Year
Ended
March 31,
2017
    Period
from

July 31,
2015

(inception)
through
March 31,
2016
 

Loss from operations

     (1,978     (306     —         (3

Interest income

     2,863       1,208       —         —    

Unrealized loss on marketable securities

     59       (45     —         —    

Net income (loss)

     944       857       —         (3

Basic and diluted net loss per share

     0.14       (0.05     (0.00     (0.00

Weighted average shares outstanding – basic and diluted

     5,136,904       4,721,185       3,750,000       3,750,000  

 

Balance Sheet Data:

   As of
March 31,
2019
    As of
March 31,
2018
     As of
March 31,
2017
    As of
March 31,
2016
 

Working capital (deficiency)

     (1,477     501        (148     (112

Trust account

     12,358       146,350        —         —    

Total assets

     12,440       146,894        195       150  

Total liabilities

     6,590       5,073        173       128  

Value of ordinary shares subject to possible redemption

     850       136,820        —         —    

Shareholders’ equity

     5,000       5,000        22       22  

Selected Unaudited Pro Forma Condensed Consolidated Financial Information and Data of the Combined Company

The following information does not give effect to the proposed reverse stock split described in Constellation Proposal No. 5.

The following selected unaudited pro forma condensed consolidated financial information has been prepared to reflect the acquisition of Constellation by DermTech. On May 29, 2019, DermTech and Constellation entered into the Merger Agreement pursuant to which a wholly-owned subsidiary of Constellation will merge with and into DermTech, with DermTech becoming a wholly-owned subsidiary of Constellation and the surviving corporation of the merger. For accounting purposes, DermTech is considered to be acquiring Constellation in the merger.

The unaudited pro forma condensed combined financial information was prepared in accordance with the regulations of the SEC. The unaudited pro forma condensed combined balance sheet as of March 31, 2019 is presented as if the merger had been completed on March 31, 2019. The unaudited pro forma condensed combined statements of operations combine DermTech’s statement of operations for the year ended December 31, 2018 with Constellation’s statement of operations for the year ended March 31, 2019. The unaudited pro forma condensed combined statement of operations assume that the merger took place as of January 1, 2019, and combines the historical results of DermTech and Constellation.

The selected unaudited pro forma condensed consolidated financial data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future

 

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periods or the results that actually would have been realized had the entities been a single entity during these periods. The selected unaudited pro forma condensed consolidated financial data for the year ended March 31, 2019 is derived from the audited consolidated financial information included elsewhere in this prospectus and should be read in conjunction with that information. For more information, please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 239 of this proxy statement/prospectus/information statement.

The unaudited pro forma condensed consolidated financial information assumes that, at the effective time of the business combination, each share of DermTech capital stock will have converted into the right to receive approximately 1.28 shares of Constellation common stock, in accordance with the terms of the Merger Agreement. The estimated exchange ratio calculations used herein is based upon DermTech’s and Constellation’s capitalization numbers immediately prior to the date of this proxy statement/prospectus/information statement, and will be adjusted to account for the issuance of any additional shares of Constellation stock prior to the consummation of the merger or for the issuance of any additional shares of DermTech stock in a manner not contemplated by the Merger Agreement prior to the consummation of the merger.

Selected Unaudited Pro Forma Condensed Combined Statements of Operations and Comprehensive Loss Data For the Year Ended December 31, 2018 (DermTech) and March 31, 2019 (Constellation)

 

Statement of Operations Data       

Total revenues

     2,442,153  

Cost of revenues

     (2,626,930

Total operating expenses

     9,504,439  

Net loss and comprehensive loss

     (9,704,705

Weighted average shares outstanding used in computing net loss per share, basic and diluted

     21,631,129  

Net loss per common share outstanding, basic and diluted

   $ (0.45

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data

 

Balance Sheet Data    As of March 31,
2019
 

Cash and cash equivalents

     25,965,186  

Total assets

     26,682,838  

Deferred revenue

     1,303,785  

Total liabilities

     7,437,424  

Additional paid-in capital

     88,747,747  

Accumulated deficit

     (69,527,968

Total stockholders’ equity

     19,245,416  

Comparative Historical and Unaudited Pro Forma Earnings and Book Value Per Share Data

The information below reflects the historical net loss and book value per share of DermTech common stock and the historical net loss and book value per share of Constellation ordinary shares in comparison with the unaudited pro forma net loss and book value per share after giving effect to the proposed business combination of DermTech with Constellation on a pro forma basis and excludes the conversion of DermTech’s preferred shares and convertible promissory notes into DermTech common stock. The unaudited pro forma net loss and book value per share do not give effect to the proposed reverse stock split described in Constellation Proposal No. 5.

You should read the tables below in conjunction with the audited financial statements of DermTech included in this proxy statement/prospectus/information statement and the audited financial statements of Constellation included in this proxy statement/prospectus/information statement and the related notes and the unaudited pro forma condensed consolidated financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

 

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Earnings (Loss) Per Share

DERMTECH

 

     Twelve Months Ended
December 31, 2018
 

Historical Per Common Share Data:

  

Basic and diluted net loss per share

   $ (2.15

CONSTELLATION

 

     Twelve Months Ended
March 31, 2019
 

Historical Per Common Share Data:

  

Basic and diluted net loss per share

   $ 0.14  

DERMTECH AND CONSTELLATION

 

     Twelve Months Ended  

Pro Forma Per Common Share Data:

  

Basic and diluted net loss per share

   $ (0.45

Book Value Per Share

DERMTECH

 

     Three Months Ended
March 31, 2019
     Twelve Months Ended
December 31, 2018
 

Historical Per Common Share Data:

     

Book value per share

   $ (2.22    $ (1.15

CONSTELLATION

 

     Twelve Months Ended
March 31, 2018
 

Historical Per Common Share Data:

  

Book value per share

   $ 0.95  

DERMTECH AND CONSTELLATION

 

     Twelve Months Ended  

Pro Forma Per Common Share Data:

  

Book value per share

   $ 0.89  

 

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MARKET PRICE AND DIVIDEND INFORMATION

Market Information

Constellation’s equity securities trade on Nasdaq. Each of Constellation’s units consists of one ordinary share, one right and one warrant and trades on Nasdaq under the symbol “CNACU”. Constellation’s units began trading on Nasdaq on June 20, 2017. The rights, warrants and ordinary shares underlying Constellation’s units began trading separately on Nasdaq under the symbols “CNACR”, “CNACW” and “CNAC”, respectively, on August 10, 2017. Each right entitles the holder thereof to receive one-tenth of one ordinary share upon the consummation of an initial business combination. Each warrant entitles the holder thereof to purchase one-half of one ordinary share. Constellation will not issue fractional shares. As a result, you must exercise warrants in multiples of two warrants, at a price of $11.50 per full share, subject to adjustment as described in Constellation’s prospectus, to validly exercise your warrants. The warrants will expire five years after the completion of Constellation’s initial business combination unless redeemed earlier. On March 14, 2019, the date before the public announcement of the business combination, Constellation’s units, ordinary shares, rights and warrants closed at $10.41, $10.35, $0.125 and $0.0896, respectively. The following table includes the high and low sales prices for Constellation’s units, ordinary shares, rights and warrants for the periods presented. Prior to June 20, 2017, there was no established public trading market for Constellation’s securities. Following the consummation of the business combination, the combined company expects its common stock to trade under the symbol “DMTK” on The Nasdaq Capital Market.

The following table sets forth the high and low sale prices for Constellation’s units, rights, warrants and ordinary shares of common stock in each full quarterly period within the three most recent fiscal years.

 

     Units      Ordinary Shares      Rights      Warrants  
Quarter Ended    High      Low      High      Low      High      Low      High      Low  

2017

                       

June 30, 2017 (June 20, 2017 – June 30, 2017)

   $ 10.24      $ 10.00        *        *        *        *        *        *  

September 30(1)

   $ 10.30      $ 10.01      $ 9.78      $ 9.64      $ 0.35      $ 0.28      $ 0.30      $ 0.23  

December 31

   $ 10.50      $ 8.22      $ 9.90      $ 9.55      $ 0.36      $ 0.25      $ 0.25      $ 0.195  

2018

                    

March 31

   $ 11.21      $ 9.82      $ 9.95      $ 9.72      $ 0.48      $ 0.27      $ 0.38      $ 0.19  

June 30

   $ 11.50      $ 10.30      $ 9.97      $ 9.95      $ 0.70      $ 0.44      $ 0.50      $ 0.36  

September 30

   $ 11.50      $ 10.30      $ 10.15      $ 9.95      $ 0.70      $ 0.3768      $ 0.50      $ 0.182  

December 31

   $ 16.04      $ 10.02      $ 10.25      $ 9.95      $ 0.45      $ 0.0101      $ 0.28      $ 0.06  

2019

                       

March 31

   $ 10.69      $ 10.05      $ 10.38      $ 8.75      $ 0.20      $ 0.0005      $ 0.1482      $ 0.05  

 

*

The high and low trade prices per share of Constellation’s ordinary shares, rights and warrants are not reflected for the quarter ending June 30, 2017 because the ordinary shares, rights and warrants underlying the units did not begin trading separately until August 10, 2017.

(1)

The information for the quarter ending September 30, 2017 for the ordinary shares, rights and warrants reflects the high and low sales prices beginning as of August 10, 2017, the first day that holders of the units elected to separate their units into ordinary shares, rights and warrants.

Holders

On June 13, 2019, there were approximately three holders of record of Constellation’s units, three holders of record of Constellation’s ordinary shares, one holder of record of Constellation’s rights and one holder of record of Constellation’s warrants. Such numbers do not include beneficial owners holding our securities through nominee names.

 

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Dividends

Constellation has not paid any cash dividends on its ordinary shares to date and does not intend to pay cash dividends prior to the completion of an initial business combination. The payment of cash dividends in the future will be dependent upon Constellation’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of an initial business combination.

Dividend Policy of Constellation

The payment of any dividends subsequent to an initial business combination will be within the discretion of Constellation’s board of directors at such time. It is the present intention of Constellation’s board of directors to retain all earnings, if any, for use in its business operations and, accordingly, Constellation’s board of directors does not anticipate declaring any dividends in the foreseeable future. In addition, Constellation’s board of directors is not currently contemplating and does not anticipate declaring any dividends in the foreseeable future. Further, if Constellation incurs any indebtedness in connection with a business combination, Constellation’s ability to declare dividends may be limited by restrictive covenants Constellation may agree to in connection therewith.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus/information statement and the documents incorporated by reference into this proxy statement/prospectus/information statement contain forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as DermTech and Constellation cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include, but are not limited to statements about:

 

   

the combined company’s ability to attain profitability;

 

   

the combined company’s ability to continue as a going concern;

 

   

the combined company’s estimates regarding its future performance, including without limitation estimates of potential future revenues;

 

   

the combined company’s ability to obtain third-party payer reimbursement for its tests;

 

   

the combined company’s ability to efficiently bill for and collect revenue resulting from its tests;

 

   

the combined company’s need to raise additional capital to fund its operations, commercialize its products, and expand its operations;

 

   

the combined company’s ability to market and sell its tests to physicians and other clinical practitioners;

 

   

the combined company’s ability to continue to develop its existing tests and develop and commercialize additional novel tests;

 

   

the combined company’s dependence on third parties for the manufacture of its products;

 

   

the combined company’s ability to meet market demand for its current and planned future tests;

 

   

the combined company’s reliance on its sole laboratory facility and the harm that may result if this facility became damaged or inoperable;

 

   

the combined company’s ability to compete with its competitors and their competing products;

 

   

the importance of the combined company’s executive management team;

 

   

the combined company’s ability to retain and recruit key personnel;

 

   

the combined company’s dependence on third parties for the supply of its laboratory substances, equipment and other materials;

 

   

the potential for the combined company to incur substantial costs resulting from product liability lawsuits against it and the potential for these lawsuits to cause the combined company to suspend sales of its products;

 

   

the possibility that a third party may claim the combined company has infringed or misappropriated its intellectual property rights and that the combined company may incur substantial costs and be required to devote substantial time defending against these claims;

 

   

the potential consequences of the combined company expanding its operations internationally;

 

   

the combined company’s ability to continue to comply with applicable privacy laws and protect confidential information from breaches;

 

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how changes in federal health care policy could increase the combined company’s costs, decrease its revenues and impact sales of and reimbursement for its tests;

 

   

the combined company’s ability to continue to comply with federal and local laws concerning its business and operations and the consequences resulting from the combined company’s failure to comply with such laws;

 

   

the possibility that the combined company may be required to conduct additional clinical studies or trials for its tests and the consequences resulting from the delay in obtaining necessary regulatory approvals;

 

   

the harm resulting from the potential loss, suspension, or other restriction on one or more of the combined company’s licenses, certifications or accreditations, or the imposition of a fine or penalty on the combined company under federal, state, or foreign laws;

 

   

the combined company’s ability to maintain its intellectual property protection;

 

   

how recent and potential future changes in tax policy could negatively impact the combined company’s business and financial condition;

 

   

how recent and potential future changes in healthcare policy could negatively impact the combined company’s business and financial condition;

 

   

the combined company’s ability to attain and/or maintain Nasdaq listing;

 

   

the combined company’s ability to manage the increased expenses and administrative burdens as a public company;

 

   

the consequences to Constellation’s stockholders if it is unable to complete its initial business combination by September 23, 2019;

 

   

the consequences to Constellation’s stockholders who purchased units in Constellation’s initial public offering and do not exercise their redemption rights;

 

   

the effects that third-party claims against Constellation could have on the per-share redemption amount received by Constellation stockholders;

 

   

the potential conflicts of interest between Constellation and its sponsor, executive officers and directors in recommending that Constellation’s stockholders vote in favor of the business combination and other proposals described herein;

 

   

the combined company’s ability to redeem Constellation stockholders’ unexpired warrants prior to their exercise;

 

   

the adverse tax and corporate governance consequences associated with Constellation reincorporating in Delaware in connection with the business combination;

 

   

the effects of a sale of the combined company’s common stock on the price of the combined company’s securities; and

 

   

the parties’ reliance on the closing of the PIPE for proceeds of at least $15 million to consummate the business combination.

For a discussion of the factors that may cause DermTech, Constellation or the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of DermTech and Constellation to complete the business combination and the effect of the business combination on the business of DermTech, Constellation and the combined company, see section entitled “Risk Factors” beginning on page 39 of this proxy statement/prospectus/information statement.

 

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Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Constellation. See section entitled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of DermTech, Constellation or the combined company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus/information statement are current only as of the date on which the statements were made. DermTech and Constellation do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

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RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. In addition, you should read and consider the risks associated with the business of Constellation because these risks may also affect the combined company – these risks can be found in Constellation’s Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. You should also read and consider the other information in this proxy statement/prospectus/information statement and the other documents incorporated by reference into this proxy statement/prospectus/information statement. Please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Risks Related to DermTech’s Business

Risks Relating to DermTech’s Financial Condition and Capital Requirements

DermTech is an emerging growth company with a history of net losses; DermTech expects to incur net losses in the future, and may never achieve sustained profitability.

DermTech has historically incurred substantial net losses, including net losses of $8.4 million in 2017 and $10.0 million in 2018; and DermTech has never been profitable. As of December 31, 2018, DermTech’s accumulated deficit is $71.4 million.

DermTech expects its losses to continue as a result of costs relating to ongoing research and development expenses, for increased sales and marketing costs for existing and planned products. These losses have had, and will continue to have, an adverse effect on DermTech’s working capital, total assets, and stockholders’ equity. Because of the numerous risks and uncertainties associated with its commercialization efforts, DermTech is unable to predict when it will become profitable, and it may never become profitable. Even if DermTech does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. DermTech’s inability to achieve and then maintain profitability would negatively affect DermTech’s business, financial condition, results of operations, and cash flows.

DermTech’s independent registered public accounting firm’s report for the year ended December 31, 2017 and 2018 includes an explanatory paragraph regarding substantial doubt about DermTech’s ability to continue as a going concern.

Due to the deficit that DermTech has accumulated since its inception, in their report on DermTech’s audited annual financial statements as of and for the year ended December 31, 2017 and 2018, DermTech’s auditors included an explanatory paragraph regarding concerns about DermTech’s ability to continue as a going concern. Recurring losses from operations raise substantial doubt about DermTech’s ability to continue as a going concern. If DermTech is unable to obtain sufficient funding at acceptable terms, it may be forced to significantly curtail its operations, and the lack of sufficient funding may have a material adverse impact on DermTech’s ability to continue as a going concern. If DermTech is unable to continue as a going concern, it might have to liquidate its assets and the values DermTech receives for its assets in liquidation or dissolution could be significantly lower than the values reflected in DermTech’s financial statements. In addition, the inclusion of an explanatory paragraph regarding substantial doubt about DermTech’s ability to continue as a going concern and its lack of cash resources may materially adversely affect DermTech’s share price and its ability to raise new capital or to enter into critical contractual relations with third parties.

 

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DermTech has a limited operating history and it expects a number of factors to cause its operating results to fluctuate on a quarterly and annual basis, which may make DermTech’s future performance difficult to predict.

DermTech is an emerging molecular diagnostics company with a limited operating history. DermTech’s operations to date have been primarily focused on developing and market testing DermTech’s technology. DermTech has not obtained regulatory approvals for any of its tests as it operates under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, guidelines. Consequently, if regulatory approval is determined to be necessary, any predictions made about DermTech’s future success or viability may not be as accurate as they could be if DermTech had a longer operating history or more commercialized products. DermTech’s financial condition and operating results have varied significantly in the past and will continue to fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond DermTech’s control. Factors relating to DermTech’s business that may contribute to these fluctuations include other factors described elsewhere in this proxy statement/prospectus/information statement and also include:

 

   

DermTech’s ability to obtain additional funding to develop and market its products and tests;

 

   

the market adoption and demand for DermTech’s tests;

 

   

the existence of favorable or unfavorable clinical guidelines for DermTech’s test;

 

   

the reimbursement of DermTech’s tests by Medicare and private payers;

 

   

DermTech’s ability to obtain and maintain any necessary regulatory approval for any of its tests in the United States and foreign jurisdictions;

 

   

potential side effects of DermTech’s tests that could delay or prevent commercialization, limit the indications for any of DermTech’s tests, require the establishment of risk evaluation and mitigation strategies, or cause any of DermTech’s commercialized tests to be taken off the market;

 

   

DermTech’s dependence on third-party suppliers and manufacturers, to supply or manufacture DermTech’s products;

 

   

DermTech’s ability to establish or maintain collaborations, licensing, or other arrangements;

 

   

DermTech’s ability to maintain and grow an effective sales and marketing infrastructure, either through the expansion of DermTech’s commercial infrastructure or through strategic collaborations;

 

   

competition from existing products or new products that may emerge;

 

   

the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for DermTech’s products;

 

   

DermTech’s ability to leverage its proprietary technology platform to discover and develop additional product candidates;

 

   

DermTech’s ability to successfully obtain, maintain, defend, and enforce intellectual property rights important to DermTech’s business;

 

   

DermTech’s ability to attract and retain key personnel to manage its business effectively;

 

   

DermTech’s ability to build its finance infrastructure and improve its accounting systems and controls;

 

   

potential product liability claims;

 

   

potential liabilities associated with hazardous materials; and

 

   

DermTech’s ability to obtain and maintain adequate insurance policies.

Accordingly, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.

 

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DermTech’s commercial success could be compromised if customers do not pay its invoices or if third-party payers, including managed care organizations and Medicare, do not provide coverage and reimbursement, breach, rescind, or modify their contracts or reimbursement policies, reimburse at a low rate, or delay payments for DermTech’s current tests and its planned future tests.

Physicians, including dermatologists, may not order DermTech’s current Pigmented Lesion Assay, or PLA, or DermTech’s Nevome test, or DermTech’s planned tests unless third-party payers, such as managed care organizations and government payers (e.g., Medicare and Medicaid), pay a substantial portion of the test price. Coverage and reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that tests using DermTech technologies are:

 

   

not experimental or investigational;

 

   

medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective;

 

   

supported by peer-reviewed publications; and

 

   

included in clinical practice guidelines.

Uncertainty surrounds third-party payer reimbursement of any test incorporating new technology, including tests developed using DermTech’s technologies. Technology assessments of new medical tests conducted by research centers and other entities may be disseminated to interested parties for informational purposes. Third-party payers and health care providers may use such technology assessments as grounds to deny coverage for a test or procedure. Technology assessments can include evaluation of clinical utility studies, which define how a test is used in a particular clinical setting or situation. DermTech filed an application for a technology assessment in April of 2018, and the comment period for the accompanying Medicare Draft Local Coverage Decision, or Draft LCD, closed in August of 2018. In March 2019, a Draft LCD proposed coverage for the PLA. A Medicare Final Coverage Decision, or Final LCD, could be available in the second half of 2019. If the Final LCD maintains the coverage proposal in the Draft LCD, the PLA will be eligible for Medicare reimbursement. If the Final LCD reverses the coverage proposal in the Draft LCD, DermTech’s business will be significantly impacted due to lack of Medicare coverage. In addition, after submission of the technology assessment in April of 2018, DermTech is prohibited from submitting claims to Medicare. Therefore, although DermTech previously submitted claims to Medicare which were reviewed on a case-by-case basis, DermTech no longer has any Medicare revenue stream pending the outcome of the technology assessment and the finalization of a Local Coverage Decision. Currently the Nevome test does not have Medicare reimbursement.

Because each payer generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse DermTech’s tests, seeking payer approvals is a time-consuming and costly process. DermTech cannot be certain that coverage for DermTech’s current tests and DermTech’s planned future tests will be provided in the future by additional third-party payers or that existing policy decisions, or reimbursement levels will remain in place or be fulfilled under existing terms and provisions. In addition, the coding procedure used by all third-party payers with respect to establishing payment rates for various procedures, including DermTech’s tests, is complex, does not currently adapt well to the genetic tests DermTech performs and may not enable coverage and adequate reimbursement rates for DermTech’s tests. If DermTech cannot obtain coverage and reimbursement from private and governmental payers such as Medicare and Medicaid for DermTech’s current tests, or new tests or test enhancements that it may develop in the future, DermTech’s ability to generate revenues could be limited, which may have a material adverse effect on its financial condition, results of operations, and cash flows. Measures have been undertaken to reduce payment rates for and decrease utilization of the clinical laboratory testing generally, including the Protecting Access to Medicare Act of 2014, or PAMA, which has resulted in reduced rates on the Medicare Clinical Laboratory Fee Schedule, or CLFS. These reductions may also impact DermTech’s PLA and Nevome tests and may also impact tests DermTech

 

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develops in the future. Because of the cost-trimming trends, third-party payers that cover and provide reimbursement for DermTech’s tests and its planned tests may suspend, revoke, or discontinue coverage at any time, or may reduce the reimbursement rates payable to DermTech. Any such action could have a negative impact on DermTech’s revenues, which may have a material adverse effect on its financial condition, results of operations, and cash flows. Additionally, if DermTech is not able to obtain sufficient clinical information in support of its tests, third-party payers could designate its tests as experimental or investigational and decline to cover and reimburse its tests because of this designation. As a result of these factors, obtaining approvals from third-party payers to cover DermTech’s tests and establishing adequate reimbursement levels is an unpredictable, challenging, time-consuming, and costly process, and DermTech may never be successful. Further, DermTech has experienced in the past, and will likely experience in the future, delays and interruptions in the receipt of payments from third-party payers due to missing documentation and/or other issues, which could cause delay in collecting DermTech’s revenue.

Additionally, DermTech is currently considered a “non-contracted provider” or “out of network” by most private third-party payers because DermTech has not entered into a specific contract to provide tests to their insured patients at specified rates of reimbursement. If DermTech were to become a contracted provider with one or more payers in the future, the amount of overall reimbursement DermTech receives would likely decrease because it could be reimbursed less money per test performed at a contracted rate than at a non-contracted rate, which could have a negative impact on DermTech’s revenues. Further, DermTech typically is unable to collect substantial payments from patients beyond that which is paid by their insurance and therefore experiences overall loss to revenue as a result.

Billing and collections processing for DermTech’s tests is complex and time-consuming, and any delay in transmitting and collecting claims could have an adverse effect on DermTech’s revenue.

Billing for DermTech’s tests is complex, time-consuming, and expensive. Depending on the billing arrangement and applicable law, DermTech bills, or plans to bill, various different parties for its tests, including Medicare, Medicaid, insurance companies, and patients, all of which may have different billing requirements. DermTech may face increased risk in its collection efforts due to the complexities of these billing requirements, including long collection cycles and lower collection rates, which could adversely affect DermTech’s business, results of operations and financial condition.

Several factors make the billing process complex, including:

 

   

differences between the list price for DermTech’s tests and the reimbursement rates of payers;

 

   

compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare and Medicaid;

 

   

disputes among payers as to which party is responsible for payment;

 

   

differences in coverage among payers and the effect of patient co-payments or co-insurance;

 

   

differences in information and billing requirements among payers;

 

   

incorrect or missing billing information; and

 

   

the resources required to manage the billing and claims appeals process.

DermTech is developing internal systems and procedures to handle these billing and collections functions and has engaged third parties to assist with some of these functions, but DermTech will need to make significant efforts and expend substantial resources to further develop its systems and procedures to handle these aspects of its business. As a result, these billing complexities, along with the related uncertainty in obtaining payment for DermTech’s tests, could negatively affect DermTech’s revenue and cash flow, DermTech’s ability to achieve or sustain profitability, and the consistency and comparability of DermTech’s results of operations. In addition, if

 

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claims for DermTech’s tests are not submitted to payers on a timely basis, or if DermTech is required to switch to a different provider to handle DermTech’s processing and collections functions, DermTech’s revenue and business could be adversely affected.

DermTech will need to raise additional capital to fund its existing operations, commercialize its products, and expand its operations.

As of December 31, 2018, DermTech’s cash and cash equivalents totaled approximately $4.7 million. Based on DermTech’s current business operations, DermTech believes the net proceeds from this offering, together with its current cash and cash equivalents, will be sufficient to meet its anticipated cash requirements for the 18-month period following this offering. If DermTech’s available cash balances, net proceeds from this offering, and anticipated cash flow from operations are insufficient to satisfy DermTech’s liquidity requirements including due to changes in DermTech’s business operations, a lengthier sales cycle, lower demand for its products, or other risks described in this proxy statement/prospectus/information statement, DermTech may seek to raise additional capital through equity offerings, debt financings, collaborations, or licensing arrangements. DermTech may also consider raising additional capital in the future to expand its business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons, including to:

 

   

increase DermTech’s efforts to drive market adoption of its tests and address competitive developments;

 

   

fund development activities and efforts of any future products;

 

   

acquire, license, or invest in technologies;

 

   

acquire or invest in complementary businesses or assets; and

 

   

finance capital expenditures and general and administrative expenses.

DermTech’s present and future funding requirements will depend on many factors, including:

 

   

DermTech’s revenue growth rate and ability to generate cash flows from operating activities;

 

   

DermTech’s sales and marketing and research and development activities;

 

   

effects of competing technological and market developments;

 

   

costs of and potential delays in product development;

 

   

changes in regulatory oversight applicable to DermTech’s tests; and

 

   

costs related to international expansion.

The various ways DermTech could raise additional capital carry potential risks. If DermTech raises funds by issuing equity securities, dilution to its stockholders could result. Any equity securities issued also could provide for rights, preferences, or privileges senior to those of holders of DermTech’s common stock. If DermTech raises funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of DermTech’s common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on DermTech’s operations. If DermTech raises funds through collaborations and licensing arrangements, DermTech might be required to relinquish significant rights to its platform technologies or products, or grant licenses on terms that are not favorable to DermTech. Additional equity or debt financing might not be available on reasonable terms, if at all. If DermTech cannot secure additional funding when needed, DermTech may have to delay, reduce the scope of, or eliminate one or more research and development programs or sales and marketing initiatives. In addition, DermTech may have to work with a partner on one or more of DermTech’s development programs, which could lower the economic value of those programs to DermTech.

 

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DermTech will also need to raise additional capital to expand its business to meet its long-term business objectives. Additional financing may be from the sale of equity or convertible or other debt securities in a public or private offering, from a credit facility or strategic partnership coupled with an investment in DermTech, or a combination of both. For further discussion of DermTech’s liquidity requirements as they relate to DermTech’s long-term plans, see the section entitled “DermTech Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal Years Ending December 31, 2017 and 2018 – Liquidity and Capital Resources.”

If physicians, including dermatologists, decide not to order the PLA, the Nevome test, or DermTech’s future tests, DermTech may be unable to generate sufficient revenue to sustain its business.

To generate demand for DermTech’s current tests and DermTech’s planned tests, DermTech will need to educate dermatologists and other health care professionals on the clinical utility, benefits, and value of the tests DermTech provides through published papers, presentations at scientific conferences, educational programs, and one-on-one education sessions by members of DermTech’s sales force. In addition, DermTech needs to assure dermatologists of their ability to obtain and maintain adequate reimbursement coverage from third-party payers for the adhesive patch sample collection method. Medical professionals are influenced by standard setting bodies that influence and/or dictate the standard of care. If DermTech is not successful in changing current guidelines from legacy standards to new molecular-based approaches DermTech’s market adoption will suffer. If DermTech cannot convince medical practitioners to order its current tests and DermTech’s planned tests, DermTech will likely be unable to create demand in sufficient volume for DermTech to achieve sustained profitability or meet its anticipated revenue projections.

DermTech expects to continue to incur significant expenses to develop and market its tests, which could make it difficult for DermTech to achieve and sustain profitability.

In recent years, DermTech has incurred significant costs in connection with the development of its tests. For the year ended December 31, 2017, DermTech’s research and development expenses were $2.0 million, its sales and marketing expenses were $2.9 million and its general and administrative expenses were $2.6 million. For the year ended December 31, 2018, DermTech’s research and development expenses were $2.1 million, its sales and marketing expenses were $2.8 million and its general and administrative expenses were $3.5 million. DermTech expects its expenses to continue to increase for the foreseeable future as DermTech conducts studies of its current tests and its planned other tests, grows its sales and marketing organization, drives adoption of and reimbursement for its tests, and develops new tests. As a result, DermTech needs to generate significant revenues in order to achieve sustained profitability.

DermTech may not be able to generate sufficient revenue from the commercialization of its PLA, Nevome test, or successfully develop and commercialize other tests to achieve or sustain profitability or meet its anticipated revenue projections.

DermTech launched PLA assay during the first half of 2016. DermTech launched the Nevome test in 2018. DermTech is in varying stages of research and development for other tests that DermTech may offer in the future. DermTech believes that its commercialization success is dependent upon its ability to significantly increase the number of customers that are using DermTech’s tests. In addition, demand for DermTech’s tests may not increase as quickly as planned and DermTech may be unable to increase its revenue levels as expected. DermTech is currently not profitable. Even if DermTech succeeds in increasing adoption of PLA or the Nevome test by dermatologists, in maintaining and creating relationships with DermTech’s existing and new customers, and developing and commercializing additional molecular diagnostic testing products, DermTech may not be able to generate sufficient revenue to achieve or sustain profitability or meet its anticipated revenue projections.

If DermTech is unable to execute its marketing strategy for PLA or the Nevome test and are unable to gain acceptance in the market, DermTech may be unable to generate sufficient revenue to sustain its business.

Although DermTech believes that its current tests and planned future tests represent a promising commercial opportunity, DermTech’s tests may never gain significant acceptance in the marketplace and therefore may never

 

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generate substantial revenue or profits for DermTech. DermTech will need to establish a market for its tests and build that market through physician education, awareness programs, and the publication of clinical trial results. Gaining acceptance in medical communities requires publication in leading peer-reviewed journals of results from studies using DermTech’s current tests and/or its planned future tests. The process of publication in leading medical journals is subject to a peer-review process and peer-reviewers may not consider the results of DermTech’s studies sufficiently novel or worthy of publication. Failure to have DermTech’s studies published in peer-reviewed journals would limit the adoption of DermTech’s current tests and its planned tests.

DermTech’s ability to successfully market the tests that it develops will depend on numerous factors, including:

 

   

conducting clinical utility studies of such tests in collaboration with key thought leaders to demonstrate their use and value in important medical decisions such as treatment selection;

 

   

the success of DermTech’s sales force;

 

   

whether healthcare providers believe such tests provide clinical utility;

 

   

whether the medical community accepts that such tests are sufficiently sensitive and specific to be meaningful in patient care and treatment decisions; and

 

   

whether health insurers, government health programs, and other third-party payers will cover and pay for such tests and, if so, whether they will adequately reimburse DermTech.

Failure to achieve widespread market acceptance of DermTech’s current tests and its planned future tests would materially harm DermTech’s business, financial condition, and results of operations.

If DermTech cannot develop tests to keep pace with rapid advances in technology, medicine and science, DermTech’s operating results and competitive position could be harmed.

In recent years, there have been numerous advances in technologies relating to the molecular diagnosis for cancer and other medical conditions. Several new cancer drugs have been approved, including several for melanoma, and a number of new drugs in clinical development may increase patient survival time. There have also been advances in methods used to identify patients likely to benefit from these drugs based on analysis of biomarkers. DermTech must continuously develop new tests and enhance any existing tests to keep pace with evolving standards of care. DermTech’s current tests and its planned tests could become obsolete unless DermTech continually innovates and expands them to demonstrate benefit in the diagnosis, monitoring, or prognosis of patients with cancer and other dermatologic conditions. If DermTech cannot adequately demonstrate the applicability of DermTech’s current tests and its planned future tests to new diagnostic and treatment developments, sales of DermTech’s tests could decline, which would have a material adverse effect on its business, financial condition, and results of operations.

DermTech’s future success will depend in part upon its ability to enhance its PLA, the Nevome test, and to develop, introduce, and commercialize other novel innovative and non-invasive diagnostics tests and services. New test development involves a lengthy and complex process and DermTech may be unable to commercialize new or improved tests or any other products DermTech may develop on a timely basis, or at all.

DermTech’s future success will depend in part upon its ability to enhance PLA, the Nevome test, and to develop new innovative products. DermTech’s failure to successfully develop new products on a timely basis could have a material adverse effect on its revenue, results of operations, and business.

The development of new or enhanced tests is a complex and uncertain process requiring precise technological execution. In addition, the successful development of new products may depend on the development of new technologies. DermTech may be required to undertake time-consuming and costly development activities. DermTech may experience difficulties that could delay or prevent the successful development,

 

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commercialization, and marketing of these new products. Before DermTech can commercialize any new products, it will need to expend significant funds in order to conduct substantial research and development, including validation studies.

DermTech’s product development process involves a high degree of risk, and product development efforts may fail for many reasons, including a failure to demonstrate the performance of the product or an inability to obtain any required certification or regulatory approval.

As DermTech develops products, it will have to make significant investments in product development, as well as sales and marketing resources. In addition, competitors may develop and commercialize competing products faster than DermTech is able to do so, which could have a material adverse effect on DermTech’s revenue, results of operations and business.

DermTech relies on a limited number of suppliers and, in some cases, a sole supplier, for certain of its laboratory substances, equipment and other materials, and any delays or difficulties securing these materials could disrupt DermTech’s laboratory operations and materially harm its business.

DermTech relies on a limited number of suppliers for certain of its laboratory substances, including reagents, as well as for the sequencers and various other equipment and materials DermTech uses in its laboratory operations. In particular, DermTech relies on Fischer Scientific and VWR for supplies and Adhesive Research for its adhesive tape material. DermTech does not have long-term agreements with any of its suppliers and, as a result, they could cease supplying these materials and equipment to DermTech at any time due to an inability to reach agreement with DermTech on supply terms, disruptions in their operations, a determination to pursue other activities or lines of business, or for other reasons, or they could fail to provide DermTech with sufficient quantities of materials that meet its specifications. Transitioning to a new supplier or locating a temporary substitute, if any are available, would be time-consuming and expensive, could result in interruptions in or otherwise affect the performance specifications of DermTech’s laboratory operations, or could require that DermTech revalidate its tests. In addition, the use of equipment or materials provided by a replacement supplier could require DermTech to alter its laboratory operations and procedures. Moreover, DermTech believes there are currently only a few manufacturers that are capable of supplying and servicing some of the equipment and other materials necessary for DermTech’s laboratory operations, including sequencers and various associated reagents. As a result, replacement equipment and materials that meet DermTech’s quality control and performance requirements may not be available on reasonable terms, in a timely manner or at all. If DermTech encounters delays or difficulties securing, reconfiguring or revalidating the equipment, reagents and other materials DermTech requires for its tests, DermTech’s operations could be materially disrupted and its business, financial condition, results of operations, and reputation could be adversely affected.

DermTech’s tests employ a novel diagnostic platform and may never be accepted by their intended markets.

DermTech’s future success depends on its ability to successfully commercialize PLA and Nevome tests, as well as DermTech’s ability to develop and market other tests that use its proprietary technology platform. The scientific discoveries that form the basis of DermTech’s proprietary technology platform and its tests are relatively new. DermTech is not aware of any other gene expression tests such as DermTech’s and there can be no assurance that physicians will be willing to use them. If DermTech does not successfully develop and commercialize its tests based upon its technological approach, DermTech may not become profitable and the value of its common stock may decline.

The novel nature of DermTech’s tests also means that fewer people are trained in or experienced with products of this type, which may make it difficult to find, hire, and retain capable personnel for research, development, and manufacturing positions.

Further, DermTech’s focus solely on gene expression tests, as opposed to multiple, more proven technologies for patient diagnosis, increases the risks associated with the ownership of DermTech’s common stock. If DermTech

 

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does not achieve market acceptance for its tests, DermTech may be required to change the scope and direction of its product development activities. In that case, DermTech may not be able to identify and implement successfully an alternative product development strategy.

If DermTech’s current tests and its planned tests do not to perform as expected, as a result of human error or otherwise, it could have a material adverse effect on DermTech’s operating results, reputation, and business.

DermTech’s success depends on the market’s confidence that it can provide reliable, high-quality diagnostic results. There is no guarantee that any accuracy DermTech has demonstrated to date will continue, particularly as the number of tests using DermTech’s assays increases and as the number of different tests that it develops and commercializes expands. DermTech believes that its customers are likely to be particularly sensitive to test defects and errors. As a result, the failure of DermTech’s current or planned tests to perform as expected could significantly impair DermTech’s reputation and the public image of its tests. As a result, the failure or perceived failure of DermTech’s products to perform as expected could have a material adverse effect on its business, financial condition and results of operation.

DermTech may be unable to manage its future growth effectively, which could make it difficult to execute its business strategy.

As part of its strategy, DermTech expects to increase its number of employees as its business grows. This future growth could create strain on DermTech’s organizational, administrative, and operational infrastructure, including laboratory operations, quality control, customer service, and sales and marketing. DermTech’s ability to manage its growth properly will require it to continue to improve its operational, financial, and management controls, as well as its reporting systems and procedures. If DermTech’s current infrastructure is unable to handle its growth, DermTech may need to further expand its infrastructure and staff and implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect DermTech’s operations. DermTech’s expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate additional employees. DermTech’s future financial performance and its ability to commercialize its products and to compete effectively will depend, in part, on DermTech’s ability to manage this potential future growth effectively, without compromising quality.

If DermTech’s sole laboratory facility becomes damaged or inoperable, or DermTech is required to vacate the facility, DermTech’s ability to sell and provide molecular tests and pursue its research and development efforts may be jeopardized.

DermTech does not have any clinical reference laboratory facilities outside of its facility in La Jolla, California. DermTech’s facilities and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, flooding, and power outages, which may render it difficult or impossible for DermTech to perform its diagnostic tests for some period of time. The inability to perform DermTech’s current tests, its planned tests, or the backlog of tests that could develop if DermTech’s facility is inoperable for even a short period of time may result in the loss of customers or harm to DermTech’s reputation or relationships with scientific or clinical collaborators, and DermTech may be unable to regain those customers or repair its reputation in the future. Furthermore, DermTech’s facilities and the equipment it uses to perform its research and development work could be costly and time-consuming to repair or replace.

The San Diego area has recently experienced serious fires and power outages, and is considered to lie in an area with earthquake risk.

Additionally, a key component of DermTech’s research and development process involves using biological samples as the basis for the development of its diagnostic tests. In some cases, these samples are difficult to obtain. If the parts of DermTech’s laboratory facility where it stores these biological samples were damaged or

 

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compromised, DermTech’s ability to pursue its research and development projects, as well as DermTech’s reputation, could be jeopardized. DermTech carries insurance for damage to its property and the disruption of its business, but this insurance may not be sufficient to cover all of DermTech’s potential losses and may not continue to be available to DermTech on acceptable terms, if at all.

Further, if DermTech’s CLIA certified laboratory became inoperable DermTech may not be able to license or transfer its technology to another facility with the necessary state licensure and CLIA certification under the scope of which DermTech’s current tests and its planned future tests could be performed. Even if DermTech finds a facility with such qualifications to perform DermTech’s tests, it may not be available to DermTech on commercially reasonable terms.

If DermTech cannot compete successfully with its competitors, DermTech may be unable to increase or sustain its revenues or achieve and sustain profitability.

DermTech’s principal competition comes from mainstream clinical diagnostic methods, used by dermatologists for many years, which focus on visual tumor tissue analysis. It may be difficult to change the methods or behavior of dermatologists to incorporate DermTech’s PLA, Nevome test, and Adhesive Skin Sample Collection Kits into their practices in conjunction with, or instead of, tissue biopsies and analysis. In addition, companies offering capital equipment and kits or reagents to local dermatologists represent another source of potential competition. These tests are used directly by the dermatologists, which can facilitate adoption. DermTech plans to focus its marketing and sales efforts on medical dermatologists rather than pathologists.

DermTech also faces competition from companies that offer device products or are conducting research to develop device products for analysis of pigmented lesions. In particular, MELA Sciences, Inc., markets its MelaFind® device to dermatologists. Scibase AB and Verisante Technology, Inc. have devices under development and may market their medical products directly to dermatologists if and when they obtain Food and Drug Administration, or FDA, approval. In addition to these companies, DermTech’s competitors also include other device companies selling photographic technologies, whole body photography services, dermatoscopes, or confocal microscopy, such as Fotofinder, Molemate, Canfield Scientific, MedX, and Caliber I.D. Many of these groups, in addition to operating research and development laboratories, are selling equipment and devices.

In addition to these device companies, Myriad Genetics, Inc., offers an expression test for melanoma that is used on surgical biopsy specimens. Myriad Genetics, Inc. could also try and market their test as a biopsy aid at the point-of-care. Gene expression testing is a relatively new area of science, especially in dermatology and DermTech cannot predict what tests others will develop that may compete with or provide results similar or superior to the results DermTech is able to achieve with the tests it develops. There are a number of companies that are focused on the oncology diagnostic market and expression tests including Exact Sciences Corporation, Veracyte, Inc., Genomic Health, Inc. and others.

Additionally, projects related to cancer diagnostics and particularly genomics have received increased government funding, both in the United States and internationally. As more information regarding cancer genomics becomes available to the public, DermTech anticipates that more products aimed at analyzing pigmented lesions and identifying melanoma may be developed and that these products may compete with DermTech’s. In addition, competitors may develop their own versions of DermTech’s current or planned tests in countries where DermTech did not apply for patents or where DermTech’s patents have not issued or have expired and may compete with DermTech in those countries, including encouraging the use of their test by physicians or patients in other countries. In addition, one or more competitors may seek to invalidate or render unenforceable any of DermTech’s patents in a court of competent jurisdiction or at the United States Patent and Trademark Office, or USPTO. If any such proceeding were to be successful and result in the invalidation or unenforceability of one or more patents in DermTech’s intellectual property portfolio, DermTech may be unable to prevent unlicensed third-party competition in the marketplace with respect to DermTech’s current and planned future tests.

 

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Some of DermTech’s present and potential competitors have widespread brand recognition and substantially greater financial and technical resources and development, production, and marketing capabilities than DermTech does. Others may develop lower-priced, less complex tests that payers and dermatologists could view as functionally equivalent to DermTech’s current or planned tests, which could force DermTech to lower the list price of its tests and impact its operating margins and ability to achieve and maintain profitability. In addition, technological innovations that result in the creation of enhanced diagnostic tools that are more sensitive or specific than DermTech’s may enable other clinical laboratories, hospitals, physicians, or medical providers to provide specialized diagnostic tests similar to DermTech’s in a more patient-friendly, efficient, or cost-effective manner than is currently possible. If DermTech cannot compete successfully against current or future competitors, it may be unable to increase or create market acceptance and sales of DermTech’s current or planned tests, which could prevent DermTech from increasing or sustaining its revenues or achieving or sustaining profitability.

DermTech’s competitors may be able to respond more quickly and effectively than DermTech can to new or changing opportunities, technologies, standards, or customer requirements. DermTech anticipates that it will face increased competition in the future as existing companies and competitors develop new or improved products and distribution strategies and as new companies enter the market with new technologies and distribution strategies. DermTech may not be able to compete effectively against these organizations. DermTech’s ability to compete successfully and to increase its market share is dependent upon DermTech’s reputation for providing responsive, professional, and high-quality products and services and achieving strong customer satisfaction. Increased competition in the future could adversely affect DermTech’s revenue, revenue growth rate, if any, margins and market share.

If DermTech is unable to identify collaborators willing to work with it to conduct clinical utility studies, or the results of those studies do not demonstrate that a test provides clinically meaningful information and value, commercial adoption of DermTech’s tests may be slow, which would negatively impact DermTech’s business.

DermTech believes clinical utility studies will show how the PLA and the Nevome test changes the decision-making of the dermatologist toward making a surgical biopsy decision, particularly to avoid making a surgical biopsy when the test is negative. Clinical utility studies also show the impact of the test results on patient care and management. Clinical utility studies are typically performed with collaborating dermatologists at medical centers and hospitals, analogous to a clinical trial, and generally result in peer-reviewed publications.

DermTech is currently conducting a variety of clinical trials for the PLA and Carcinome tests with investigators at multiple sites in the U.S. DermTech will need to conduct additional studies for these tests, as well as other tests DermTech plans to introduce, to drive test adoption in the marketplace and reimbursement. Should DermTech not be able to perform these studies, or should their results not provide clinically meaningful data and value for physicians, including dermatologists and oncologists, adoption of DermTech’s tests could be impaired and it may not be able to obtain reimbursement for them.

DermTech is undergoing a management transition.

DermTech has recently added a new Chief Commercial Officer. DermTech is also recruiting for other senior positions including payer market access and reimbursement. DermTech’s board of directors and management reporting structure may change. Such a management transition subjects DermTech to a number of risks, including risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, effects on corporate culture, and the need for transfer of historical knowledge. In addition, DermTech’s operations will be adversely affected if its management does not work together harmoniously, efficiently allocate responsibilities between themselves, or implement and abide by effective controls.

 

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The loss of key members of DermTech’s executive management team could adversely affect its business.

DermTech’s success in implementing its business strategy depends largely on the skills, experience, and performance of key members of its executive management team and others in key management positions, including John Dobak, M.D., DermTech’s Chief Executive Officer and President, Zuxu Yao, Ph.D., DermTech’s Chief Scientific Officer, and Burkhard Jansen, M.D., DermTech’s Chief Medical Officer. The collective efforts of each of these persons and others working with them as a team are critical to DermTech as it continues to develop its technologies, tests, and research and development and sales programs. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of DermTech’s executive management team could adversely affect its operations. If DermTech were to lose one or more of these key employees, DermTech could experience difficulties in finding qualified successors, competing effectively, developing its technologies, and implementing its business strategy. DermTech’s Chief Executive Officer and President, Chief Commercial Officer, Chief Medical Officer, and V.P. of Research and Development have employment agreements; however, the existence of an employment agreement does not guarantee retention of members of DermTech’s executive management team and DermTech may not be able to retain those individuals for the duration of or beyond the end of their respective terms. DermTech does not maintain “key person” life insurance on any of its employees.

In addition, DermTech relies on collaborators, consultants, and advisors, including scientific and clinical advisors, to assist DermTech in formulating its research and development and commercialization strategy. DermTech’s collaborators, consultants, and advisors are generally employed by employers other than DermTech and may have commitments under agreements with other entities that may limit their availability to DermTech.

The loss of a key employee, the failure of a key employee to perform in his or her current position, or DermTech’s inability to attract and retain skilled employees could result in DermTech’s inability to continue to grow its business or to implement its business strategy.

There is a scarcity of experienced professionals in DermTech’s industry. If DermTech is not able to retain and recruit personnel with the requisite technical skills, it may be unable to successfully execute its business strategy.

The specialized nature of DermTech’s industry results in an inherent scarcity of experienced personnel in the field. DermTech’s future success depends upon its ability to attract and retain highly skilled personnel, including scientific, technical, laboratory, sales, marketing, business, regulatory, and administrative personnel necessary to support DermTech’s anticipated growth, develop DermTech’s business, and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that DermTech requires and the competition for qualified personnel among life science businesses, DermTech may not succeed in attracting or retaining the personnel it requires to continue and grow DermTech’s operations.

DermTech’s inability to attract, hire, and retain a sufficient number of qualified sales professionals would hamper DermTech’s ability to launch and increase demand for its PLA, to expand geographically, and to successfully commercialize any other tests or products DermTech may develop.

To succeed in selling DermTech’s PLA, and any other tests or products that DermTech is able to develop, DermTech must expand its sales force in the United States and/or internationally by recruiting sales representatives with extensive experience in dermatology and close relationships with medical dermatologists, dermatopathologists, and other hospital personnel. To achieve its marketing and sales goals, DermTech will need to substantially build its sales and commercial infrastructure, with which to date it has had little experience. Sales professionals with the necessary technical and business qualifications are in high demand, and there is a risk that DermTech may be unable to attract, hire, and retain the number of sales professionals with the right qualifications, scientific backgrounds, and relationships with decision-makers and potential customers needed to achieve DermTech’s sales goals. DermTech expects to face competition from other companies in its industry,

 

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some of whom are much larger than DermTech and who can pay greater compensation and benefits than DermTech can, in seeking to attract and retain qualified sales and marketing employees. If DermTech is unable to hire and retain qualified sales and marketing personnel, its business will suffer.

DermTech currently relies on third-party suppliers for critical materials needed to perform DermTech’s current tests and its planned future tests and any problems experienced by them could result in a delay or interruption of their supply to DermTech.

DermTech currently purchases raw materials for its tests and products under purchase orders and does not have long-term contracts with most of the suppliers of these materials. If suppliers were to delay or stop producing DermTech’s materials or reagents, or if the prices they charge DermTech were to increase significantly, or if they elected not to sell to DermTech, DermTech would need to identify other suppliers. DermTech could experience delays in manufacturing or performing its tests while finding another acceptable supplier, which could impact DermTech’s results of operations. The changes could also result in increased costs associated with qualifying the new materials or reagents and in increased operating costs. Further, any prolonged disruption in a supplier’s operations could have a significant negative impact on DermTech’s ability to perform tests in a timely manner.

Some of the components used in DermTech’s current or planned products are currently sole source, and substitutes for these components might not be able to be obtained easily or may require substantial design or manufacturing modifications. Any significant problem experienced by one of DermTech’s sole-source suppliers may result in a delay or interruption in the supply of components to DermTech until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay or interruption would likely lead to a delay or interruption in DermTech’s manufacturing operations. The inclusion of substitute components must meet DermTech’s product specifications and could require DermTech to qualify the new supplier with the appropriate government regulatory authorities. In addition, one or more components used in DermTech’s current, or future planned, products may be patented by a third party and may not have any substantial non-infringing uses, in which case, any inability to secure a license to such components on terms that are commercially reasonable to DermTech may have a material impact on DermTech’s business and render it difficult or impracticable for DermTech to continue to offer its current and future planned tests and products.

DermTech may encounter manufacturing problems or delays that could result in lost revenue.

The Adhesive Skin Sample Collection Kits DermTech distributes are manufactured by a third party supplier. This manufacturer assembles several components, including the key adhesive patch trifold, into a finished product, then labels, stores, and ships this finished product. The adhesive tape subcomponent of the adhesive patches is provided by a single-source third party. This tape is assembled into the individual adhesive patches by another third-party supplier.

DermTech believes it has arranged for adequate manufacturing capacity for the Adhesive Skin Sample Collection Kits through DermTech’s third-party manufacturer. If demand for DermTech’s current tests and its planned future tests increases significantly, DermTech will need to either expand manufacturing capabilities through its third-party manufacturer or outsource to other manufacturers. If DermTech’s third-party or other manufacturers engaged by DermTech fail to manufacture and deliver the Adhesive Skin Sample Collection Kits or certain reagents in a timely manner, DermTech’s relationships with its customers could be seriously harmed. DermTech cannot assure you that manufacturing or quality control problems will not arise as DermTech attempts to increase the production of the Adhesive Skin Sample Collection Kit or that DermTech can increase its manufacturing capabilities and maintain quality control in a timely manner or at commercially reasonable costs. If DermTech cannot have the Adhesive Skin Sample Collection Kits manufactured consistently on a timely basis because of these or other factors, it could have a significant negative impact on DermTech’s ability to perform tests and generate revenues.

 

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If DermTech cannot support demand for its current tests and its planned future tests, including successfully managing the evolution of its technology and manufacturing platforms, DermTech’s business could suffer.

As DermTech’s test volume grows, DermTech will need to increase its testing capacity, implement automation, increase DermTech’s scale and related processing, customer service, billing, collection, and systems process improvements, and expand DermTech’s internal quality assurance program and technology to support testing on a larger scale. DermTech will also need additional technicians, certified laboratory scientists, and other scientific and technical personnel to process these additional tests. Any increases in scale, related improvements and quality assurance may not be successfully implemented and appropriate personnel may not be available. As additional tests are commercialized, DermTech may need to bring new equipment on line, implement new systems, technology, controls and procedures, and hire personnel with different qualifications. Failure to implement necessary procedures or to hire the necessary personnel could result in a higher cost of processing or an inability to meet market demand. DermTech cannot assure you that it will be able to perform tests on a timely basis at a level consistent with demand, that DermTech’s efforts to scale its commercial operations will not negatively affect the quality of its test results or that DermTech will respond successfully to the growing complexity of its testing operations. If DermTech encounters difficulty meeting market demand or quality standards for its current tests and its planned future tests, DermTech’s reputation could be harmed and its future prospects and business could suffer, which may have a material adverse effect on DermTech’s financial condition, results of operations, and cash flows.

If DermTech were sued for product liability or professional liability, it could face substantial liabilities that exceed its resources.

The marketing, sale, and use of DermTech’s current tests and its planned future diagnostic tests could lead to the filing of product liability claims against DermTech if someone alleges that its tests failed to perform as designed. DermTech may also be subject to liability for errors in the test results DermTech provides to physicians or for a misunderstanding of, or inappropriate reliance upon, the information DermTech provides. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for DermTech to defend.

Although DermTech believes that its existing product and professional liability insurance is adequate, DermTech’s insurance may not fully protect DermTech from the financial impact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against DermTech, with or without merit, could increase DermTech’s insurance rates or prevent DermTech from securing insurance coverage in the future. Additionally, any product liability lawsuit could damage DermTech’s reputation, result in the recall of tests, or cause current partners to terminate existing agreements and potential partners to seek other partners, any of which could impact DermTech’s results of operations.

If DermTech uses biological and hazardous materials in a manner that causes injury or violates laws or regulations, DermTech could be liable for damages or subject to enforcement actions.

DermTech’s activities currently require the controlled use of potentially harmful biological and hazardous materials and chemicals. DermTech cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, DermTech could be held liable for any resulting damages, and any liability could exceed DermTech’s resources or any applicable insurance coverage DermTech may have. Additionally, DermTech is subject to, on an ongoing basis, federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on DermTech’s financial condition, results of operations and cash flows. In the event of an accident or if DermTech otherwise fails to comply with applicable regulations, DermTech could lose its permits or approvals or be held liable for damages or penalized with fines.

 

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DermTech may acquire other businesses, form joint ventures, or make investments in other companies or technologies that could harm DermTech’s operating results, dilute its stockholders’ ownership, increase its debt, or cause it to incur significant expense.

As part of DermTech’s business strategy, DermTech may pursue acquisitions of businesses and assets. DermTech also may pursue strategic alliances and joint ventures that leverage its core technology and industry experience to expand its offerings or distribution. DermTech has no experience with acquiring other companies and limited experience with forming strategic alliances and joint ventures. DermTech may not be able to find suitable partners or acquisition candidates, and DermTech may not be able to complete such transactions on favorable terms, if at all. If DermTech makes any acquisitions, it may not be able to integrate these acquisitions successfully into its existing business, and DermTech could assume unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could have a material adverse effect on DermTech’s financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing DermTech’s existing business. DermTech may experience losses related to investments in other companies, which could have a material negative effect on DermTech’s results of operations. DermTech may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and DermTech may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or joint venture.

To finance any acquisitions or joint ventures, DermTech may choose to issue shares of its common stock as consideration, which would dilute the ownership of DermTech’s stockholders. If the price of its common stock is low or volatile, DermTech may not be able to acquire other companies or fund a joint venture project using its stock as consideration. Alternatively, it may be necessary for DermTech to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to DermTech, or at all.

International expansion of DermTech’s business would expose DermTech to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.

DermTech’s business strategy contemplates possible international expansion, including partnering with academic and commercial testing laboratories, and introducing the PLA, the Nevome test, or other future products outside the United States and exporting the Adhesive Skin Sample Collection Kit. DermTech is currently testing samples through a distributor in Canada. Doing business internationally involves a number of risks, including:

 

   

multiple, conflicting, and changing laws and regulations such as tax laws, export and import restrictions, privacy, data security and data transfer laws, employment laws, intellectual property laws, regulatory requirements, and other governmental approvals, permits and licenses;

 

   

failure by DermTech or its distributors to obtain regulatory approvals for the sale or use of DermTech’s current tests and its planned future tests in various countries;

 

   

difficulties in managing foreign operations;

 

   

complexities associated with managing government payer systems, multiple payer-reimbursement regimes, or self-pay systems;

 

   

logistics and regulations associated with shipping blood samples, including infrastructure conditions and transportation delays;

 

   

limits on DermTech’s ability to penetrate international markets if its current tests and its planned future diagnostic tests cannot be processed by an appropriately qualified local laboratory;

 

   

financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;

 

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reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on any trade secrets DermTech may have, if such protection is available;

 

   

natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions; and

 

   

failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintaining accurate information and control over sales activities and distributors’ activities.

Any of these risks, if encountered, could significantly harm DermTech’s future international expansion and operations and, consequently, have a material adverse effect on DermTech’s financial condition, results of operations, and cash flows.

Declining general economic or business conditions may have a negative impact on DermTech’s business.

Continuing concerns over United States health care reform legislation and energy costs, geopolitical issues, the availability and cost of credit, and government stimulus programs in the United States and other countries have contributed to increased volatility and diminished expectations for the global economy. These factors, combined with low business and consumer confidence and high unemployment, precipitated an economic slowdown and recession. If the economic climate does not improve, or it deteriorates, DermTech’s business, including DermTech’s access to patient samples and the addressable market for diagnostic tests that DermTech may successfully develop, as well as the financial condition of DermTech’s suppliers and its third-party payers, could be adversely affected, resulting in a negative impact on DermTech’s business, financial condition, and results of operations.

Intrusions into DermTech’s computer systems could result in compromise of confidential information.

Despite the implementation of security measures, DermTech’s technology or systems that it interfaces with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, or similar problems. Any of these might result in confidential medical, business, or payment information, including as may be disclosed as part of a credit card transaction, or other information of other persons or of DermTech, including employees, being revealed to unauthorized persons.

DermTech must comply with complex and overlapping laws protecting the privacy and security of health information and personal data.

There are a number of state, federal and international laws protecting the privacy and security of health information and personal data. As part of the American Recovery and Reinvestment Act 2009, or ARRA, Congress amended and strengthened the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s healthcare information by healthcare providers, healthcare clearinghouses, and health insurance plans, collectively referred to as covered entities. HIPAA also imposes compliance obligations and corresponding penalties for non-compliance on individuals and entities that provide services to healthcare providers and other covered entities, collectively referred to as business associates. ARRA also made significant increases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement authority to state attorneys general. The amendments also created notification requirements for individuals whose health information has been inappropriately accessed or disclosed: notification requirements to federal regulators and in some cases, notification to local and national media. Notification is not required under HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by the U.S. Department of Health and Human Services, or HHS. Most states have adopted laws requiring notification of affected individuals and state regulators in the event of a

 

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breach of personal information, which is a broader class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the United States implicate local and national data protection standards, impose additional compliance requirements, and generate additional risks of enforcement for non-compliance. DermTech must comply with all applicable privacy and data security laws in order to operate its business and may be required to expend significant capital and other resources to ensure ongoing compliance, to protect against security breaches and hackers or to alleviate problems caused by such breaches. Breaches of health information and/or personal data may be extremely expensive to remediate, may prompt federal or state investigation, fines, civil and/or criminal sanctions and significant reputational damage.

DermTech may have to comply with laws governing the use and disclosure of genetic testing information.

Many states have adopted laws governing genetic testing and the use and disclosure of genetic test results. These laws impose specific testing consent requirements, patient authorization requirements for the use and disclosure of test results and some impose limits on the retention and secondary use of patient samples. Many of these laws are vaguely written and some are overly broad. DermTech must analyze and ensure compliance with the genetic testing laws in the jurisdictions from which DermTech obtains samples and may be required to expend significant capital and other resources to ensure ongoing compliance. DermTech’s failure to comply could interfere with DermTech’s ability to operate and/or lead to sanctions, fines, or other regulatory actions as well as civil claims.

DermTech depends on its information technology and telecommunications systems, and any failure of these systems could harm its business.

DermTech depends on information technology and telecommunications systems for significant aspects of its operations. In addition, DermTech’s third-party billing and collections provider depends upon telecommunications and data systems provided by outside vendors and information DermTech provides on a regular basis. These information technology and telecommunications systems support a variety of functions, including test processing, sample tracking, quality control, customer service and support, billing and reimbursement, research and development activities, and DermTech’s general and administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts, and natural disasters. Moreover, despite network security and back-up measures, some of DermTech’s servers are potentially vulnerable to physical or electronic break-ins, computer viruses, and similar disruptive problems. Despite the precautionary measures DermTech has taken to prevent unanticipated problems that could affect its information technology and telecommunications systems, failures or significant downtime of DermTech’s information technology or telecommunications systems, or those used by DermTech’s third-party service providers could prevent DermTech from processing tests, providing test results to oncologists, pathologists, billing payers, processing reimbursement appeals, handling patient or physician inquiries, conducting research and development activities, and managing the administrative aspects of DermTech’s business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of DermTech’s operations depend could have an adverse effect on its business.

DermTech relies on Federal Express Corporation, or FedEx, and United Parcel Service of America, Inc., or UPS, for the distribution of its products and, if FedEx or UPS incurs any damage to the facilities where DermTech products are located or is unable to distribute DermTech’s products as needed, it could have a material adverse effect on DermTech’s results of operations and business.

DermTech relies on FedEx and UPS for the distribution of its products. The FedEx or UPS facilities where DermTech products are located may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, communications failure, or terrorism. Any material destruction to the

 

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facilities where DermTech’s products are located could adversely affect the ability of FedEx or UPS to meet the needs of DermTech’s customers. In addition, a disruption or slowdown in the operations of FedEx or UPS, including as a result of damage to the facilities of FedEx or UPS or a strike by FedEx or UPS employees, could cause delays in DermTech’s ability to fulfill customer orders and may cause orders to be cancelled, lost, or delivered late, DermTech’s products to be returned, or receipt of products to be refused, any of which could adversely affect DermTech’s business and its results of operations. If DermTech’s shipping costs were to increase as a result of an increase by FedEx or UPS or as a result of obtaining a new third-party logistics company and if DermTech is unable to pass on these higher costs to its customers, it could have a material adverse effect on DermTech’s results of operations and business.

Regulatory Risks Relating to DermTech’s Business

Healthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on DermTech’s financial condition, results of operations, and cash flows.

The 2010 Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, makes a number of substantial changes in the way health care is financed by both governmental and private insurers. The ACA made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA requires each medical device manufacturer to pay an excise tax on the medical devices it sells. The medical device tax has been suspended through 2019. It is unclear at this time when, or if, sales of DermTech’s laboratory developed tests, or LDTs, will trigger the medical device tax, and it is possible that this tax will apply to some or all of DermTech’s existing tests or tests it may develop in the future. Additionally, the ACA introduces mechanisms to reduce the per capita rate of growth in Medicare spending if expenditures exceed certain targets. Any such reductions could affect reimbursement payments for DermTech’s tests. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which DermTech expects will impact its industry and its operations in ways that DermTech cannot currently predict.

Among other things, the ACA:

 

   

establishes an Independent Payment Advisory Board to reduce the per capita rate of growth in Medicare spending if spending exceeds a target growth rate. The Independent Payment Advisory Board has broad discretion to propose policies, which may have a negative impact on payment rates for services, including clinical laboratory services, beginning in 2016, and for hospital services beginning in 2020; and

 

   

established the Physician Payments Sunshine Act, or the Sunshine Act, which imposes new reporting and disclosure requirements for applicable device manufacturers of covered products and those entities under common ownership that provide assistance and support to applicable manufacturers, with regard to payments or other transfers of value made to certain practitioners (including physicians and teaching hospitals) and certain investment ownership interests held by physicians in the reporting entity.

DermTech cannot predict whether or when these or other recently enacted healthcare initiatives will be implemented at the federal or state level or how any such legislation or regulation may affect DermTech. For instance, the payment reductions imposed by the ACA and the changes to reimbursement amounts paid by Medicare for tests such as DermTech based on the procedure set forth in PAMA, could limit the prices DermTech will be able to charge or the amount of available reimbursement for DermTech’s tests, which would reduce its revenue. Additionally, these healthcare policy changes could be amended or additional healthcare initiatives could be implemented in the future. For instance, there is uncertainty regarding the continued effect of the ACA in its current form following the results of the 2016 U.S. presidential election and in light of the policies of the current administration, which has threatened to repeal, replace, or change the ACA. Further, the impact on DermTech’s business of the expansion of the federal and state governments’ role in the U.S. healthcare industry

 

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generally, including the social, governmental, and other pressures to reduce healthcare costs while expanding individual benefits, is uncertain. Any future changes or initiatives could have a materially adverse effect on DermTech’s business, financial condition, results of operations, and cash flows.

Currently, DermTech is not subject to the Sunshine Act provisions of the ACA. However, if in the future the FDA determines that the Adhesive Skin Sample Collection Kit or any of DermTech’s current or future products are subject to premarket clearance or approval process, DermTech would be subject to the Physician Payments Sunshine Act.

The final rule implementing the Sunshine Act is complex, ambiguous, and broad in scope. If DermTech is considered an “applicable manufacturer” under the Sunshine Act it will be subject to reporting requirements. In addition, certain of DermTech’s subsidiaries may be found to be subject to the reporting requirements to the extent they provide assistance and support to DermTech with respect to the manufacturing, marketing promotion, sale or distribution of DermTech’s covered products. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, and teaching hospitals. The Sunshine Act preempts similar state reporting laws, although DermTech or its subsidiaries may be required to continue to report under certain provisions of such state laws. Failure to comply with the Sunshine Act may subject DermTech to civil monetary penalties.

The U.S. federal government continues to show significant interest in pursuing health care reform and reducing health care costs. Similarly, commercial third-party payers may seek to reduce costs by reducing coverage or reimbursement for DermTech’s tests. Any government-adopted reform measures or changes to commercial third-party payer coverage and reimbursement policies could cause significant pressure on the pricing of, and reimbursement for, health care products and services, including DermTech’s tests, which could decrease demand for DermTech’s tests, and adversely affect DermTech’s sales and revenue.

In addition, some payers have implemented, or are in the process of implementing, laboratory benefit management programs, often using third-party benefit managers to manage these programs. The stated goals of these programs are to help improve the quality of outpatient laboratory services, support evidence-based guidelines for patient care and lower costs. The impact on laboratories, such as DermTech, of active laboratory benefit management by third parties is unclear, and DermTech expects that it would have a negative impact on its revenue in the short term. It is possible that payers will resist reimbursement for tests that DermTech offers, in favor of less expensive tests, may require pre-approval for DermTech’s tests or may impose additional pricing pressure on and substantial administrative burden for reimbursement for DermTech’s tests. DermTech expects to continue to focus substantial resources on increasing adoption of, and coverage and reimbursement for, DermTech’s current tests and any future tests it may develop. DermTech believes it may take several years to achieve broad coverage and adequate contracted reimbursement with a majority of payers for DermTech’s tests. However, DermTech cannot predict whether, under what circumstances, or at what payment levels payers will cover and reimburse DermTech’s tests. If DermTech fails to establish and maintain broad adoption of, and coverage and reimbursement for, its tests, DermTech’s ability to generate revenue could be harmed and its future prospects and its business could suffer.

DermTech’s business could be adversely impacted by its failure or the failure of physicians to comply with the ICD-10-CM Code Set.

CMS adopted a new coding set for diagnoses, commonly known as ICD-10-CM, which significantly expanded the previous coding set. Compliance with ICD-10-CM is required for all claims with dates of service on or after October 1, 2015. DermTech believes it has fully implemented ICD-10-CM, however, DermTech’s failure to implement and apply the new code set could adversely impact its business. In addition, if physicians fail to provide appropriate codes for desired tests, DermTech may not be reimbursed for tests it performs.

 

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Billing for DermTech’s tests is complex and DermTech must dedicate substantial time and resources to the billing process to be paid for its tests; long payment cycles of Medicare, Medicaid, and/or other third-party payers, or other payment delays, could hurt DermTech’s cash flows and increase its need for working capital.

Billing for clinical laboratory testing services is complex, time-consuming, and expensive. Depending on the billing arrangement and applicable law, DermTech will bill various payers, including Medicare, Medicaid, private insurance companies, and patients, all of which have different billing requirements. To the extent laws or contracts require DermTech to bill patient co-payments or co-insurance, DermTech must also comply with these requirements. DermTech may also face increased risks in its collection efforts, including potential write-offs of doubtful accounts, long collection cycles, and failure by third parties to properly process payment of claims in a timely manner which could adversely affect DermTech‘s business, results of operations, and financial condition. Several factors make the billing practice complex, including:

 

   

compliance with complex federal and state regulations related to Medicare billing;

 

   

disputes among payers as to which party is responsible for payment; resistance by patients to cover any substantial amount of the payment;

 

   

differences in coverage among payers and effect of patient co-payments or co-insurance;

 

   

differences in information and billing requirements among payers;

 

   

incorrect or missing billing information; and

 

   

the resources required to manage the billing and claims appeals process.

Additionally, DermTech’s billing activities require it to implement compliance procedures and oversight, train and monitor its employees, challenge coverage and payment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. Payers also conduct external audits to evaluate payments, which add further complexity to the billing process.

Failure to comply with these billing requirements may result in non-payment, refunds, exclusion from government healthcare programs, and civil or criminal liabilities, any of which may have a material adverse effect on DermTech’s revenues and earnings. These billing complexities and the related uncertainties in obtaining reimbursement could negatively affect DermTech’s cash flow and DermTech’s ability to achieve profitability.

DermTech’s business could be harmed by the loss, suspension, or other restriction on a license, certification, or accreditation, or by the imposition of a fine or penalties, under CLIA, its implementing regulations, or other state, federal, and foreign laws and regulations affecting licensure or certification, or by future changes in these laws or regulations.

The diagnostic testing industry is subject to extensive laws and regulations, many of which have not been interpreted by the courts. CLIA requires virtually all laboratories to be certified by the federal government and mandates compliance with various operational, personnel, facilities administration, quality, and proficiency testing requirements intended to ensure that testing services are accurate, reliable, and timely. CLIA certification is also a prerequisite to be eligible to bill state and federal health care programs, as well as many private third-party payers, for laboratory testing services. DermTech’s clinical laboratory must be certified under CLIA in order for it to perform testing on human specimens. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance, and inspections. DermTech has a current certificate of registration from CMS to perform high-complexity testing, which is managed by California Laboratory Field Services, or CA LFS. To renew this certificate, DermTech is subject to survey and inspection every two years. Moreover, CA LFS and/or CLIA

 

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inspectors may make periodic inspections of DermTech’s clinical laboratory outside of the renewal process. The biennial survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA certificate of accreditation, a CMS-approved accreditation organization. Sanctions for failure to comply with CLIA requirements, including proficiency testing violations, may include suspension, revocation, or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as the imposition of significant fines or criminal penalties. In addition, DermTech is subject to regulation under state laws and regulations governing laboratory licensure. Some states have enacted state licensure laws that are more stringent than CLIA.

In addition, state and foreign requirements for laboratory certification may be costly or difficult to meet and could affect DermTech’s ability to receive specimens from certain states or foreign countries. Currently DermTech is receiving samples from all 50 U.S. states and certain provinces in Canada. Each state maintains independent licensure, registration, or certification procedures that it must maintain compliance with in order to receive and test samples from that location. Maintaining compliance with the myriad of state and foreign requirements is time consuming and resource intensive and failure to maintain compliance could result in sanctions.

Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or DermTech’s failure to renew a CLIA certificate, a state or foreign license, or accreditation, could have a material adverse effect on DermTech’s business. If the CLIA certificate of DermTech’s laboratory is revoked, that could also impact DermTech’s licensure or certification in the states or in foreign jurisdictions.

DermTech is also accredited from the College of American Pathologists, or CAP, which is a higher standard than that of the CLIA regulations. CAP is an independent, non-governmental organization of board-certified pathologists that accredits laboratories nationwide on a voluntary basis and that has been recognized by CMS as an accreditation organization to inspect laboratories to determine adherence to the CLIA standards. Since CAP has deemed status with CA LFS, DermTech’s post-CAP re-accreditation inspections will be performed by teams formed by CAP. While not required to operate a CLIA-certified laboratory, many private insurers require CAP accreditation as a condition to contracting with clinical laboratories to cover their tests. In addition, some countries outside the United States require CAP accreditation as a condition to permitting clinical laboratories to test samples taken from their citizens. Failure to maintain CAP accreditation could have a material adverse effect on the sales of DermTech’s tests and the results of its operations.

If DermTech were to lose its CLIA certification, CAP accreditation or California laboratory license, whether as a result of a revocation, suspension, or limitation, DermTech would no longer be able to offer its tests, which would limit its revenues and harm its business. If DermTech were to lose its license in any other state where it is required to hold a license, DermTech would not be able to test specimens from those states

If the FDA were to begin requiring approval or clearance of DermTech’s current tests and its planned future tests, DermTech could incur substantial costs and time delays associated with meeting requirements for premarket clearance or approval or DermTech could experience decreased demand for, or reimbursement of, its tests.

Although the FDA maintains that it has authority to regulate the development and use of LDTs, such as DermTech’s and many other laboratories’ test as medical devices, it has not exercised its authority with respect to most LDTs as a matter of enforcement discretion. The FDA could, at any time, change its policy with regard to this matter.

DermTech believes that its tests, as utilized in its clinical laboratory, are and would be LDTs. As a result, DermTech believes that pursuant to the FDA’s current policies and guidance, the FDA does not require that DermTech obtain regulatory clearances or approvals for DermTech’s LDTs. DermTech believes the Adhesive Skin Sample Collection Kit it provides for collection and transport of skin samples from a health care provider to

 

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DermTech’s clinical laboratory is considered a Class I medical device subject to the FDA regulation, but is currently exempt from premarket review by the FDA. However, the FDA could assert this device is Class II, which would subject it and DermTech’s assay to premarket clearance or approval processes, which could be time-consuming and expensive. While DermTech believes that it is currently in material compliance with applicable laws and regulations, DermTech cannot assure you that the FDA, or other regulatory agencies, would agree with its determination, and a determination that it has violated these laws, or a public announcement that DermTech is being investigated for possible violations of these laws, could adversely affect DermTech’s business, prospects, results of operations, or financial condition.

Even though DermTech commercializes its tests as LDTs, DermTech’s tests may in the future become subject to more onerous regulation by the FDA. For example, the FDA may disagree with DermTech’s assessment that its tests fall within the definition of an LDT and seek to regulate DermTech’s tests as medical devices. Moreover, the FDA has issued draft guidance and a 2017 Discussion Paper to allow for further public discussion about an appropriate LDT oversight approach and to give congressional committees the opportunity to develop a legislative solution. The FDA has also solicited public input and published two draft guidance documents relating to FDA oversight of NGS-based tests. These two draft guidance documents describe the FDA’s thinking and proposed approach regarding the possible use of FDA-recognized standards to support analytical validity, and public human genetic variant databases to support clinical validity, of these tests. Additionally, two different bi-partisan bills have been circulated as discussion drafts in Congress, both of which reflect FDA policy positions and seek to establish new regulatory frameworks for laboratory testing, including the type of testing DermTech provides.

If the FDA begins to enforce its medical device requirements for LDTs, or if the FDA disagrees with DermTech’s assessment that its tests are LDTs, DermTech could for the first time be subject to enforcement of a variety of regulatory requirements, including registration and listing, medical device reporting, and quality control, and DermTech could be required to obtain premarket clearance or approval for its existing tests and any new tests it may develop, which may force DermTech to cease marketing its tests until it obtains the required clearance or approval. The premarket review process can be lengthy, expensive, time-consuming, and unpredictable. Further, obtaining premarket clearance may involve, among other things, successfully completing clinical trials. Clinical trials require significant time and cash resources and are subject to a high degree of risk, including risks of experiencing delays, failing to complete the trial or obtaining unexpected or negative results. If DermTech is required to obtain premarket clearance or approval and/or conduct premarket clinical trials, DermTech’s development costs could significantly increase, DermTech’s introduction of any new tests it may develop may be delayed, and sales of DermTech’s existing tests could be interrupted or stopped. Any of these outcomes could reduce DermTech’s revenue or increase its costs and materially adversely affect its business, prospects, results of operations, or financial condition. Moreover, any cleared or approved labeling claims may not be consistent with DermTech’s current claims or adequate to support continued adoption of and reimbursement for DermTech’s tests. For instance, if DermTech is required by the FDA to label DermTech’s tests as investigational, or if labeling claims the FDA allows DermTech to make are limited, order levels may decline and reimbursement may be adversely affected. As a result, DermTech could experience significantly increased development costs and a delay in generating additional revenue from its existing tests or from tests it may develop.

The requirement of premarket review could negatively affect DermTech’s business until such review is completed and clearance to market or approval is obtained. The FDA could require that DermTech stop selling its tests pending premarket clearance or approval. If the FDA allows DermTech’s tests to remain on the market but there is uncertainty about DermTech’s tests, if they are labeled investigational by the FDA, or if labeling claims the FDA allows DermTech to make are limited, orders from dermatologists or reimbursement may decline. The regulatory approval process may involve, among other things, successfully completing additional clinical trials and making a 510(k) or other premarket submission, or filing a premarket approval application, or PMAA, with the FDA. If the FDA requires premarket review, DermTech’s tests may not be cleared or approved

 

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on a timely basis, if at all. DermTech may also decide voluntarily to pursue FDA premarket review of DermTech’s tests if DermTech determines that doing so would be appropriate.

Additionally, should future regulatory actions affect any of the reagents DermTech obtains from suppliers and uses in conducting DermTech’s tests, DermTech’s business could be adversely affected in the form of increased costs of testing or delays, limits, or prohibitions on the purchase of reagents necessary to perform DermTech’s testing. While DermTech qualifies all materials used in its products in accordance with the regulations and guidelines of the CLIA, the FDA could promulgate regulations or guidance documents impacting DermTech’s ability to purchase materials necessary for the performance of its tests. If any of the reagents DermTech obtains from suppliers and uses in its tests are affected by future regulatory actions, DermTech’s business could be adversely affected, including by increasing the cost of testing or delaying, limiting, or prohibiting the purchase of reagents necessary to perform testing with DermTech’s products.

If DermTech were required to conduct additional clinical studies or trials before continuing to offer tests that it has developed or may develop as LDTs, those studies or trials could lead to delays or failure to obtain necessary regulatory approval, which could cause significant delays in commercializing any future products and harm DermTech’s ability to achieve sustained profitability.

If the FDA decides to require that DermTech obtain 510(k) clearance, premarket approvals pursuant to a PMAA, or any other type of premarket submission in order to commercialize DermTech’s current PLA, the Nevome test, or DermTech’s planned future tests, DermTech may be required to conduct additional premarket clinical testing before submitting a regulatory notification or application for commercial sales. In addition, as part of DermTech’s long-term strategy DermTech may plan to seek FDA clearance or approval; however, DermTech would need to conduct additional clinical validation activities on its tests before it can submit an application for FDA approval or clearance. Clinical trials must be conducted in compliance with FDA regulations or the FDA may take enforcement action or reject the data. The data collected from these clinical trials may ultimately be used to support market clearance or approval for DermTech’s tests. DermTech believes it would likely take two years or more to conduct the clinical studies and trials necessary to obtain approval from the FDA to commercially launch DermTech’s current tests and DermTech’s planned future tests outside of its clinical laboratory. Even if DermTech’s clinical trials are completed as planned, DermTech cannot be certain that their results will support DermTech’s test claims or that the FDA or foreign authorities will agree with DermTech’s conclusions regarding the results of its clinical trials. Success in early clinical trials does not ensure that later clinical trials will be successful, and DermTech cannot be sure that the later trials will replicate the results of prior clinical trials and studies. If DermTech is required to conduct premarket clinical trials, whether using prospectively acquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase DermTech’s test development costs and delay commercialization. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. Moreover, the clinical trial process may fail to demonstrate that DermTech’s current tests and DermTech’s planned future tests are effective for the proposed indicated uses, which could cause DermTech to abandon a test candidate and may delay development of other tests.

DermTech may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of its clinical trials, which would increase the cost and complexity of DermTech’s trials. DermTech may also depend on clinical investigators, medical institutions, and contract research organizations to perform the trials properly. If these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness, or accuracy of the clinical data they obtain is compromised due to the failure to adhere to DermTech’s clinical protocols or for other reasons, DermTech’s clinical trials may have to be extended, delayed or terminated. Many of these factors would be beyond DermTech’s control. DermTech may not be able to enter into replacement arrangements without undue

 

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delays or considerable expenditures. If there are delays in testing or approvals as a result of the failure to perform by third parties, DermTech’s research and development costs would increase, and DermTech may not be able to obtain regulatory clearance or approval for DermTech’s current tests and its planned future tests. In addition, DermTech may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm DermTech’s ability to market its tests or to achieve sustained profitability.

If DermTech fails to comply with the complex federal, state, local and foreign laws and regulations that apply to its business, DermTech could suffer severe consequences that could materially and adversely affect its operating results and financial condition.

DermTech’s operations are subject to extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among other things:

 

   

CLIA, which requires that laboratories obtain certification from the federal government, and state licensure laws;

 

   

FDA laws and regulations;

 

   

HIPAA, which imposes comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions; amendments to HIPAA under the Health Information Technology for Economic and Clinical Health Act, or HITECH, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general and impose requirements for breach notification;

 

   

state laws regulating genetic testing and protecting the privacy of genetic test results, as well as state laws protecting the privacy and security of health information and personal data and mandating reporting of breaches to affected individuals and state regulators;

 

   

the federal anti-kickback law, or the Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program;

 

   

the federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;

 

   

the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;

 

   

other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, and false claims acts, which may extend to services reimbursable by any third-party payer, including private insurers;

 

   

the Sunshine Act, which requires medical device manufactures to track and report to the federal government certain payments and other transfers of value made to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members;

 

   

Section 216 of the PAMA, which requires applicable laboratories to report private payer data in a timely and accurate manner beginning in 2017 and every three years thereafter (and in some cases annually);

 

   

state laws that impose reporting and other compliance-related requirements; and

 

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similar foreign laws and regulations that apply to DermTech in the countries in which DermTech operates. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. DermTech’s failure to comply could lead to civil or criminal penalties, exclusion from participation in state and federal health care programs, or prohibitions or restrictions on DermTech’s laboratories’ ability to provide or receive payment for DermTech’s services. DermTech believes that it is in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage DermTech’s reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers.

These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. DermTech’s failure to comply could lead to civil or criminal penalties, exclusion from participation in state and federal health care programs, or prohibitions or restrictions on DermTech’s laboratories’ ability to provide or receive payment for its services. DermTech believes that it is in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage DermTech’s reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payers.

DermTech is subject to numerous federal and state healthcare statutes and regulations; complying with laws pertaining to its business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties and a material adverse effect to its business and operations.

Federal and state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, unlawful trade practices, kickbacks, patient inducement and statutory or common law fraud restrict the provision of items or services for free or at reduced charge to government health care program beneficiaries. Such state laws may also restrict the provision of items or services for free or at a reduced charge to non-government health care program beneficiaries. These laws and regulations relating to the provision of items or services for free are complex and are subject to interpretation by the courts and by government agencies. DermTech does not currently charge Medicare or Medicaid beneficiaries for its tests nor does DermTech submit claims to any federal healthcare program.

To the extent DermTech’s business operations are found to be in violation of any of these laws or any other governmental regulations that may apply to DermTech, it may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, monetary fines, individual imprisonment, disgorgement of profits, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if DermTech becomes subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment or restructuring of DermTech’s operations, any of which could adversely affect DermTech’s ability to operate its business and pursue its strategy. If any of the physicians or other healthcare providers or entities with whom DermTech expects to do business, including current or future collaborators, are found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also affect DermTech’s business.

As a clinical laboratory, DermTech’s business practices may face additional scrutiny from government regulatory agencies such as the Department of Justice, the U.S. Department of Health and Human Services Office of Inspector General, or OIG, and CMS. Certain arrangements between clinical laboratories and referring physicians have been identified in fraud alerts issued by the OIG as implicating the Anti-Kickback Statute. The

 

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OIG has stated that it is particularly concerned about these types of arrangements because the choice of laboratory, as well as the decision to order laboratory tests, typically are made or strongly influenced by the physician, with little or no input from patients. Moreover, the provision of payments or other items of value by a clinical laboratory to a referral source could be prohibited under the Stark Law unless the arrangement meets all criteria of an applicable exception. The government has been active in enforcement of these laws as they apply to clinical laboratories.

Numerous states have enacted laws prohibiting business corporations, such as DermTech, from practicing medicine and other professions and from employing or engaging physicians and other professionals to practice medicine, generally referred to as the prohibition against the corporate practice of medicine and the professions, which could include physician laboratory directors. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed professional. For example, California’s Medical Board has indicated that determining the appropriate diagnostic tests for a particular condition and taking responsibility for the ultimate overall care of a patient, including providing treatment options available to the patient, would constitute the unlicensed practice of medicine if performed by an unlicensed person. Violation of these corporate practice of medicine laws may result in civil or criminal fines, as well as sanctions imposed against the business corporation and/or the professional through licensure proceedings and criminal penalties.

The growth of DermTech’s business and its expansion outside of the United States may increase the potential of violating similar foreign laws or DermTech’s internal policies and procedures. The risk of DermTech being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against DermTech for violation of these or other laws or regulations, even if DermTech successfully defend against it, could cause DermTech to incur significant legal expenses and divert DermTech’s management’s attention from the operation of its business. Any of the foregoing consequences could seriously harm DermTech’s business and its financial results.

DermTech may be required to comply with laws and contractual obligations governing the transmission, security, and privacy of health information, or other information, including personally identifiable information and payment information, including credit card information, that require significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.

Under the administrative simplification provisions of HIPAA, HHS has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security of PHI used or disclosed by health care providers and other covered entities.

The privacy regulations regulate the use and disclosure of PHI by health care providers engaging in certain electronic transactions or “standard transactions.” They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered health care provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The HIPAA security regulations establish administrative, physical, and technical standards for maintaining the integrity and availability of PHI in electronic form. These standards apply to covered health care providers and also to “business associates” or third parties providing services involving the use or disclosure of PHI. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, DermTech may be required to comply with both HIPAA privacy regulations and varying state privacy and security laws.

Moreover, HITECH, among other things, established certain health information security breach notification requirements. In the event of a breach of unsecured PHI, a covered entity must notify each individual whose PHI is breached, federal regulators and in some cases, must publicize the breach in local or national media. Breaches affecting 500 individuals or more are publicized by federal regulators who publicly identify the breaching entity, the circumstances of the breach and the number of individuals affected.

 

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These laws contain significant fines and other penalties for wrongful use or disclosure of PHI. Given the complexity of HIPAA and HITECH and their overlap with state privacy and security laws, and the fact that these laws are rapidly evolving and are subject to changing and potentially conflicting interpretation, DermTech’s ability to comply with the HIPAA, HITECH and state privacy requirements is uncertain and the costs of compliance are significant. Adding to the complexity is that DermTech’s operations are evolving and the requirements of these laws will apply differently depending on such things as whether or not DermTech bills electronically for its services, or provide services involving the use or disclosure of PHI and incur compliance obligations as a business associate. The costs of complying with any changes to the HIPAA, HITECH and state privacy restrictions may have a negative impact on DermTech’s operations. Noncompliance could subject DermTech to criminal penalties, civil sanctions and significant monetary penalties as well as reputational damage.

DermTech also is required to collect and maintain personal information about its employees, and DermTech collects information about customers as part of some of its marketing programs, as well as receives and transfers certain payment information, to accept payments from its customers, including credit card information. The collection and use of such information is regulated at the federal and state levels, and may be subject to contractual obligations as well. The regulatory environment related to information security and privacy is increasingly demanding. If the security and information systems that DermTech or its outsourced third party providers use to store or process such information are compromised or if DermTech, or such third parties, otherwise fail to comply with these laws, regulations, and contractual obligations, DermTech could face litigation and the imposition of penalties that could adversely affect DermTech’s financial performance. DermTech’s reputation as a brand or as an employer could also be adversely affected from these types of security breaches or regulatory violations, which could impair DermTech’s sales or ability to attract and keep qualified employees.

Clinical research is heavily regulated and failure to comply with human subject protection regulations may disrupt DermTech’s research program leading to significant expense, regulatory enforcement, private lawsuits, and reputational damage.

Clinical research is subject to federal, state, and, for studies conducted outside of the United States, international regulation. At the federal level, the FDA imposes regulations for the protection of human subjects and requirements such as initial and ongoing institutional review board review; informed consent requirements, adverse event reporting and other protections to minimize the risk and maximize the benefit to research participants. Many states impose human subject protection laws that mirror or in some cases exceed federal requirements. HIPAA also regulates the use and disclosure of PHI in connection with research activities. Research conducted overseas is subject to a variety of national protections such as mandatory ethics committee review, as well as laws regulating the use, disclosure and cross-border transfer of personal data. The costs of compliance with these laws may be significant and compliance with regulatory requirements may result in delay. Noncompliance may disrupt DermTech’s research and result in data that is unacceptable to regulatory authorities, data lock, or other sanctions that may significantly disrupt DermTech’s operations.

Violation of a state’s prohibition on the corporate practice of medicine could result in a material adverse effect on DermTech’s business.

A number of states, including California, do not allow business corporations to employ physicians to provide professional services. This prohibition against the “corporate practice of medicine” is aimed at preventing corporations such as DermTech from exercising control over the medical judgments or decisions of physicians. The state licensure statutes and regulations and agency and court decisions that enumerate the specific corporate practice rules vary considerably from state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. If regulatory authorities or other parties in any jurisdiction successfully assert that DermTech is engaged in the unauthorized corporate practice of medicine, DermTech could be required to restructure its contractual and other arrangements. In addition, violation of these laws may result in sanctions imposed against DermTech and/or the professional through licensure proceedings, and DermTech could be subject to civil and criminal penalties that could result in exclusion from state and federal health care programs.

 

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If DermTech is sued for product liability or errors and omissions liability, it could face substantial liabilities that exceed its resources.

The marketing, sale and use of DermTech’s PLA could lead to product liability claims if someone were to allege that it failed to perform as it was designed. DermTech may also be subject to liability for errors in results DermTech provides to physicians or for misunderstanding of, or inappropriate reliance upon, the information DermTech provides. DermTech may also be subject to similar types of claims related to products DermTech may develop in the future. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time-consuming for DermTech to defend. Although DermTech maintains product liability and errors and omissions insurance, DermTech cannot assure you that its insurance would fully protect it from the financial impact of defending against these types of claims, or any judgments, fines or settlement costs arising out of any such claims. Any product liability or errors and omissions liability claim brought against DermTech, with or without merit, could increase its insurance rates or prevent it from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to DermTech’s reputation or cause it to suspend sales of its product. The occurrence of any of these events could have an adverse effect on DermTech’s business results of operations.

Intellectual Property Risks Related to DermTech’s Business

DermTech’s collaborators may assert ownership or commercial rights to inventions DermTech develops from DermTech’s use of the biological materials which they provide to DermTech, or otherwise arising from the collaboration.

DermTech collaborates with several institutions, physicians, and researchers in scientific matters. Also, DermTech relies on numerous third parties to provide it with adhesive patch samples and biological materials that DermTech uses to develop tests. If DermTech cannot successfully negotiate sufficient ownership, licensing, and/or commercial rights to any inventions that result from its use of a third-party collaborator’s materials, or if disputes arise with respect to the intellectual property developed with the use of a collaborator’s samples, or data developed in a collaborator’s study, DermTech’s ability to capitalize on the market potential of these inventions or developments may be limited or precluded altogether.

If DermTech is unable to maintain intellectual property protection, DermTech’s competitive position could be harmed.

DermTech’s ability to protect its discoveries and technologies affects its ability to compete and to achieve sustained profitability. Currently, DermTech relies on a combination of U.S. and foreign patents and patent applications, copyrights, trademarks and trademark applications, confidentiality or non-disclosure agreements, material transfer agreements, licenses, consulting agreements, work-for-hire agreements, and invention assignment agreements to protect DermTech’s intellectual property rights. DermTech also maintains certain company know-how, trade secrets, and technological innovations designed to provide DermTech with a competitive advantage in the marketplace as trade secrets. Currently, DermTech owns five issued U.S. patents, four pending U.S. patent applications, and their corresponding foreign counterpart patents and patent applications, relevant to DermTech’s testing methodology and expression profiles. While DermTech intends to pursue additional patent applications, it is possible that DermTech’s pending patent applications and any future applications may not result in issued patents. Even if patents are issued, third parties may independently develop similar or competing technology that avoids DermTech’s patents. Further, DermTech cannot be certain that the steps it has taken will prevent the misappropriation of DermTech’s trade secrets and other confidential information as well as the misuse of DermTech’s patents and other intellectual property, particularly in foreign countries where DermTech has not filed for patent protection.

From time-to-time the U.S. Supreme Court, other federal courts, the USPTO, may change the standards of patentability and any such changes could have a negative impact on DermTech’s business. For instance, in 2008, the Court of Appeals for the Federal Circuit issued a decision that methods or processes cannot be patented

 

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unless they are tied to a machine or involve a physical transformation. The U.S. Supreme Court later reversed that decision in Bilski v. Kappos, finding that the “machine-or-transformation” test is not the only test for determining patent eligibility. The Court, however, declined to specify how and when processes are patentable. In 2012, in the case Mayo Collaborative Services v. Prometheus Laboratories, Inc., the U.S. Supreme Court reversed the Federal Circuit’s application of Bilski and invalidated a patent focused on a diagnostic process because the patent claim embodied a law of nature.

In 2013, in Association for Molecular Pathology v. Myriad Genetics, the Supreme Court unanimously ruled that, “[a] naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated,” thereby invalidating Myriad Genetics’ patents on the BRCA1 and BRCA2 breast cancer genes. However, the Supreme Court also held that manipulation of a gene to create something not found in nature, such as a strand of synthetically-produced complementary DNA, or cDNA, could still be eligible for patent protection. The Supreme Court noted that method patents, which concern technical procedures for carrying out a certain process, are not affected by the ruling.

More recently, the Federal Circuit has ruled on several patent cases – such as Univ. of Utah Research Found. v. Ambry Genetics Corp., 774 F.3d 755 (Fed. Cir. 2014), Ariosa Diagnostics, Inc. v. Sequenom, Inc., 788 F.3d 1371 (Fed. Cir. 2015), Genetic Tech. Ltd. v. Merial LLC, 818 F.3d 1369 (Fed. Cir. 2016), and Cleveland Clinic Found. v. True Health Diagnostics, 859 F.3d 1352 (Fed. Cir. 2017) – that some diagnostic method claims are patent ineligible. These decisions have narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. Some aspects of DermTech’s technology involve processes that may be subject to this evolving standard and DermTech cannot guarantee that any of its pending process claims will be patentable as a result of such evolving standards. In addition, this combination of decisions has created uncertainty as to the value of certain issued patents, in particular patents in the molecular biology analysis and diagnostic space. Moreover, there is additional uncertainty around the evolving standard in light of the USPTO Revised Patent Subject Matter Eligibility Guidance issued in Jan. 2019.

It should also be noted that in 2010, the Secretary’s Advisory Committee on Genetics, Health and Society voted to approve a report entitled “Gene Patents and Licensing Practices and Their Impact on Patient Access to Genetic Tests.” That report defines “patent claims on genes” broadly to include claims to isolated nucleic acid molecules as well as methods of detecting particular sequences or mutations. The report also contains six recommendations, including the creation of an exemption from liability for infringement of patent claims on genes for anyone making, using, ordering, offering for sale, or selling a test developed under the patent for patient care purposes, or for anyone using the patent-protected genes in the pursuit of research. The report also recommended that HHS should explore, identify, and implement mechanisms that will encourage more voluntary adherence to current guidelines that promote nonexclusive in-licensing of diagnostic genetic and genomic technologies. It is unclear whether HHS will act upon these recommendations, or if the recommendations would result in a change in law or process that could negatively impact DermTech’s patent portfolio or future research and development efforts. If acted upon, implementation of such provisions could have a material negative impact on DermTech’s business.

DermTech may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in the loss of significant rights, the implementation of an injunction, and the assessment of treble damages.

From time-to-time DermTech may face intellectual property infringement or misappropriation claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect DermTech negatively. For example, were a third party to succeed on an infringement claim against DermTech, it may be required to pay substantial damages, including treble damages if such infringement were found to be willful. In addition, DermTech could face an injunction barring DermTech from conducting the allegedly infringing activity, including an order preventing DermTech from offering its current tests and future planned tests in the marketplace. The outcome of the litigation could require it to enter

 

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into a license agreement which may not be pursuant to acceptable or commercially reasonable or practical terms or which may not be available at all.

It is also possible that an adverse finding of infringement against DermTech may require it to dedicate substantial resources and time in developing non-infringing alternatives, which may or may not be possible. In the case of diagnostic tests, DermTech would also need to include non-infringing technologies, which would require DermTech to re-validate the test. Any such re-validation, in addition to being costly and time-consuming, may be unsuccessful. Finally, DermTech may initiate claims to assert or defend its own intellectual property against third parties. Any intellectual property litigation, irrespective of whether DermTech is the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert and distract DermTech’s management’s attention from its business and negatively affect its operating results or financial condition.

Changes in health care policy could increase DermTech’s costs, decrease its revenues and impact sales of and reimbursement for its tests.

In March 2010, the ACA, became law. This law substantially changed the way health care is financed by both commercial payers and government payers, and significantly impacted DermTech’s industry. Since 2016 there have been efforts to repeal all or part of the ACA, and the current Presidential Administration and the U.S. Congress have taken action to roll back certain provisions of the ACA. For example, the Tax Cuts and Jobs Act, among other things, removes penalties for not complying with the ACA’s individual mandate to carry health insurance. The current Presidential Administration and the U.S. Congress may take further action regarding the ACA, including, but not limited to, repeal or replacement. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect DermTech’s business. The ACA contained a number of provisions expected to impact DermTech’s business and operations, some of which in ways DermTech cannot currently predict, including those governing enrollment in state and federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state and federal health care programs and will result in the development of new programs. For instance, the ACA required each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, and began to apply to sales of taxable medical devices after December 31, 2012. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020. The taxes imposed by the ACA and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to DermTech and lower reimbursement by payers for DermTech’s tests, any of which may have a material adverse impact on DermTech’s business, financial condition, results of operations or cash flows. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. DermTech anticipates there will continue to be proposals by legislators at both the federal and state levels, regulators and commercial payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices DermTech will be able to charge for its tests, the coverage of or the amounts of reimbursement available for DermTech’s tests from payers, including commercial payers and government payers.

U.S. healthcare reform

In the United States, there have been a number of legislative and regulatory changes at the federal and state levels which seek to reduce healthcare costs and improve the quality of healthcare. For example, in March 2010, the ACA, became law. This law substantially changed the way health care is financed by both commercial payers and government payers, and significantly impacted DermTech’s industry. Since 2016 there have been efforts to repeal all or part of the ACA, and the current Presidential Administration and U.S. Congress have taken action to

 

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roll certain provisions of the ACA. For example, the Tax Cuts and Jobs Act, among other things, removes penalties for not complying with the ACA’s individual mandate to carry health insurance. The current Presidential Administration and the U.S. Congress may take further action regarding the ACA, including, but not limited to, repeal or replacement. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect DermTech’s business. The ACA contained a number of provisions expected to impact DermTech’s business and operations, some of which in ways DermTech cannot currently predict, including those governing enrollment in state and federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state and federal health care programs and will result in the development of new programs. For instance, the ACA required each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, and began to apply to sales of taxable medical devices after December 31, 2012. Through a series of legislative amendments, the tax was suspended for 2016 through 2019. Absent further legislative action, the device excise tax will be reinstated on medical device sales starting January 1, 2020. The taxes imposed by the ACA and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to DermTech and lower reimbursement by payers for DermTech’s tests, any of which may have a material adverse impact on its business, financial condition, results of operations or cash flows. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. DermTech anticipates there will continue to be proposals by legislators at both the federal and state levels, regulators and commercial payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices DermTech will be able to charge for its tests, the coverage of or the amounts of reimbursement available for its tests from payers, including commercial payers and government payers.

Tax Risks Related to DermTech’s Business

DermTech’s ability to use its net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its carryforwards to offset future taxable income. DermTech’s existing net operating loss carryforwards, or NOLs, may be subject to limitations arising from previous ownership changes, and if DermTech undergoes an ownership change in connection with or after a merger transaction, DermTech’s ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in DermTech’s stock ownership, some of which are outside of DermTech’s control, could result in an ownership change under Section 382 of the Code. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, DermTech’s existing and any future NOLs could expire or otherwise be unavailable to offset future income tax liabilities. DermTech has not conducted a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since inception due to the significant complexity and cost associated with such a study.

The recently passed comprehensive tax reform bill could adversely affect DermTech’s business and financial condition.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, or the TCJA, that significantly reforms the Code. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation on the deductibility of interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and

 

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elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, reduction or elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. The overall impact of the TCJA is uncertain and DermTech’s business and financial condition could be adversely affected. The impact of this tax reform on holders of the combined company’s common stock is also uncertain and could be adverse. You are urged to consult with your legal and tax advisors with respect to such legislation and the potential tax consequences of investing in the combined company’s common stock.

Risks Related to Constellation’s Business and the Business Combination

Subsequent to the consummation of the business combination, Constellation may be required to take writedowns or write-offs, restructuring and impairment or other charges that could have a significant negative effect on Constellation’s financial condition, results of operations and ordinary share price, which could cause you to lose some or all of your investment.

Although Constellation has conducted due diligence on DermTech, Constellation cannot assure you that this diligence revealed all material issues that may be present in DermTech’s business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of Constellation’s and DermTech’s control will not later arise. As a result, Constellation may be forced to later writedown or write-off assets, restructure its operations, or incur impairment or other charges that could result in losses. Even if Constellation’s due diligence successfully identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with Constellation’s preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on Constellation’s liquidity, the fact that Constellation reports charges of this nature could contribute to negative market perceptions about it or its securities. In addition, charges of this nature may cause Constellation to be unable to obtain future financing on favorable terms or at all.

There can be no assurance that the combined company’s common stock will be approved for listing on Nasdaq following the Closing or that the combined company will be able to comply with the continued listing standards of Nasdaq.

In connection with the closing of the business combination, Constellation intends to list the combined company’s common stock and warrants on Nasdaq under the symbols “DMTK” and “DMTKW,” respectively. The combined company’s continued eligibility for listing may depend on the number of Constellation’s ordinary shares that are redeemed. If, after the business combination, Nasdaq delists the combined company’s shares from trading on its exchange for failure to meet the listing standards, the combined company and its stockholders could face significant material adverse consequences including:

 

   

a limited availability of market quotations for the combined company’s securities;

 

   

a determination that the combined company’s common stock is a “penny stock” which will require brokers trading in the combined company’s common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of the combined company’s common stock;

 

   

a limited amount of analyst coverage; and

 

   

a decreased ability to issue additional securities or obtain additional financing in the future.

If the business combination’s benefits do not meet the expectations of investors or securities analysts, the market price of the combined company’s securities may decline.

If the benefits of the business combination do not meet the expectations of investors or securities analysts, the market price of the combined company’s securities prior to the Closing may decline. The market values of the

 

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combined company’s securities at the time of the business combination may vary significantly from their prices on the date the Merger Agreement was executed, the date of this proxy statement/prospectus/information statement, or the date on which Constellation’s shareholders vote on the business combination.

In addition, following the business combination, fluctuations in the price of the combined company’s securities could contribute to the loss of all or part of your investment. Prior to the business combination, there has not been a public market for DermTech’s capital stock. Accordingly, the valuation ascribed to DermTech may not be indicative of the price that will prevail in the trading market following the business combination. If an active market for the combined company’s securities develops and continues, the trading price of the combined company’s securities following the business combination could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond the combined company’s control. Any of the factors listed below could have a material adverse effect on your investment in the combined company’s securities and the combined company’s securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of the combined company’s securities may not recover and may experience a further decline.

Factors affecting the trading price of the combined company’s securities may include:

 

   

actual or anticipated fluctuations in the combined company’s quarterly financial results or the quarterly financial results of companies perceived to be similar to it;

 

   

changes in the market’s expectations about the combined company’s operating results;

 

   

success of competitors;

 

   

the combined company’s operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

   

changes in financial estimates and recommendations by securities analysts concerning the combined company or the medical diagnostic industry in general;

 

   

operating and share price performance of other companies that investors deem comparable to the combined company;

 

   

the combined company’s ability to market new and enhanced products on a timely basis;

 

   

changes in laws and regulations affecting the combined company’s business;

 

   

the combined company’s ability to meet compliance requirements;

 

   

commencement of, or involvement in, litigation involving the combined company;

 

   

changes in the combined company’s capital structure, such as future issuances of securities or the incurrence of additional debt;

 

   

the volume of the combined company’s shares of common stock available for public sale;

 

   

any major change in the combined company’s board of directors or management;

 

   

sales of substantial amounts of the combined company’s shares of common stock by the combined company’s directors, executive officers or significant shareholders or the perception that such sales could occur;

 

   

general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism; and

 

   

the issuance of shares of common stock in the PIPE financing at a price below the current (or then current) trading prices of shares of Constellation common stock as reported by the Nasdaq Capital Market.

 

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Broad market and industry factors may materially harm the market price of the combined company’s securities irrespective of the combined company’s operating performance. The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of the combined company’s securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the combined company could depress the combined company’s share price regardless of the combined company’s business, prospects, financial conditions or results of operations. A decline in the market price of the combined company’s securities also could adversely affect the combined company’s ability to issue additional securities and the combined company’s ability to obtain additional financing in the future.

Following the consummation of the business combination, the combined company will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on its business, financial condition and results of operations.

Following the consummation of the business combination, the combined company will face increased legal, accounting, administrative and other costs and expenses as a public company that DermTech does not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the PCAOB and the securities exchanges, impose additional reporting and other obligations on public companies. Compliance with public company requirements will increase costs and make certain activities more time-consuming. A number of those requirements will require the combined company to carry out activities DermTech has not done previously. For example, the combined company will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, additional expenses associated with SEC reporting requirements will be incurred. Furthermore, if any issues in complying with those requirements are identified (for example, if the auditors identify a material weakness or significant deficiency in the internal control over financial reporting), the combined company could incur additional costs rectifying those issues, and the existence of those issues could adversely affect the combined company’s reputation or investor perceptions of it. It may also be more expensive to obtain director and officer liability insurance. Risks associated with the combined company’s status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of directors or as executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased costs will require the combined company to divert a significant amount of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by shareholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase costs.

The combined company’s failure to timely and effectively implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act that will be applicable to it after the business combination is consummated could have a material adverse effect on its business.

DermTech is not currently subject to Section 404 of the Sarbanes-Oxley Act. However, following the consummation of the business combination, the combined company will be required to provide management’s attestation on internal controls. The standards required for a public company under Section 404(a) of the Sarbanes-Oxley Act are significantly more stringent than those required of DermTech as a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that will be applicable after the business combination. If the combined company is not able to implement the additional requirements of Section 404(a) in a timely manner or with adequate compliance, it may not be able to assess whether its internal controls over financial reporting are effective, which may subject it to adverse regulatory consequences and could harm investor confidence and the market price of its securities.

 

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The combined company will qualify as an emerging growth company within the meaning of the Securities Act of 1933, as amended, or the Securities Act, and if it takes advantage of certain exemptions from disclosure requirements available to emerging growth companies, which could make the Combined Company’s securities less attractive to investors and may make it more difficult to compare the combined company’s performance to the performance of other public companies.

The combined company will qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups, or JOBS Act. As such, the combined company will be eligible for and intends to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as it continues to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The combined company will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of its ordinary shares that are held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which it has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Constellation’s ordinary shares in its initial public offering. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as the combined company is an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Constellation has elected not to opt out of such extended transition period and, therefore, the combined company may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Investors may find the ordinary shares less attractive because the combined company will rely on these exemptions, which may result in a less active trading market for the ordinary shares and their price may be more volatile.

The unaudited pro forma financial information included herein may not be indicative of what the combined company’s actual financial position or results of operations would have been.

The unaudited pro forma financial information included herein is presented for illustrative purposes only and is not necessarily indicative of what the combined company’s actual financial position or results of operations would have been had the business combination been completed on the dates indicated.

DermTech’s management has limited experience in operating a public company.

DermTech’s executive officers have limited experience in the management of a publicly traded company. DermTech’s management team may not successfully or effectively manage its transition to a public company following the business combination that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to the management and growth of the combined company. DermTech currently may not have a complement of personnel with the appropriate level of knowledge, experience, and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the United States and U.S. GAAP. The development and implementation of the standards and controls necessary for the combined company to achieve the level of accounting standards required of a public company in the United States may require costs greater than expected. It is possible that the combined company will be required to expand its employee base and hire additional employees to support its operations as a public company which will increase its operating costs in future periods.

 

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Constellation’s sponsor has agreed to vote in favor of the business combination, regardless of how Constellation’s public shareholders vote.

Unlike many other blank check companies in which the initial shareholders agree to vote their Founder Shares in accordance with the majority of the votes cast by the public shareholders in connection with an initial business combination, Constellation’s sponsor has agreed to vote its Founder Shares, as well as any public shares purchased during or after Constellation’s initial public offering, in favor of the business combination. Constellation’s sponsor owns approximately 72.7% of the outstanding ordinary shares. Accordingly, it is more likely that the necessary shareholder approval to complete the business combination will be received than would be the case if Constellation’s initial shareholders agreed to vote their Founder Shares in accordance with the majority of the votes cast by Constellation’s public shareholders.

If Constellation is not able to complete its initial business combination by September 23, 2019, it will cease all operations except for the purpose of winding up and Constellation will redeem its public shares and liquidate, in which case the warrants and rights will expire worthless.

Constellation’s memorandum and articles of association provide that Constellation must complete an initial business combination before September 23, 2019. Constellation may not be able to consummate an initial business combination within such time period. Constellation’s ability to complete its initial business combination may be negatively impacted by general market conditions, volatility in the capital and debt markets and the other risks described herein.

If Constellation is unable to consummate its initial business combination by September 23, 2019 and Constellation’s shareholders have not approved a further extension by such date, Constellation will, as promptly as reasonably possible but not more than five business days thereafter, distribute the aggregate amount then on deposit in the trust account (net of taxes payable, and less up to $50,000 of interest to pay liquidation expenses), pro rata to the public shareholders by way of redemption and cease all operations except for the purposes of winding up of its affairs. This redemption of public shareholders from the Trust Account shall be effected as required by function of Constellation’s memorandum and articles of association and prior to any voluntary winding up. In the event of liquidation, there will be no distribution with respect to Constellation’s outstanding warrants. Accordingly, the warrants will expire worthless. If Constellation is unable to complete an initial business combination within the required time period and Constellation redeems the public shares for the funds held in the trust account, holders of rights will not receive any such funds in exchange for their rights and the rights will expire worthless.

In addition, Constellation may seek and receive shareholder approval to extend the deadline to complete its initial business combination to a date after September 23, 2019, which could negatively impact the timing of redemptions by public shareholders and the consummation of the business combination.

For illustrative purposes, based on funds in the Trust Account of approximately $12.4 million on May 28, 2019, the estimated per share redemption price would have been approximately $10.45.

Constellation’s sponsor, directors, officers, advisors or their affiliates may elect to purchase shares from public shareholders, which may influence the vote on the business combination and reduce the public “float” of ordinary shares.

Constellation’s sponsor, directors, officers, advisors or their affiliates may purchase ordinary shares in privately negotiated transactions or in the open market either prior to or following the completion of the business combination, although they are under no obligation to do so. Such a purchase may include a contractual acknowledgement that such shareholder, although still the record holder of such shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. In the event that Constellation’s sponsor and Constellation’s directors, officers, advisors or their affiliates purchase shares in

 

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privately negotiated transactions from public shareholders who have already elected to exercise their redemption rights, such selling shareholders would be required to revoke their prior elections to redeem their shares. The purpose of such purchases could be to vote such shares in favor of the business combination and thereby increase the likelihood of obtaining shareholder approval of the business combination. This may result in the completion of the business combination that may not otherwise have been possible.

In addition, if such purchases are made, the public “float” of the ordinary shares and the number of beneficial holders of the combined company’s securities may be reduced, possibly making it difficult for the combined company to obtain the quotation, listing or trading of its securities on a national securities exchange.

Constellation’s ability to successfully effect the business combination and successfully operate the business thereafter will be largely dependent upon the efforts of certain key personnel of DermTech, all of whom Constellation expects to stay with the combined company following the business combination. The loss of such key personnel could negatively impact the operations and profitability of the combined business.

Constellation’s ability to successfully effect the business combination and successfully operate the business is dependent upon the efforts of certain key personnel of DermTech. Although Constellation expects all of such key personnel to remain with the combined company following the business combination, there can be no assurance that they will do so. It is possible that DermTech will lose some key personnel, the loss of which could negatively impact the operations and profitability of the combined company. Furthermore, following the closing of the business combination, certain of the key personnel of DermTech may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause the combined company to have to expend time and resources helping them become familiar with such requirements.

Constellation’s board of directors did not obtain a fairness opinion in determining whether or not to proceed with the business combination and, as a result, the terms may not be fair from a financial point of view to Constellation’s public shareholders.

In analyzing the business combination, the Constellation’s board of directors conducted significant due diligence on DermTech. For a complete discussion of the factors utilized by Constellation’s board of directors in approving the business combination, see the section entitled, “The Business Combination – Constellation Reasons for the Business Combination.” The Constellation board of directors believes because of the financial skills and background of its directors, it was qualified to conclude that the business combination was fair from a financial perspective to its shareholders and that DermTech’s fair market value was at least 80% of Constellation’s net assets (excluding deferred underwriting discounts and commissions). Notwithstanding the foregoing, Constellation’s board of directors did not obtain a fairness opinion to assist it in its determination. Accordingly, Constellation’s board of directors may be incorrect in its assessment of the business combination.

The ability of Constellation’s public shareholders to exercise redemption rights with respect to a large number of ordinary shares could increase the probability that the business combination will be unsuccessful and that Constellation’s shareholders will have to wait for liquidation in order to redeem their public shares.

Since the Merger Agreement requires that Constellation has at least $15,000,000 at the Closing, the probability that the business combination will be unsuccessful is increased if a large number of public shares are tendered for redemption and Constellation is unable to raise enough additional funds to satisfy this requirement. If the business combination is unsuccessful, public shareholders will not receive their pro rata portion of the Trust Account until the Trust Account is liquidated. If public shareholders are in need of immediate liquidity, they could attempt to sell their public shares in the open market; however, at such time, the ordinary shares may trade at a discount to the pro rata per share amount in the Trust Account. In either situation, Constellation’s shareholders may suffer a material loss on their investment or lose the benefit of funds expected in connection with the redemption until Constellation is liquidated or Constellation’s shareholders are able to sell their public shares in the open market.

 

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If a shareholder fails to comply with the procedures for tendering its public shares in connection with the business combination, such shares may not be redeemed.

This proxy statement/prospectus/information statement describes the various procedures that must be complied with in order for a shareholder to validly redeem its public shares. In the event that a shareholder fails to comply with these procedures, its shares may not be redeemed.

Constellation’s public shareholders will not have any rights or interests in funds from the Trust Account, except under certain limited circumstances. To liquidate their investment, therefore, public shareholders may be forced to sell their public shares, rights or warrants, potentially at a loss.

Constellation’s public shareholders will be entitled to receive funds from the Trust Account only (i) in the event of a redemption of the public shares prior to any winding up in the event Constellation does not consummate its initial business combination by September 23, 2019, (ii) if they redeem their shares in connection with an initial business combination that Constellation consummates or (iii) if they redeem their shares in connection with a shareholder vote to amend Constellation’s amended and restated memorandum and articles of association (A) to modify the substance or timing of Constellation’s obligation to redeem 100% of Constellation’s public shares if Constellation does not complete its initial business combination by September 23, 2019 or (B) with respect to any other provision relating to shareholders’ rights or pre-business combination activity. In addition, if Constellation is unable to complete an initial business combination by September 23, 2019 for any reason, compliance with British Virgin Islands law may require that Constellation submit a plan of liquidation to its shareholders for approval prior to the distribution of the proceeds held in the Trust Account. In that case, public shareholders may be forced to wait beyond September 23, 2019 before they receive funds from the Trust Account. In no other circumstances will a public shareholder have any right or interest of any kind in the Trust Account. Accordingly, to liquidate your investment, you may be forced to sell your public shares, rights or warrants, potentially at a loss.

If a shareholder or a “group” of shareholders are deemed to hold in excess of 20% of the public shares, such shareholder or group will lose the ability to redeem all such public shares in excess of 20% of the public shares.

Constellation’s memorandum and articles of association provide that a public shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended, or the Exchange Act), will be restricted from seeking redemption rights with respect to more than an aggregate of 20% of the public shares, which we refer to as the Excess Shares. However, Constellation would not be restricting its shareholders’ ability to vote all of their ordinary shares (including Excess Shares) for or against a business combination. The inability of a shareholder to redeem the Excess Shares will reduce its influence over Constellation’s ability to complete a business combination and such shareholder could suffer a material loss on its investment in Constellation if it sells Excess Shares in open market transactions. Additionally, such shareholder will not receive redemption distributions with respect to the Excess Shares if Constellation completes a business combination. And as a result, such shareholder will continue to hold that number of shares exceeding 20% and, in order to dispose of such shares, would be required to sell its shares in open market transactions, potentially at a loss.

Public shareholders who purchased units in Constellation’s initial public offering and do not exercise their redemption rights may pursue rescission rights and related claims.

Constellation’s public shareholders may allege that some aspects of the business combination are inconsistent with the disclosure contained in the prospectus issued by Constellation in connection with the offer and sale of units in its initial public offering, including the structure of the proposed business combination. Consequently, a public shareholder who purchased units in Constellation’s initial public offering (excluding the initial shareholders) and still holds them at the time of the business combination and who does not seek to exercise

 

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redemption rights, might seek rescission of the purchase of the units such holder acquired in Constellation’s initial public offering. A successful claimant for damages under applicable law could be awarded an amount to compensate for the decrease in the value of such holder’s shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. If shareholders bring successful rescission claims against the combined company, it may not have sufficient funds following the consummation of the business combination to pay such claims, or if claims are successfully brought against the combined company following the consummation of the business combination, the combined company’s results of operations could be adversely affected and, in any event, the combined company may be required in connection with the defense of such claims to incur expenses and divert employee attention from other business matters.

If third parties bring claims against Constellation, the proceeds held in the Trust Account could be reduced and the per-share redemption amount received by shareholders may be less than $10.10 per share.

Constellation’s placing of funds in the Trust Account may not protect those funds from third-party claims against Constellation. Although Constellation seeks to have all vendors, service providers (other than Constellation’s independent auditors), prospective target businesses and other entities with which Constellation does business execute agreements with Constellation waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account for the benefit of the public shareholders, such parties may not execute such agreements, or even if they execute such agreements they may not be prevented from bringing claims against the Trust Account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against Constellation’s assets, including the funds held in the Trust Account. If any third-party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, Constellation’s management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third-party that has not executed a waiver if management believes that such third-party’s engagement would be significantly more beneficial to Constellation than any alternative.

Examples of possible instances where Constellation may engage a third-party that refuses to execute a waiver include the engagement of a third-party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with Constellation and will not seek recourse against the Trust Account for any reason. Upon redemption of Constellation’s public shares, if Constellation is unable to complete its business combination within the prescribed timeframe, or upon the exercise of a redemption right in connection with Constellation’s business combination, Constellation will be required to provide for payment of claims of creditors that were not waived that may be brought against Constellation within the 10 years following redemption. Accordingly, the per-share redemption amount received by public shareholders could be less than the $10.10 per share initially held in the Trust Account, due to claims of such creditors. In order to protect the amounts held in the Trust Account, Constellation’s sponsor agreed to be liable to Constellation if and to the extent any claims by a vendor for services rendered or products sold to Constellation, or a prospective target business with which Constellation has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account. This liability will not apply with respect to any claims by a third-party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under Constellation’s indemnity of the underwriters of Constellation’s initial public offering against certain liabilities, including liabilities under the Securities Act. Moreover, in the event that an executed waiver is deemed to be unenforceable against a third-party, then Constellation’s sponsor will not be responsible to the extent of any liability for such third-party claims. Constellation has not independently verified whether its sponsor has sufficient funds to satisfy its indemnity obligations. Therefore, Constellation cannot assure you that its sponsor would be able to satisfy those obligations.

 

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If, before distributing the proceeds in the Trust Account to the public shareholders, Constellation files a bankruptcy petition or an involuntary bankruptcy petition is filed against Constellation that is not dismissed, the claims of creditors in such proceeding may have priority over the claims of Constellation’s shareholders and the per-share amount that would otherwise be received by the public shareholders in connection with Constellation’s liquidation may be reduced.

If, before distributing the proceeds in the Trust Account to the public shareholders, Constellation files a bankruptcy petition or an involuntary bankruptcy petition is filed against Constellation that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in Constellation’s bankruptcy estate and subject to the claims of third parties with priority over the claims of Constellation’s public shareholders. To the extent any bankruptcy claims deplete the Trust Account, the per-share amount that would otherwise be received by Constellation’s public shareholders in connection with Constellation’s liquidation may be reduced.

Future issuances of equity securities may dilute the interests of Constellation’s shareholders and reduce the price of Constellation’s securities. The PIPE Shares may be issued at a price below the current trading price (or then current trading price) of shares of Constellation common stock as reported by the Nasdaq Capital Market; these issuances (or proposed issuances) of the PIPE Shares may reduce the market price of Constellation’s common stock as reported by the Nasdaq Capital Market.

Any future issuance of Constellation’s equity securities, such as the PIPE, could dilute the interests of Constellation’s then existing shareholders and could substantially decrease the trading price of Constellation’s securities. Constellation may issue equity or equity-linked securities in connection with the business combination or in the future, including pursuant to a private investment in public equity, or PIPE, or other offering of equity securities, for a number of reasons, including to finance Constellation’s operations and business strategy (including in connection with acquisitions and other transactions), to adjust Constellation’s ratio of debt to equity, to satisfy its obligations upon the exercise of then-outstanding options or other equity-linked securities, if any, or for other reasons.

In accordance with the Subscription Agreements, Constellation agreed to sell to the Subscribers an aggregate of 6,153,847 shares of Constellation common stock for a purchase price of $3.25 per share and 1,231 shares of Constellation Series A Convertible Preferred Stock for a purchase price of $3,250 per share (equal to $3.25 per share of common stock on an as-converted basis), in a private placement in which Constellation will raise an aggregate of approximately $24,000,000, less certain offering related expenses payable by Constellation. The shares of Constellation common stock to be issued pursuant to the PIPE will be identical to the shares of Constellation common stock that will be held by Constellation’s public stockholders at the time of the closing of the business combination. The shares of Constellation Series A Convertible Preferred Stock to be issued pursuant to the PIPE will be governed by a Certificate of Designation that will be filed in connection with the closing of the PIPE, or the PIPE Closing. The PIPE Closing will be contingent upon the substantially concurrent consummation of the business combination. The issuance (or proposed issuance) of the PIPE Shares at a price per share that is less than the current (or then current) price of Constellation’s common stock as reported by the Nasdaq Capital Market may reduce the market price of shares of Constellation’s common stock.

Constellation’s sponsor, executive officers and directors have potential conflicts of interest in recommending that shareholders vote in favor of approval of the Business Combination Proposal and approval of the other proposals described in this proxy statement/prospectus/information statement.

When you consider the recommendation of Constellation’s board of directors in favor of approval of the Business Combination Proposal, you should keep in mind that certain of Constellation’s directors and officers have interests in the business combination that are different from, or in addition to, your interests as a shareholder. These interests include, among other things:

 

   

the beneficial ownership of Constellation’s sponsor and directors of an aggregate of 3,882,500 ordinary shares, which shares would become worthless if Constellation does not complete a business

 

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combination within the applicable time period, as Constellation’s initial shareholders have waived any right to redemption with respect to these ordinary shares. Such shares have an aggregate market value of approximately $40,378,000 based on the closing price of the ordinary shares of $10.40 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of warrants to purchase 212,500 ordinary shares, which warrants would expire and become worthless if Constellation does not complete a business combination within the applicable time period. Such warrants have an aggregate market value of approximately $12,750 based on the closing price of Constellation’s warrants of $0.06 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of rights to receive 42,500 ordinary shares, which rights will become worthless if Constellation does not complete a business combination within the applicable time period. Such rights have an aggregate market value of approximately $8,725 based on the closing price of Constellation’s rights of $0.2053 on Nasdaq on July 31, 2019; and

 

   

as of July 31, 2019, Constellation’s initial shareholders have advanced approximately $94,559 to Constellation for operating expenses. Such advances will be repaid only if Constellation completes a business combination.

These interests may influence Constellation’s directors in making their recommendation that you vote in favor of the Business Combination Proposal and the other proposals described in this proxy statement/prospectus/information statement. You should also read the section entitled “The Business Combination – Constellation Reasons for the Business Combination.”

Constellation may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of a majority of the then outstanding warrants. As a result, the exercise price of your warrants could be increased, the exercise period could be shortened and the number of ordinary shares purchasable upon exercise of a warrant could be decreased, all without your approval.

The warrants are subject to the warrant agreement, dated June 19, 2017, between Constellation and Continental Stock Transfer & Trust Company, as warrant agent. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of a majority of the then outstanding warrants to make any change that adversely affects the interests of the registered holders. Accordingly, Constellation or the combined company may amend the terms of the warrants in a manner adverse to a holder if holders of a majority of the then outstanding warrants approve of such amendment. Although Constellation’s or the combined company’s ability to amend the terms of the warrants with the consent of a majority of the then outstanding warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number of ordinary shares purchasable upon exercise of the warrants.

The combined company may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.

The combined company will have the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of the ordinary shares equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the combined company gives notice of redemption. If and when the warrants become redeemable by the combined company, the combined company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding warrants could force you (i) to exercise your warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the

 

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then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. None of the private warrants will be redeemable by the combined company so long as they are held by their initial purchasers or their permitted transferees.

Constellation may amend the terms of the rights in a manner that may be adverse to holders with the approval by the holders of a majority of the then outstanding rights.

The rights are subject to the rights agreement, dated June 19, 2017, between Constellation and Continental Stock Transfer & Trust Company, as rights agent. The rights agreement provides that the terms of the rights may be amended without the consent of any holder to cure any ambiguity or correct any defective provision. The rights agreement requires the approval by the holders of a majority of the then outstanding rights (including the private rights) in order to make any change that adversely affects the interests of the registered holders.

Constellation believes it has been a passive foreign investment company, or PFIC, since its inception, which could result in adverse U.S. federal income tax consequences to U.S. taxpayers.

If Constellation is a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds Constellation’s ordinary shares, warrants or rights, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements. Because of the composition of Constellation’s assets and income, Constellation believes that it has been considered a PFIC since its inception and will be until it becomes a Delaware corporation pursuant to the Domestication (discussed further in the section entitled “Proposal No. 2 – The Domestication Proposal – Material U.S. Federal Income Tax Consequences of the Domestication – PFIC Considerations”). While there is a start-up exception from the PFIC rules, Constellation believes that it does not qualify for such exception. In addition, Constellation may not provide timely financial information that would be required for U.S. taxpayers to make a potentially favorable qualified electing fund, or QEF, election, and such election would be unavailable with respect to Constellation’s rights and warrants.

We urge U.S. taxpayers to consult their own tax advisors regarding the application of the PFIC rules.

An investor may be subject to adverse U.S. federal income tax consequences in the event the Internal Revenue Service, or the IRS, was to disagree with the U.S. federal income tax consequences described herein.

We have not sought a ruling from the IRS as to any U.S. federal income tax consequences described herein. The IRS may disagree with the descriptions of U.S. federal income tax consequences contained herein, and its determination may be upheld by a court. Any such determination could subject an investor or Constellation to adverse U.S. federal income tax consequences that would be different than those described herein. Accordingly, each prospective investor is urged to consult a tax advisor with respect to the specific tax consequences of the acquisition, ownership and disposition of Constellation’s ordinary shares, rights and warrants, including the applicability and effect of state, local or non-U.S. tax laws, as well as U.S. federal tax laws.

Constellation’s Corporate Effective Tax Rate may increase as a result of becoming a U.S. domiciled corporation.

In connection with the closing of the business combination, Constellation anticipates that it will change its jurisdiction of incorporation from the British Virgin Islands to Delaware, which change is referred to as the Domestication. As a result of the Domestication, Constellation will become subject to U.S. tax on Constellation’s income and capital gains. As a result, Constellation’s corporate effective tax rate may increase significantly, which could materially impact Constellation’s financial results, including its earnings and cash flow, for periods after the Domestication. Constellation’s current corporate effective tax rate fluctuates significantly from period to period, and is based upon the application of currently applicable income tax laws, regulations and treaties, as well as current judicial and administrative interpretations of these income tax laws, regulations and treaties, in various jurisdictions, in addition to the jurisdiction where Constellation’s parent is organized and domiciled.

 

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The highest statutory corporate tax rate for U.S. federal income tax purposes is 21%. Constellation’s effective tax rate for purposes of financial reporting may, however, vary significantly from the statutory rates under which Constellation operates (including the U.S. statutory rate that would apply after the Domestication) because of, among other things, timing differences in the recognition of income and expense for U.S. GAAP and tax purposes, and differences in how each jurisdiction in which Constellation operates treats the same item of income or expense. Constellation is unable to predict the impact of the Domestication on its effective tax rate going forward for future years. In addition, the tax laws of the United States and other jurisdictions could change in the future, and those changes could cause a material increase in Constellation’s effective tax rate at a later date as well.

If the business combination results in an ownership change under Section 382 of the Code for DermTech, pre-merger U.S. net operating loss carryforwards and certain other tax attributes will be subject to limitations.

At December 31, 2018 and 2017, DermTech had federal tax net operating loss carryforwards of approximately $59,404,000 and $51,264,000, respectively, as well as state tax net operating loss carryforwards at December 31, 2018 and 2017 of approximately $45,647,000 and $38,738,000, respectively. The federal tax loss carryforwards began to expire in 2019, while the state tax loss carryforwards begin to expire in 2028. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. DermTech has not conducted a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since inception due to the significant complexity and cost associated with such a study. If DermTech undergoes an ownership change in connection with the business combination, the combined company’s ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in the combined company’s stock ownership, some of which are outside of the combined company’s control, could result in an ownership change under Section 382 of the Code. Furthermore, the combined company’s ability to utilize NOLs of companies that it may acquire in the future may be subject to limitations. For these reasons, the combined company may not be able to utilize a material portion of the NOLs, even if it were to achieve profitability.

The TCJA was enacted on December 22, 2017 and significantly reforms the Code. The TCJA, among other things, includes changes to U.S. federal tax rates and the rules governing net operating loss carryforwards. For NOLs arising in tax years beginning after December 31, 2017, the TCJA limits a taxpayer’s ability to utilize NOL carryforwards to 80% of annual taxable income. In addition, NOLs arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018, will not be subject to the taxable income limitation, and NOLs generated in tax years ended before January 1, 2018 will continue to have a two-year carryback and twenty-year carryforward period. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOL is expected to be utilized. The changes in the carryforward/carryback periods as well as the new limitation on use of NOLs may significantly impact the combined company’s valuation allowance assessments for NOLs generated after December 31, 2017.

The recently passed comprehensive tax reform bill could adversely affect the combined company’s business and financial condition.

In December 2017, the TCJA significantly revised the Code. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, reduction or elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal

 

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tax law is uncertain and the combined company’s business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The impact of this tax reform on holders of common stock of the combined company is also uncertain and could be adverse. Stockholders of the combined company should consult with their legal and tax advisors with respect to this legislation and its potential tax consequences under their particular circumstances.

Currently, Constellation is governed by British Virgin Islands law but upon effectiveness of the Domestication, Constellation will be governed by Delaware law, which has anti-takeover implications.

Upon effectiveness of the Domestication, Constellation’s organizational documents will change and it and its organizational documents will be governed by Delaware law rather than British Virgin Islands law. The application of Delaware law to Constellation as a result of the Domestication may have the effect of deterring hostile takeover attempts or a change in control. Section 203 of the Delaware General Corporation Law, or the DGCL, restricts certain “business combinations” with “interested stockholders” for three years following the date that a person becomes an interested stockholder unless: (1) the “business combination” or the transaction which caused the person or entity to become an interested stockholder is approved by the Board of Directors prior to such business combination or transactions; (2) upon the completion of the transaction in which the person or entity becomes an “interested stockholder” such interested stockholder holds at least 85% of the voting stock of the combined company not including (x) shares held by officers and directors and (y) shares held by employee benefit plans under certain circumstances; or (3) at or after the person or entity becomes an “interested stockholder,” the “business combination” is approved by the Board of Directors and holders of at least 66 2/3% of the outstanding voting stock, excluding shares held by such interested stockholder. A Delaware corporation may elect not to be governed by Section 203. We do not anticipate making such an election.

Constellation’s board of directors may, to the extent permitted by applicable law, choose to waive any conditions to consummation of the business combination and proceed to consummate the business combination.

The Merger Agreement contains conditions precedent to the obligations of the parties to consummate the business combination. The Merger Agreement also provides that these conditions precedent may to the extent permitted by applicable law, be waived, in whole or in part, and the business combination consummated notwithstanding that a condition precedent has not been fulfilled or satisfied and notwithstanding that the waiver of the condition may directly or indirectly impact the financial condition of the combined company. The determination to waive the satisfaction of certain conditions will be made by Constellation’s board of directors. No additional vote of the shareholders will be required in connection with the waiver of a condition precedent.

The exercise of discretion by Constellation’s directors and officers in agreeing to changes to the terms of or waivers of closing conditions in the Merger Agreement may result in a conflict of interest when determining whether such changes to the terms of the Merger Agreement or waivers of conditions are appropriate and in the best interests of Constellation’s securityholders.

In the period leading up to the closing of the business combination, other events may occur that, pursuant to the Merger Agreement, would require Constellation to agree to amend the Merger Agreement, to consent to certain actions or to waive rights that Constellation is entitled to under the Merger Agreement. Such events could arise because of changes in the course of DermTech’s business, a request by the DermTech to undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or the occurrence of other events that would have a material adverse effect on DermTech’s business and would entitle Constellation to terminate the Merger Agreement. In any of such circumstances, it would be in the discretion of Constellation, acting through its board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors described elsewhere in this proxy statement/prospectus/information statement may result in a conflict of interest on the part of one or more of the directors between what he may believe is best for Constellation and its securityholders and what he may believe is best for himself or his affiliates in determining

 

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whether or not to take the requested action. As of the date of this proxy statement/prospectus/information statement, Constellation does not believe there will be any changes or waivers that Constellation’s directors and officers would be likely to make after shareholder approval of the Business Combination Proposal has been obtained. While certain changes may be made without further shareholder approval, if there is a change to the terms of the business combination that would have a material impact on the shareholders, Constellation will be required to circulate a new or amended proxy statement/prospectus/information statement or supplement thereto and resolicit the vote of its shareholders with respect to the Business Combination Proposal.

There may be sales of a substantial amount of the combined company’s common stock after the business combination by Constellation’s and DermTech’s current shareholders, and these sales could cause the price of Constellation’s securities to fall.

After the business combination and assuming consummation of the PIPE, there will be 26,295,225 shares of the combined company’s common stock outstanding (subject to certain assumptions, including: (i) all of Constellation’s issued and outstanding rights are converted into shares of common stock of the combined company upon consummation of the business combination; (ii) 6,153,847 shares of Constellation common stock and 1,231 shares of Constellation Series A Convertible Preferred Stock are sold in the PIPE; (iii) none of Constellation’s public shareholders exercise their redemption rights; (iv) none of Constellation’s warrants are exercised to purchase shares of common stock of the combined company; and (v) 16,000,000 shares of common stock of the combined company are issued to current DermTech stockholders upon the completion of the business combination. If the actual facts are different than these assumptions, the number of shares of the combined company’s common stock issued and outstanding will be different. Of Constellation’s issued and outstanding ordinary shares that were issued prior to the business combination, all will be freely transferable, except for any ordinary shares held by the combined company’s “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following completion of the business combination, Constellation expects that approximately 66% of the outstanding common stock of the combined company will be held by entities affiliated with the combined company and its executive officers and directors.

Future sales of the combined company’s common stock may cause the market price of Constellation’s securities to drop significantly, even if Constellation’s business is doing well.

After the business combination and pursuant to the Registration Rights Agreement, certain former DermTech stockholders will be entitled to demand that Constellation registers the resale of their securities subject to certain minimum requirements. These stockholders will also have certain “piggyback” registration rights with respect to registration statements filed subsequent to the business combination.

Upon effectiveness of any registration statement the combined company files pursuant to the Registration Rights Agreement, and upon the expiration of the lockup period applicable to the parties to the Registration Rights Agreement, these parties may sell large amounts of the combined company’s common stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in the share price of the combined company’s common stock or putting significant downward pressure on the price of the combined company’s common stock.

Sales of substantial amounts of the combined company’s common stock in the public market after the business combination, or the perception that such sales will occur, could adversely affect the market price of the combined company’s common stock and make it difficult for the combined company to raise funds through securities offerings in the future.

After the Closing, Constellation’s rights will convert into shares of common stock of the combined company and warrants will become exercisable for shares of the combined company, which would increase the number of shares eligible for future resale in the public market and result in dilution to Constellation’s shareholders.

If the business combination is completed, Constellation expects that its outstanding rights will convert into an aggregate of 1,493,625 shares of common stock of the combined company and outstanding warrants to purchase

 

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an aggregate of 7,468,125 shares of common stock of the combined company will become exercisable in accordance with the terms of the rights agreement and warrant agreement governing those securities. Holders of Constellation’s rights will need to affirmatively convert their rights after the consummation of the business combination. The warrants will become exercisable 30 days after the completion of the business combination, and will expire at 5:00 p.m., New York time, five years after the completion of the business combination or earlier upon redemption or liquidation. The exercise price of these warrants will be $11.50 per share, or approximately $85,883,438 in the aggregate for all shares underlying these warrants, assuming none of the warrants are exercised through “cashless” exercise. To the extent such warrants are exercised, additional shares of Constellation’s ordinary shares will be issued, which will result in dilution to the shareholders of the combined company and increase the number of shares of common stock eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of Constellation’s shares of common stock.

Because Constellation has no current plans to pay cash dividends on its ordinary shares for the foreseeable future, you may not receive any return on investment unless you sell your ordinary shares for a price greater than that which you paid for it.

Constellation may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of Constellation’s board of directors and will depend on, among other things, Constellation’s results of operations, financial condition, cash requirements, contractual restrictions and other factors that Constellation’s board of directors may deem relevant. In addition, Constellation’s ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness it or its subsidiaries incur. As a result, you may not receive any return on an investment in Constellation’s ordinary shares unless you sell Constellation’s ordinary shares for a price greater than that which you paid for it. See the section entitled “Market Price and Dividend Information – Dividends – Dividend Policy of Constellation.”

If, following the business combination, securities or industry analysts do not publish or cease publishing research or reports about the combined company, its business, or its market, or if they change their recommendations regarding the combined company’s securities adversely, the price and trading volume of the combined company’s securities could decline.

The trading market for the combined company’s securities will be influenced by the research and reports that industry or securities analysts may publish about the combined company, its business, market or competitors. Securities and industry analysts do not currently, and may never, publish research on the combined company. If no securities or industry analysts commence coverage of the combined company, the combined company’s share price and trading volume would likely be negatively impacted. If any of the analysts who may cover the combined company change their recommendation regarding the combined company’s shares of common stock adversely, or provide more favorable relative recommendations about the combined company’s competitors, the price of the combined company’s shares of common stock would likely decline. If any analyst who may cover the combined company were to cease coverage of the combined company or fail to regularly publish reports on it, the combined company could lose visibility in the financial markets, which in turn could cause its share price or trading volume to decline.

If Constellation fails to consummate the PIPE, it may not have enough funds to complete the business combination.

As a condition to Closing, the Merger Agreement provides that Constellation must have $15,000,000 available at the Closing. Because the amount in Constellation’s Trust Account is less than $15,000,000, Constellation requires the funds from the PIPE in order to consummate the business combination. While Constellation has entered into Subscription Agreements to raise an aggregate of approximately $24,000,000 immediately prior to

 

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the Closing, there can be no assurance that the counterparties to the Subscription Agreements will perform their obligations thereunder. If Constellation fails to consummate the PIPE, it is unlikely that Constellation will have sufficient funds to meet the condition to Closing in the Merger Agreement.

Constellation’s Proposed Amended and Restated Charter, to be in effect upon the completion of the business combination, will designate the Court of Chancery of the State of Delaware, or the Chancery Court, or the federal district court for the District of Delaware, or the District Court of Delaware, as the exclusive forum for certain types of actions and proceedings that may be initiated by the combined company’s stockholders, which could limit the combined company’s stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or employees.

The combined company’s Proposed Amended and Restated Charter, to be in effect upon the completion of the business combination, will require, unless the combined company otherwise consents, that the Chancery Court will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on the combined company’s behalf, (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of the combined company’s current or former directors, officers and employees to the combined company or its stockholders, (iii) any action or proceeding asserting a claim against the combined company or any of its current or former directors, officers or employees, arising out of or pursuant to any provision of the DGCL, the combined company’s Proposed Amended and Restated Charter to be in effect following the completion of the business combination or the combined company’s Proposed Bylaws to be in effect following the completion of the business combination, (iv) any action or proceeding to interpret, apply, enforce or determine the validity of the combined company’s Proposed Bylaws to be in effect following the completion of the business combination, (v) any action or proceeding as to which the DGCL confers jurisdiction to the Chancery Court, or (vi) any action or proceeding asserting a claim against the combined company, or its directors, officers or employees, relating to certain internal affairs matters. If the Chancery Court does not have jurisdiction for these actions or proceedings, then the actions or proceedings must be brought in a state court located in the State of Delaware. If these state courts also do not have jurisdiction, these actions or proceedings must be brought in the District Court of Delaware. These limitations in the combined company’s Proposed Amended and Restated Charter to be in effect upon the completion of this offering will not apply to actions brought to enforce a duty or liability created by the Securities Act, the Exchange Act or to any claim for which the federal courts have exclusive jurisdiction. In addition, any person purchasing or otherwise acquiring any interest in any shares of the combined company’s capital stock shall be deemed to have notice of and to have consented to this provision of the combined company’s Proposed Amended and Restated Charter. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or employees, which may discourage such lawsuits against the combined company and its directors, officers and employees even though an action, if successful, might benefit the combined company’s stockholders. Stockholders who do bring a claim in the Chancery Court or the District Court of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near the jurisdiction. The Chancery Court or the District Court of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to the combined company than to the combined company’s stockholders. Alternatively, if a court were to find these provisions of the combined company’s Proposed Amended and Restated Charter to be in effect upon the completion of this offering inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the combined company may incur additional costs, which could have a material adverse effect on the combined company’s business, financial condition or results of operations.

 

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THE SPECIAL MEETING OF CONSTELLATION SHAREHOLDERS

General

Constellation is furnishing this proxy statement/prospectus/information statement to its shareholders as part of the solicitation of proxies by Constellation’s board of directors for use at the special meeting of shareholders to be held on August 27, 2019, and at any adjournment or postponement thereof. This proxy statement/prospectus/information statement is first being furnished to Constellation’s shareholders on or about August 9, 2019. This proxy statement/prospectus/information statement provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meeting.

Date, Time and Place of Special Meeting

The special meeting will be held at 10:00 a.m. Eastern time, on August 27, 2019, at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, NY 10166, or such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the proposals.

Purpose of the Special Meeting

At the special meeting of shareholders, Constellation will ask the Constellation shareholders to vote in favor of the following proposals:

 

   

The Business Combination Proposal – a proposal to approve the adoption of the Merger Agreement and the business combination contemplated under the Merger Agreement;

 

   

The Domestication Proposal – a proposal to (a) approve the Domestication of Constellation; (b) adopt, upon the Domestication taking effect, the Interim Charter in place of Constellation’s Current Charter, which will remove or amend those provisions of our Current Charter that terminate or otherwise cease to be applicable as a result of the Domestication and provide for a majority of the stockholders to act by written consent; (c) file a notice of continuation out of the British Virgin Islands with the British Virgin Islands Registrar of Corporate Affairs under Section 184 of the BVI Companies Act; and (d) file the Interim Charter with the Secretary of State of Delaware;

 

   

The Charter Amendment Proposal – to approve and adopt, subject to and conditional on the Domestication and the closing of the business combination (but with immediate effect upon the closing of the business combination), separate proposals to adopt the Proposed Bylaws and amendments to Constellation’s Interim Charter, as set out in the draft Proposed Amended and Restated Charter to (a) change the name of Constellation to DermTech, Inc., (b) remove or amend those provisions of our Interim Charter which terminate or otherwise cease to be applicable following the closing of the business combination, and (c) add new provisions to our Interim Charter which will be applicable following the closing of the business combination;

 

   

The Incentive Plan Proposal – to consider and vote upon a proposal to approve and assume the DermTech Plan and all outstanding DermTech equity awards granted thereunder;

 

   

The Reverse Stock Split Proposal - to consider and vote upon a proposal to effect a one-for-two reverse stock split of all of Constellation’s issued and outstanding shares of common stock, subsequent to the closing of the business combination;

 

   

The Nasdaq Proposal – a proposal to consider and vote upon a proposal to approve, for purposes of complying with applicable Nasdaq Listing Rules, the issuance of more than 20% of the current total issued and outstanding ordinary shares of Constellation, which Nasdaq may deem to be a change of control pursuant to the Business Combination; and

 

   

The Adjournment Proposal – a proposal to authorize the adjournment of the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based on the tabulated

 

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vote at the time of the special meeting, there are not sufficient votes to approve the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal or the Nasdaq Proposal, or public shareholders have elected to redeem an amount of public shares such that the minimum available cash condition to the obligation to closing of the business combination would not be satisfied.

Recommendation of Constellation’s Board of Directors

Constellation’s board of directors believes that each of the Business Combination Proposal, the Domestication Proposal, the Charter Amendment Proposal, the Reverse Stock Split Proposal, the Incentive Plan Proposal, the Nasdaq Proposal and the Adjournment Proposal to be presented at the special meeting is in the best interests of Constellation and its shareholders and unanimously recommends that its shareholders vote “FOR” each of the proposals.

When you consider the recommendation of Constellation’s board of directors in favor of approval of the Business Combination Proposal, you should keep in mind that certain of Constellation’s directors and officers have interests in the business combination that are different from, or in addition to, your interests as a shareholder. These interests include, among other things:

 

   

the beneficial ownership of Constellation’s sponsor and directors of an aggregate of 3,882,500 ordinary shares, which shares would become worthless if Constellation does not complete a business combination within the applicable time period, as Constellation’s initial shareholders have waived any right to redemption with respect to these ordinary shares. Such shares have an aggregate market value of approximately $40,378,000 based on the closing price of the ordinary shares of $10.40 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of warrants to purchase 212,500 ordinary shares, which warrants would expire and become worthless if Constellation does not complete a business combination within the applicable time period. Such warrants have an aggregate market value of approximately $12,750 based on the closing price of Constellation’s warrants of $0.06 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor and directors of rights to receive 42,500 ordinary shares, which rights will become worthless if Constellation does not complete a business combination within the applicable time period. Such rights have an aggregate market value of approximately $8,725 based on the closing price of Constellation’s rights of $0.2053 on Nasdaq on June 12, 2019; and

 

   

as of July 31, 2019, Constellation’s initial shareholders have advanced approximately $94,559 to Constellation for operating expenses. Such advances will be repaid only if Constellation completes a business combination.

Voting Power; Record Date

You will be entitled to vote or direct votes to be cast at the special meeting if you owned Constellation’s ordinary shares at the close of business on July 25, 2019, which is the record date for the special meeting. You are entitled to one vote for each ordinary share that you owned as of the close of business on the record date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the record date, there were 5,342,532 ordinary shares outstanding, of which 1,187,532 are public shares, 3,593,750 are founder shares held by Constellation’s initial shareholders and 561,250 are private shares held by Constellation’s initial shareholders.

Vote of Initial Shareholders

In connection with Constellation’s initial public offering, Constellation entered into an agreement with its initial shareholders, directors and officers pursuant to which they each agreed to vote the Founder Shares and any other

 

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shares acquired during and after Constellation’s initial public offering in favor of the Business Combination Proposal. This agreement applies to Constellation’s sponsor as it relates to the Founder Shares and private shares and the requirement to vote its Founder Shares and private shares in favor of the Business Combination Proposal.

Constellation’s initial shareholders have also agreed to waive their redemption rights with respect to their Founder Shares and private shares and to waive their redemption rights with respect to any public shares that they may acquire in connection with the completion of the business combination. The Founder Shares and private shares have no redemption rights upon Constellation’s liquidation and will be worthless if no business combination is effected by Constellation prior to September 23, 2019, unless a further extension is approved by Constellation’s shareholders. However, Constellation’s initial shareholders are entitled to redemption rights upon Constellation’s liquidation with respect to any public shares they may own.

Who Can Answer Your Questions About Voting

If you have any questions about how to vote or direct a vote in respect of your ordinary shares, you may contact us at:

Constellation Alpha Capital Corp.

Attention: Rajiv Shukla

Emerald View, Suite 400

2054 Vista Parkway

West Palm Beach, FL 33411

Tel: (561) 404-9034

Email: info@constellationalpha.com

Quorum and Required Vote for Proposals for the Special Meeting of Shareholders

A quorum of Constellation’s shareholders is necessary to hold a valid meeting. A quorum will be present at the special meeting if at least 50% of Constellation’s ordinary shares outstanding and entitled to vote at the special meeting are represented in person or by proxy. Abstentions will count as present for the purposes of establishing a quorum.

The approval of each of the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal and Adjournment Proposal requires the affirmative vote of the holders of a majority of the ordinary shares that are voted on each such proposal at the special meeting. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the special meeting, an abstention from voting, or a broker non-vote will have no effect on the outcome of a vote on any of the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal or Adjournment Proposal.

Broker Non-Votes and Abstentions

Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. Constellation believes the proposals presented to its shareholders will be considered non-discretionary and therefore your broker, bank or nominee cannot vote your shares without your instruction. If you do not provide instructions with your proxy, your bank, broker or other nominee may deliver a proxy card expressly indicating that it is NOT voting your shares; this indication that a bank, broker or nominee is not voting your shares is referred to as a “broker non-vote.”

With respect to the special meeting, abstentions are considered present for the purposes of establishing a quorum but will have no effect on the outcome of a vote on any of the Business Combination Proposal, Domestication

 

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Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal or Adjournment Proposal. Broker non-votes will not be counted for the purposes of establishing a quorum and will have no effect on the outcome of a vote on any of the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal or Adjournment Proposal.

Voting Your Shares

Each ordinary share that you own in your name entitles you to one vote on each of the proposals for the special meeting of shareholders. Your one or more proxy cards show the number of ordinary shares that you own.

If you are a holder of record, there are two ways to vote your shares:

 

   

You can vote by completing, signing and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the applicable special meeting(s). If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your ordinary shares will be voted, as recommended by Constellation’s board of directors. With respect to proposals for the special meeting, that means: “FOR” each of the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal and Adjournment Proposal.

 

   

You can attend the special meeting and vote in person. You will be given a ballot when you arrive. However, if your ordinary shares are held in the name of your broker, bank or other nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your ordinary shares.

Revoking Your Proxy

If you have submitted a proxy to vote your ordinary shares and wish to change your vote, you may do so by delivering a later-dated, signed proxy card to us, prior to the date of the special meeting or by voting in person at the special meeting. Attendance at the special meeting alone will not change your vote. You also may revoke your proxy by sending a notice of revocation to us at: Constellation Alpha Capital Corp., Attention: Rajiv Shukla, Emerald View, Suite 400, 2054 Vista Parkway, West Palm Beach, FL 33411.

No Additional Matters May Be Presented at the Special Meeting

The special meeting has been called only to consider the approval of the Business Combination Proposal, Domestication Proposal, Charter Amendment Proposal, Incentive Plan Proposal, Reverse Stock Split Proposal, Nasdaq Proposal and Adjournment Proposal. Under Constellation’s memorandum and articles of association, other than procedural matters incident to the conduct of the special meeting, no other matters may be considered at the special meeting if they are not included in this proxy statement/prospectus/information statement, which serves as the notice of the special meeting.

Redemption Rights

Pursuant to Constellation’s memorandum and articles of association, holders of public shares may demand that such shares be redeemed in exchange for a pro rata share of the aggregate amount on deposit in the Trust Account, less taxes payable, calculated as of two business days prior to the consummation of the business combination. Holders of public shares may redeem such shares regardless of whether such public shares were held by them as of the record date. If demand is properly made and the business combination is consummated,

 

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these shares, immediately prior to the business combination, will cease to be outstanding and will represent only the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account as of two business days prior to the consummation of the business combination, less taxes payable, upon the consummation of the business combination. For illustrative purposes, based on funds in the Trust Account of approximately $12.4 million on May 28, 2019, the estimated per share redemption price would have been approximately $10.45.

Redemption rights are not available to holders of rights or warrants in connection with the business combination.

In order to exercise your redemption rights, you must, prior to 4:30 p.m., Eastern time, on August 23, 2019 (two business days before the special meeting), both:

 

   

Submit a request in writing that Constellation redeem your public shares for cash to Continental Stock Transfer & Trust Company, Constellation’s transfer agent, at the following address:

Continental Stock Transfer & Trust Company

One State Street Plaza, 30th Floor

New York, New York 10004-1561

Attn: Mark Zimkind

E-mail: mzimkind@continentalstock.com

 

   

Deliver your public shares either physically or electronically through DTC to Constellation’s transfer agent. Shareholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent. It is Constellation’s understanding that shareholders should generally allot at least one week to obtain physical certificates from the transfer agent. However, Constellation does not have any control over this process and it may take longer than one week. Shareholders who hold their shares in street name will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically. If you do not submit a written request and deliver your public shares as described above, your shares will not be redeemed.

Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with Constellation’s consent, until the vote is taken with respect to the business combination. If you delivered your shares for redemption to Constellation’s transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request that Constellation’s transfer agent return the shares (physically or electronically). You may make such request by contacting Constellation’s transfer agent at the phone number or address listed above.

Each redemption of public shares by Constellation’s public shareholders will decrease the amount in the Trust Account. In no event, however, will Constellation redeem public shares in an amount that would cause its net tangible assets to be less than $5,000,001.

Prior to exercising redemption rights, shareholders should verify the market price of their ordinary shares as they may receive higher proceeds from the sale of their ordinary shares in the public market than from exercising their redemption rights if the market price per share is higher than the redemption price. Constellation cannot assure you that you will be able to sell your ordinary shares in the open market, even if the market price per share is higher than the redemption price stated above, as there may not be sufficient liquidity in the ordinary shares when you wish to sell your shares.

If you exercise your redemption rights, your ordinary shares will cease to be outstanding immediately prior to the business combination and will only represent the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account. You will no longer own those shares. You will be entitled to receive cash for these shares only if you properly demand redemption.

 

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If the Business Combination Proposal is not approved and Constellation does not consummate an initial business combination by September 23, 2019, unless a further extension is approved by Constellation’s shareholders, it will be required to dissolve and liquidate and the rights and warrants will expire worthless.

Appraisal Rights

Appraisal rights are not available to holders of shares of Constellation’s units, ordinary shares, rights or warrants in connection with the business combination.

Material U.S. Federal Income Tax Consequences of the Exercise of Redemption Rights

The following is a discussion of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of Constellation ordinary shares who exercise their redemptions rights to receive cash from the trust account (with each such exercise called a “Redemption”). This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, current administrative interpretations and practices of the IRS, and judicial decisions, all as currently in effect as of the date hereof and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax considerations described below. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this summary. This summary does not discuss the impact that U.S. state and local taxes and taxes imposed by non-U.S. jurisdictions could have on the matters discussed in this summary. This summary does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular shareholder in light of its investment or tax circumstances or to shareholders subject to special tax rules, such as:

 

   

certain U.S. expatriates;

 

   

a dealer in securities or foreign currencies;

 

   

traders in securities that elect mark-to-market treatment;

 

   

pass-through entities such as partnerships, S corporations, disregarded entities for federal income tax purposes and limited liability companies (and investors therein);

 

   

U.S. Holders (as defined below) whose functional currency is not the U.S. dollar;

 

   

financial institutions or banks;

 

   

a person that received Constellation ordinary shares as compensation for services;

 

   

mutual funds;

 

   

qualified plans, such as 401(k) plans, individual retirement accounts, etc.;

 

   

insurance companies;

 

   

broker-dealers;

 

   

regulated investment companies (or RICs);

 

   

real estate investment trusts (or REITs);

 

   

persons holding Constellation ordinary shares stock as part of a “straddle,” “wash sale,” “hedge,” “conversion transaction,” “synthetic security,” or other integrated investment;

 

   

persons subject to the alternative minimum tax provisions of the Code;

 

   

tax-exempt organizations;

 

   

persons that actually or constructively own five percent or more of Constellation ordinary shares;

 

   

redeeming non-U.S. Holders (as defined below);

 

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a controlled foreign corporation; and/or

 

   

a passive foreign investment company.

If any partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds Constellation ordinary shares, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partner and the partnership. If you are a partner of a partnership holding Constellation ordinary shares, you should consult your tax advisor. This summary assumes that shareholders hold Constellation ordinary shares as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment and not as a dealer or for sale to customers in the ordinary course of the shareholder’s trade or business.

This summary does not address the tax consequences to Constellation stockholders under any state, local or foreign tax laws or the U.S. federal estate or gift, Medicare net investment income, or alternative minimum tax provisions of the Code. This summary does not address the U.S. federal income tax consequences of transactions effectuated prior or subsequent to, or concurrently with, a Redemption (whether or not any such transactions are undertaken in connection with a Redemption) including, without limitation, the exercise of an option to acquire Constellation ordinary shares or other rights to acquire Constellation ordinary shares.

WE URGE HOLDERS OF CONSTELLATION ORDINARY SHARES TO CONSULT THEIR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF A REDEMPTION.

U.S. Federal Income Tax Consequences to U.S. Holders

This section is addressed to U.S. Holders of Constellation ordinary shares who exercise their redemption rights to receive cash from the trust account. For purposes of this discussion, a “U.S. Holder” is a beneficial owner that is, for U.S. federal income tax purposes:

 

   

a citizen or resident of the United States;

 

   

a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof;

 

   

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

any trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

Redemption of Constellation Ordinary Shares

Subject to the PFIC rules discussed below (see sectioned entitled “PFIC Considerations”), U.S. Holders of Constellation ordinary shares who exercise their redemption rights to receive cash from the trust account in exchange for all of their Constellation ordinary shares generally will be required, subject to the following paragraphs, to treat the transaction as a sale of such shares and recognize gain or loss upon the Redemption in an amount equal to the difference, if any, between the amount of cash received and the tax basis of the Constellation ordinary shares redeemed. A U.S. Holder’s tax basis in such Constellation ordinary shares generally will equal the cost of such shares. A shareholder that purchased Constellation units would have been required to allocate the cost between the Constellation ordinary shares and the public warrants comprising the units based on their relative fair market values at the time of the purchase. Subject to the passive foreign investment company rules discussed below, a shareholder’s gain or loss on a Redemption should be treated as capital gain or loss if such shares were held as a capital asset on the date of the Redemption. The deductibility of capital losses is subject to limitations. U.S. Holders that acquired Constellation ordinary shares at different dates or at different prices should consult their tax advisors to determine how the above rules apply to them.

 

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If a U.S. Holder does not exchange all of its Constellation ordinary shares in a Redemption, such Redemption will generally still be treated as a sale or exchange of Constellation ordinary shares , with the consequences described in the immediately preceding paragraph, if the Redemption: (i) is “not essentially equivalent to a dividend” with respect to such U.S. Holder under Section 302(b)(1) of the Code; (ii) is a “substantially disproportionate” redemption with respect to such U.S. Holder under Section 302(b)(2) of the Code; or (iii) results in a “complete redemption” of such U.S. Holder’s interest in our stock under Section 302(b)(3) of the Code. In determining whether any of the foregoing tests are satisfied, a U.S. Holder takes into account not only stock actually owned by the U.S. Holder, but also shares of Constellation ordinary shares that are constructively owned by such U.S. Holder. A U.S. Holder may constructively own, in addition to stock owned directly, stock owned by certain related individuals and entities in which the U.S. Holder has an interest or that have an interest in such U.S. Holder, as well as any stock the U.S. Holder has a right to acquire by exercise of an option, which generally would include stock that could be acquired pursuant to the exercise of the public warrants. In order to meet the substantially disproportionate test, the percentage of Constellation’s outstanding voting stock actually and constructively owned by the U.S. Holder immediately following a Redemption must, among other requirements, be less than 80 percent of the percentage of Constellation’s outstanding voting stock actually and constructively owned by the U.S. Holder immediately before the Redemption. There will be a complete termination of a U.S. Holder’s interest if either all the shares of Constellation actually and constructively owned by the U.S. Holder are redeemed or all the shares of Constellation actually owned by the U.S. Holder are redeemed and the U.S. Holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of shares owned by certain family members and the U.S. Holder does not constructively own any other shares of Constellation. A Redemption of the shares will not be essentially equivalent to a dividend if a U.S. Holder’s Redemption results in a “meaningful reduction” of the U.S. holder’s proportionate interest in Constellation. Whether a Redemption will result in a meaningful reduction in a U.S. holder’s proportionate interest in Constellation will depend on the particular facts and circumstances. However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority shareholder in a publicly held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” A U.S. Holder should consult with its own tax advisors as to the tax consequences of a Redemption.

If a Redemption does not qualify as a sale or exchange of Constellation ordinary shares under Section 302 of the Code, then the U.S. Holder will be treated as receiving a corporate distribution. Subject to the passive foreign investment company rules discussed below, such distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent paid from current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in such U.S. Holder’s Constellation ordinary shares. Any remaining excess will be treated as gain realized on the sale or other disposition of the shares. Special rules may apply to dividends received by U.S. Holders that are taxable corporations. After the application of the foregoing rules, any remaining tax basis of the U.S. Holder in the redeemed shares will be added to the U.S. Holder’s adjusted tax basis in its remaining stock, or, if it has none, to the U.S. Holder’s adjusted tax basis in its warrants or possibly in other shares constructively owned by it.

Each U.S. Holder should consult its own tax advisor regarding the tax treatment of a Redemption.

PFIC Considerations

In addition to the discussion above, a Redemption could be subject to the passive foreign investment company provisions of the Code if Constellation is or ever was a passive foreign investment company or PFIC.

A. Definition of a PFIC

In general, Constellation will be a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder held Constellation ordinary shares, (a) at least 75% or more of Constellation’s gross income for the

 

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taxable year was passive income or (b) at least 50% or more of the value, determined on the basis of a quarterly average, of Constellation’s assets is attributable to assets that produce or are held to produce passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents and royalties that are derived in the active conduct of a trade or business), and gains from the disposition of passive assets.

B. PFIC Status of Constellation

Constellation believes that it has been considered a PFIC since its inception. The determination of whether a foreign corporation is a PFIC is primarily factual and there is little administrative or judicial authority on which to rely to make a determination.

C. Effects of PFIC Rules on a Redemption

If the Constellation were classified as a PFIC at any time during such U.S. Holder’s holding period in such ordinary shares and the U.S. Holder had not made a QEF election under Section 1295 of the Code for the first taxable year in which the U.S. Holder owned Constellation ordinary shares or in which Constellation was a PFIC, whichever is later, Section 1291 of the Code generally requires taxable gain to U.S. Holders of Constellation ordinary shares in a Redemption to be taxed at the rate applicable to ordinary income and an interest charge would apply based on a complex set of computational rules designed to offset the tax deferral with respect to the undistributed earnings of Constellation. Under these rules:

 

   

the U.S. Holder’s gain would be allocated ratably over the U.S. Holder’s holding period for such holder’s Constellation ordinary shares;

 

   

the amount of gain allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain, or to the period in the U.S. Holder’s holding period before the first day of the first taxable year in which Constellation was a PFIC, would be taxed as ordinary income;

 

   

the amount of gain allocated to other taxable years (or portions thereof) of the U.S. Holder and included in such holder’s holding period would be taxed at the highest tax rate in effect for that year applicable to the U.S. Holder; and

 

   

the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.

If a U.S. Holder is treated as receiving a corporate distribution in a Redemption instead of a sale of ordinary shares, any amounts distributed to a U.S. Holder generally would be treated in the same manner as gain subject to the PFIC rules.

The PFIC rules are complex and the implementation of certain aspects of the PFIC rules requires the issuance of Treasury regulations which in many instances have not been promulgated and which may be promulgated and which may have retroactive effect. There can be no assurance that any of these proposals will be enacted or promulgated, and if so, the form they will take or the effect that they may have on this discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. Holders are strongly urged to consult their own tax advisors concerning the impact of these rules on a Redemption, including, without limitation, whether a QEF election, deemed sale election and/or mark to market election is available with respect to their Constellation ordinary shares and the consequences to them of any such election. In addition, Constellation may not provide timely financial information that would be required for U.S. taxpayers to make a potentially favorable QEF election.

Information Reporting Requirements and Backup Withholding

Under U.S. federal income tax and U.S. Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. U.S. Holders are urged to consult with their own tax advisors concerning such reporting requirements.

 

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SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF A REDEMPTION IN THEIR PARTICULAR CIRCUMSTANCES.

Solicitation of Proxies

Constellation will pay the cost of soliciting proxies for the special meeting. Constellation will reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of ordinary shares for their expenses in forwarding soliciting materials to beneficial owners of ordinary shares and in obtaining voting instructions from those owners. Constellation’s directors, officers and employees may solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

Share Ownership

As of the record date, Constellation’s sponsor beneficially owns an aggregate of approximately 72.7% of Constellation’s outstanding ordinary shares. Constellation’s sponsor has agreed to vote all of its founder shares and any public shares acquired by it in favor of the Business Combination Proposal.

 

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THE BUSINESS COMBINATION

This section and the section entitled “The Merger Agreement” beginning on page 118 of this proxy statement/prospectus/information statement describe the material aspects of the business combination, including the Merger Agreement. While Constellation and DermTech believe that this description covers the material terms of the business combination and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus/information statement for a more complete understanding of the business combination and the Merger Agreement, including the Merger Agreement itself which is attached as Annex A to this proxy statement/prospectus/information statement, and the other documents to which you are referred herein. See the section entitled “Where You Can Find More Information” beginning on page 271 of this proxy statement/prospectus/information statement.

Background of the Business Combination

Constellation was formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more businesses or entities. Constellation is not limited to any particular industry or sector.

Constellation received $143.75 million of the proceeds from its initial public offering, which was consummated on June 23, 2017. The proceeds of the initial public offering, including proceeds from the exercise of the underwriters’ over-allotment option, were placed in the trust account immediately following the initial public offering and, in accordance with Constellation’s memorandum and articles of association, will be released upon the consummation of the business combination. Cowen and Company, LLC, or Cowen, served as the sole book-running managing underwriter for Constellation’s initial public offering. In its role as an underwriter, Cowen received an underwriting fee and was entitled to deferred underwriting compensation upon the consummation of Constellation’s initial business combination. Cowen, together with its affiliates, holds approximately 136,250 private units and 783,047 ordinary shares of Constellation.

Except for all interest income that may be released to Constellation to pay taxes and up to $50,000 to pay liquidation expenses, none of the funds held in the trust account will be released until the earlier of (x) the completion of Constellation’s initial business combination within the required time period, (y) the redemption of 100% of the public shares if Constellation has not completed an initial business combination by September 23, 2019 (as a result of the extension described below) or (z) the redemption of any public shares properly tendered in connection with a shareholder vote to amend Constellation’s memorandum and articles of association (A) to modify the substance or timing of its obligation to redeem 100% of the public shares if it does not complete an initial business combination within the required time period or (B) with respect to any other provision relating to shareholders’ rights or pre-business combination activity. In the event of Constellation’s liquidation for failure to complete a business combination within the allotted time, up to $50,000 of net interest may be released to Constellation if Constellation has no or insufficient working capital to fund the costs and expenses of its dissolution and liquidation. After the payment of approximately $3.4 million in expenses relating to the initial public offering, approximately $700,000 of the net proceeds of the initial public offering and private placement of the private units was retained by Constellation for working capital purposes. The funds in the trust account are invested in U.S. government treasury bills with a maturity of 180 days or less or money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, as amended, which invest only in direct U.S. government treasury obligations.

On March 21, 2019, at a special meeting of Constellation’s shareholders, an amendment to Constellation’s memorandum and articles of association was approved to extend the date by which Constellation has to consummate a business combination for an additional six months, from March 23, 2019 to September 23, 2019. The purpose of the extension was to allow Constellation more time to complete a business combination transaction. Following redemptions of 13,187,468 of Constellation’s ordinary shares in connection with the extension, a total of approximately $12.3 million remained in Constellation’s trust account.

 

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Prior to the consummation of the initial public offering, neither Constellation, nor anyone on its behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to a potential transaction with Constellation.

Following the initial public offering, Constellation’s acquisition team, which included certain officers and directors of Constellation, commenced a comprehensive search for a target business. During the course of this search process, Constellation reviewed and considered more than 85 companies and engaged with several possible target businesses in detailed substantive discussions or negotiations with respect to potential transactions. Constellation entered into substantive discussions with a number of potential target companies, including discussions regarding the type and amount of consideration to be provided relative to a potential transaction and entered into a definitive business combination agreement with one target company, as described below. Constellation delivered non-binding letters of intent to 13 companies. The decision not to pursue alternative acquisition targets was generally the result of Constellation’s determination that each business was not an attractive target due to a combination of business prospects, strategy, management teams, structure and valuation differences.

On August 2, 2018, Constellation entered into an agreement, or the Share Purchase Agreement, to purchase all the issued and outstanding shares of capital stock of Medall Healthcare Private Limited, a company registered under the laws of India, or Medall. Under the terms of the Share Purchase Agreement between Constellation Health Holdings, a wholly-owned Singapore subsidiary of Constellation, and the shareholders of Medall, the Share Purchase Agreement provided for automatic termination in the event that any of the conditions precedent in the Share Purchase Agreement were not fulfilled or waived on or prior to the termination date. As of December 3, 2018, several conditions precedent remained unfulfilled or unsatisfied within the time periods specified in the Share Purchase Agreement, and, as a result, the Share Purchase Agreement terminated automatically. Such conditions precedent included the failure to obtain necessary financing, satisfy certain regulatory obligations, obtain certain required insurance, deliver certain tax forms and certifications, register certain contractors, take certain corporate actions (such as the authorization and reclassification of shares required to consummate the transaction) and the inability to satisfactorily make certain required representations.

Constellation resumed exploring alternative transactions following the termination of the Medall transaction. Between December 3, 2018 and the execution of the definitive Merger Agreement on May 29, 2019, Constellation reviewed more than 20 new potential business combination opportunities from various investment banks and Mr. Shukla’s personal network. On December 4, 2019, Constellation received a non-confidential presentation on DermTech from LifeSci Capital, or LifeSci. On December 5, 2018, Constellation executed a non-disclosure agreement with DermTech and received access to the DermTech dataroom for legal and financial due diligence. On December 6, 2018, Mr. Rajiv Shukla, Constellation’s chief executive officer, and Mr. Craig Pollak, Constellation’s chief financial officer, discussed transaction terms with Dr. John Dobak, DermTech’s president and chief executive officer, Mr. Steve Kemper, DermTech’s chief financial officer and their financial advisors.

On December 10, 2018, Constellation and DermTech executed a non-binding term sheet with a 30-day exclusivity period. Among the opportunities referenced above, only DermTech progressed to substantive due diligence after the execution of a mutually agreed term sheet, which occurred after the termination of the Medall transaction.

On December 11, 2018, Mr. Shukla met with Dr. Dobak and Mr. Kemper in San Diego, CA to discuss process and timing for the potential transaction. On December 12, 2018, Mr. Shukla met with the board of directors of DermTech and subsequently met with members of DermTech’s management team to address questions regarding process, potential timing and key aspects of business strategy going forward. On December 21, 2018, Mr. Shukla, Mr. Pollak, Dr. Dobak and Mr. Kemper along with their financial advisors conducted a telephonic discussion centered on diligence items, fund raising, and negotiation around key transaction terms.

During the period from December 10, 2018 and until May 2019, Constellation conducted legal and financial due diligence on DermTech. On January 5, 2019, Mr. Shukla conducted a status update call with Dr. Dobak and a representative of RTW Investments L.P., an investor in DermTech. On January 7, 2019, Mr. Shukla conducted a

 

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call with Dr. Dobak to discuss diligence items. On January 8, 2019, DermTech extended exclusivity for the non-binding term sheet for an additional 30 days. On January 17, 2019, the parties and their financial advisors conducted a status update call. On January 18, 2019, Constellation entered into an engagement letter with LifeSci for a PIPE financing. On January 25, 2019, DermTech and Constellation conducted an update call regarding the proposed PIPE financing. On February 5, 2019, DermTech held a meeting of its board of directors to discuss matters related to the transaction. On February 7, 2019 and February 8, 2019, Mr. Shukla, Mr. Pollak, Dr. Dobak, Mr. Kemper and Cowen received updates from LifeSci on the progress of the proposed PIPE financing. The PIPE process failed to generate interest from investors based on the proposed commercial terms of the PIPE. Consequently, the PIPE process was halted so that Constellation and DermTech could consider revisions to the proposed business terms of the merger. On February 13, 2019, after consultations with Constellation, representatives from Cowen contacted Dr. Dobak to propose a revised valuation and cash condition to closing.

Between February 13, 2019 and March 5, 2019, DermTech and Constellation undertook extensive negotiations to determine a new capital and valuation structure that was acceptable to both parties. During this period and after, Cowen, in its capacity as informal capital markets advisor to Constellation, assisted in arranging telephonic conferences and facilitating the discussions among the parties. The discussions included, among other things, negotiations around a lower valuation for DermTech, the forfeiture of certain of the Founder Shares by Constellation’s sponsor, the composition of the board of directors and management team of the combined company following the consummation of the transaction, the strategy of the combined company following the consummation of the transaction and the restructuring of outstanding deferred underwriting fees owed to the underwriters in connection with Constellation’s initial public offering. On March 9, 2019 the parties reached a comprehensive agreement in principle on the proposed structure, valuation, minimum capital requirement, outstanding banking fees and future banking support. On March 10, 2019, Constellation terminated its letter agreement with LifeSci. Between March 9, 2019 and March 13, 2019, Dr. Dobak updated DermTech’s board of directors and certain DermTech stockholders as to the merits of the agreed upon transaction, the need for access to public capital markets and the costs associated with becoming a public company, as well as other various financing alternatives.

On March 13, 2019, the DermTech board of directors conducted a telephonic discussion to approve the signing of a revised non-binding letter of intent reflecting the agreement in principle reached on March 9, 2019, or the Revised LOI, and the press release announcing the Revised LOI, at which time the DermTech board of directors agreed to proceed with the Revised LOI and the press release.

On March 14, 2019, Mr. Shukla briefed the board of directors of Constellation on the potential business combination with DermTech and execution of the Revised LOI, at which time the board of directors agreed to proceed with the Revised LOI and issuance of the press release. On March 15, 2019, Constellation issued the press release announcing the Revised LOI. On March 21, 2019, representatives of Cowen, Greenberg Traurig, LLP, or Greenberg, counsel to Constellation, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., or Mintz, counsel to DermTech, discussed various legal related matters in connection with the proposed merger. Based on the revised commercial terms, Cowen facilitated introductions to Constellation of institutional investors that may have had an interest in the PIPE financing and assisted in arranging telephonic and in person meetings.

During the period from March 16, 2019, and until May 22, 2019, Constellation continued its financial and legal due diligence on DermTech and Greenberg and Mintz negotiated the terms of the Merger Agreement, including the termination provisions, the amount of the termination fee and the treatment of DermTech’s outstanding stock options, restricted stock units, warrants and convertible notes.

On May 2, 2019 and May 15, 2019, representatives of Cowen provided an update to Mr. Shukla and Mr. Pollak, Dr. Dobak and Mr. Kemper, and representatives of Greenberg and Mintz, regarding the status of the proposed PIPE financing. By separate conference call on May 9, 2019, representatives of Cowen discussed the marketing efforts with regard to the proposed PIPE financing with Mr. Shukla, Mr. Pollak and representatives of Greenberg. On May 22, 2019, the board of directors of Constellation unanimously approved (i) the Merger Agreement and the transactions contemplated by the Merger Agreement and (ii) the PIPE and related Subscription Agreements.

 

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Constellation executed the Subscription Agreements for the PIPE financing between May 22, 2019 and August 1, 2019. The Merger Agreement was executed on May 29, 2019 by the parties and Constellation and DermTech jointly issued a press release announcing the entering into the Merger Agreement. On May 29, 2019, Constellation filed a Current Report on Form 8-K announcing the execution of the Merger Agreement and the Subscription Agreements and disclosing the key terms of the Merger Agreement and the Subscription Agreements.

DermTech Reasons for the Business Combination

The following discussion sets forth material factors considered by the DermTech board of directors in reaching its determination to authorize the business combination, including the merger; however, it may not include all of the factors considered by the DermTech board of directors. In light of the number and wide variety of factors considered in connection with its evaluation of the business combination, including the merger, the DermTech board of directors did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The DermTech board of directors viewed its position and determinations as being based on all of the information available and the factors presented to and considered by it.

In the course of reaching its decision to approve the merger, the DermTech board of directors consulted with its senior management, financial advisor and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:

 

   

the DermTech board of directors’ belief, after reviewing the various alternative transactions that were considered by the DermTech board of directors and the likelihood of achieving any of these alternative transactions, that currently no alternatives to the merger were reasonably likely to create greater value for DermTech’s stockholders than the merger;

 

   

the expectation that the merger would be a more time and cost effective means to access capital than other alternatives considered, including an initial public offering of DermTech’s common stock and additional financings of DermTech as a non-publicly traded entity;

 

   

the potential for access to public capital markets following the business combination, including sources of capital from a broader range of investors to support the continued development and commercialization of DermTech’s products than it could otherwise obtain if it continued to operate as a privately-held company;

 

   

historical and current information concerning DermTech’s business, including its financial performance and condition, recent publishing of the draft Medicare coverage policy and desire to scale the commercial effort around this coverage, operations, ongoing clinical trial efforts for its current product candidate, management and prospective competitive position;

 

   

the cash resources of the combined company expected to be available at the closing of the business combination relative to the anticipated burn rate of the combined company;

 

   

the potential to provide DermTech’s current stockholders with greater liquidity by owning stock in a public company;

 

   

the fact that the shares of Constellation common stock issued to DermTech stockholders will be registered pursuant to a registration statement on Form S-4 by Constellation and will become freely tradable for DermTech’s stockholders following the expiration of the 180-day lock-up period provided for by the Lock-Up Agreement;

 

   

the ability to obtain a NASDAQ listing and the fact that Constellation will change its name to “DermTech, Inc.” upon the closing of the business combination;

 

   

the competitive market conditions private companies currently face when seeking exchange traded merger or business combination partners;

 

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the belief, after conducting due diligence, that Constellation had comparatively fewer and less significant ongoing obligations and material liabilities when compared to other potential exchange traded merger and business combination partners;

 

   

the likelihood that the merger will be consummated on a timely basis; and

 

   

the terms and conditions of the Merger Agreement, including, without limitation, the following:

 

   

the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes, with the result that the DermTech stockholders will not generally recognize taxable gain or loss for U.S. federal income tax purposes upon the exchange of DermTech capital stock for Constellation common stock pursuant to the merger;

 

   

the Stockholder Support Agreement, pursuant to which certain stockholders of DermTech, have agreed, solely in their capacity as stockholders of DermTech, to vote all of their shares of DermTech capital stock in favor of the adoption or approval, respectively, of the Merger Agreement and the transactions contemplated by the Merger Agreement; and

 

   

the belief that the other terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations in these agreements, were reasonable in light of the entire transaction.

The DermTech board of directors also considered a number of uncertainties and risks in its deliberations concerning the merger and the other transactions contemplated by the Merger Agreement, including the following:

 

   

the possibility that the merger might not be completed and the potential adverse effect of the public announcement of the merger on the reputation of DermTech and the ability of DermTech to obtain financing in the future in the event the merger is not completed;

 

   

the risk that the merger might not be consummated in a timely manner or at all;

 

   

the substantial expenses to be incurred in connection with the merger;

 

   

the fact that the representations and warranties in the Merger Agreement do not survive the closing of the business combination and the potential risk of liabilities that may arise post-closing;

 

   

the additional public company expenses and obligations that DermTech’s business will be subject to following the business combination to which it has not previously been subject; and

 

   

various other risks associated with the combined company and the merger, including the risks described in the section entitled “Risk Factors” beginning on page 39 of this proxy statement/prospectus/information statement.

The DermTech board of directors weighed the benefits, advantages and opportunities of a potential transaction against the uncertainties and risks described above, as well as the possible diversion of management attention for an extended period of time. After taking into account these and other factors, the DermTech board of directors approved and authorized the Merger Agreement and the transactions contemplated thereby, including the merger.

Constellation Reasons for the Business Combination

As described under “Background of the Business Combination” above, Constellation’s board of directors, in evaluating the business combination, consulted with Constellation’s management and legal and other advisors in reaching its decision at its meeting on May 22, 2019 to approve and adopt the Merger Agreement and the transactions contemplated by the Merger Agreement. At this and at prior meetings, Constellation’s board of directors considered a variety of factors weighing positively and negatively with respect to the business combination. In light of the number and wide variety of factors considered in connection with its evaluation of

 

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the business combination, Constellation’s board of directors did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. Constellation’s board of directors viewed its position as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors. This explanation of the reasons for Constellation’s board of directors’ approval of the business combination, and all other information presented in this section, is forward-looking in nature and, therefore, should be read in light of the factors discussed under the section titled “Cautionary Note Regarding Forward-Looking Statements.”

The factors considered by our board of directors include, but are not limited to, the following:

 

   

Significant addressable market opportunity. With approximately 15 million surgical biopsies performed to diagnose 5.4 million cases of skin cancer annually, DermTech’s lead product, Pigmented Lesion Assessment, or PLA, for melanoma detection, will potentially provide a significant market opportunity and there are additional opportunities to apply DermTech’s PLA technology to inflammatory diseases with an available potential total market opportunity of greater than $5 billion per annum;

 

   

Disruptive Technology with Substantiating Clinical Validation and Significant Advantages Relative to Current Standard of Care. Constellation’s management and board of directors believe that PLA is less invasive than traditional surgical incisions because it utilizes an adhesive patch and, based on DermTech’s clinical studies to date, the likelihood of missed melanoma is 1% for the PLA test compared to 17% for current standard surgical biopsy. Constellation’s management and board of directors also believe that PLA offers attractive unit economics as it provides significant cost saving per melanoma detected compared to surgical biopsy;

 

   

Near Term Value. Constellation’s management and board of directors believe that DermTech provides near term value creating an inflection point with a line of sight to Medicare coverage policy. DermTech has received a draft favorable coverage decision from Medicare MolDX. The final policy is expected by DermTech management in the second half of 2019 and DermTech expects to experience a significant revenue increase after CMS approval because of the opportunity to approach private payors. DermTech believes that, if Medicare coverage is granted, PLA may generate significant revenues in the second and third years following such coverage grant;

 

   

Blue-Chip Investor Base. Constellation’s management and board of directors believe that DermTech has an existing blue-chip investor base featuring ‘crossover’ investors, including RTW and the Jacobs Family, that will be supportive of the business combination;

 

   

Private Placement. The ability of Constellation to consummate the contemplated PIPE transaction for up to $24 million in gross proceeds and satisfy the Merger Agreement’s minimum cash condition;

 

   

Product Pipeline. Constellation’s management and board of directors considered DermTech’s robust product pipeline and collaborations with “big pharma;”

 

   

Experienced Management Team. Constellation’s management and board of directors believe that DermTech has an experienced management team poised to execute on DermTech’s commercialization plan after CMS approval of PLA. DermTech’s Chief Executive Officer, John Dobak, was previously the founder and chairman of 10xBio. DermTech’s Chief Executive Officer, Steven Kemper, was previously Chief Financial Officer of GenMark (Nasdaq: GNMK), Dexcom (Nasdaq: DXCM) and Cryogen. DermTech’s Chief Commercial Officer, Todd Wood, was recently hired by DermTech and was previously the Vice President of US sales at Allergan;

 

   

Terms of the Business Combination. The financial and other terms and conditions of the Merger Agreement, as reviewed by the board of directors, see the section entitled “The Merger Agreement” beginning on page 118, and the fact that such terms and conditions are reasonable and were the product of arm’s length negotiations between Constellation and DermTech;

 

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Attractive Market Valuation of Comparable Post-Approval Companies. Constellation management’s observation that the valuations of the Comparable Post-Approval Companies in the year following Center for Medicare and Medicaid Services (CMS) approval reflect enterprise values/revenue (based on data publicly available data from Bloomberg and Capital IQ as well as data provided by DermTech) ranging from 2.7x to 21.9x (with a median of 8.6x); and

 

   

Attractive Market Valuation of Comparable Listed Companies and Comparable Post-Approval Companies. Constellation management’s observation that the public trading market valuations of the Comparable Listed Companies reflect enterprise values/sales multiples (based on public filings and Wall Street consensus estimates as of May 19, 2019) ranging from 2.9x to 15.1x projected FY2019 (with a median of 5.1x) and ranging from 2.7x to 10.5x projected FY2020 (with a median of 5.3x). Post-Closing, the anticipated post-money initial equity valuation of the combined company is expected to be approximately $81.6 million. Based on DermTech forecasts for the current and forward financial years, the various multiples for the combined company are expected to be at an attractive valuation relative to the Comparable Listed Companies and the Comparable Post-Approval Companies.

Constellation’s board of directors also considered the following factors:

 

   

The pricing terms of the contemplated PIPE transaction, pursuant to which Constellation will sell shares of its common stock at $3.25 per share compared to Constellation’s initial public offering price of $10.00 per share;

 

   

The risks associated with the failure of DermTech to receive CMS approval in the second half of 2019 or at all;

 

   

DermTech’s reliance on the PLA test to generate revenues both currently and in the future;

 

   

DermTech’s ongoing and future capital needs to commercialize PLA for melanoma and to capitalize on additional opportunities to apply PLA technology to other diseases;

 

   

DermTech does not have employment agreements with the majority of its executives or other personnel of DermTech and there are no current plans to enter into such arrangements before, or in connection with, the business combination;

 

   

DermTech currently lacks the ability to launch and commercialize other tests in their pipeline and is subject to competition from other diagnostic companies; and

 

   

The interests of Constellation’s principal shareholder, directors and certain executive officers in the business combination, see the section entitled “Interests of the Constellation Directors and Executive Officers in the Business Combination.

In connection with analyzing the business combination, Constellation’s management, based on its experience and judgment, selected the Comparable Listed Companies and the Comparable Post-Approval Companies. The Comparable Listed Companies are comprised of Exact Sciences Corporation, Guardant Health, Inc., Genomic Health, Inc., Quidel Corporation, Myriad Genetics, Inc., Invitae Corporation, NeoGenomics, Inc., Natera, Inc. and OncoCyte Corporation. The Comparable Post-Approval Companies include Exact Sciences, Veracyte, Genomic Health and BioSite. Constellation’s management selected the Comparable Listed Companies because they are publicly traded companies with certain operations, results, business mixes or size and scale that, for the purposes of analysis, may be considered similar to certain operations, results, business mixes or size and scale of DermTech. Constellation’s management selected the Comparable Post-Approval Companies because they are diagnostics companies that reached a certain stage in their development with respect to CMS approval that, for the purposes of analysis, may be considered relevant to DermTech’s experience with respect to potential CMS approval. None of the Comparable Listed Companies or the Comparable Post-Approval Companies is identical or directly comparable to DermTech.

In connection with its analysis of the business combination, Constellation’s management reviewed and compared, using publicly available information, certain current, projected and historical financial information for

 

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DermTech corresponding to current and historical financial information, ratios and public market multiples for the Comparable Companies, as described above.

Constellation’s board of directors also considered the business combination in light of the investment criteria set forth in Constellation’s final prospectus for its initial public offering including, without limitation, that based upon Constellation’s analyses and due diligence, DermTech has unrecognized value and other positive characteristics, such as competitive advantages in its industry, multiple pathways to growth and desirable returns on capital, all of which Constellation’s board of directors believed have a strong potential to create meaningful shareholder value following the consummation of the business combination.

The above discussion of the material factors considered by Constellation’s board of directors is not intended to be exhaustive but does set forth the principal factors considered by Constellation’s board of directors.

Interests of the DermTech Directors and Executive Officers in the Business Combination

In considering the recommendation of the DermTech board of directors with respect to the approval of the business combination, DermTech stockholders should be aware that certain members of the board of directors and executive officers of DermTech have interests in the business combination that may be different from, or in addition to, interests they may have as DermTech stockholders. The DermTech board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective decisions to approve the Merger Agreement, the business combination and related transactions, and to recommend that the DermTech stockholders sign and return the written consent as contemplated by this proxy statement/prospectus/information statement.

Potential Payments and Other Benefits Awardable in Connection with the Business Combination

DermTech’s Compensation Committee has, by resolution, deemed the business combination a “change in control” for the purposes of Dr. Dobak’s and Mr. Kemper’s employment agreements. DermTech’s board of directors has also deemed any resignation of Dr. Dobak or Mr. Kemper during the 18-month period following such “change in control” a termination for “good reason” for purposes of their employment agreements. Therefore, if the business combination is consummated, Dr. Dobak and Mr. Kemper may be entitled to receive certain benefits prescribed by their employment agreements, as further described under the section below entitled “Management Following the Business Combination—Narrative Disclosure to Summary Compensation Table” beginning on page 233 of this proxy statement/prospectus/information statement.

In addition, DermTech’s board of directors has, by resolution, fully accelerated the vesting of all shares of DermTech common stock underlying each of Dr. Dobak’s and Mr. Kemper’s outstanding stock options and restricted stock units, such resolution to be effective as of immediately prior to the consummation of the business combination.

DermTech’s Compensation Committee has, by resolution, accelerated two years of vesting of all shares of DermTech common stock underlying all outstanding stock options and restricted stock units held by persons who have been employed or contracted by DermTech for at least six months, such resolution to be effective immediately prior to the closing of the business combination. DermTech’s Compensation Committee has also approved the full acceleration of the vesting of all shares of DermTech common stock underlying all outstanding stock options and restricted stock units held by persons who have been employed or contracted by DermTech for at least six months and who are terminated (or constructively terminated) due to the business combination.

Constellation has not quantified the value of the immediate vesting of these securities because it would not be practicable to do so. Although Constellation’s ordinary shares have traded on the Nasdaq Capital Market between $10.39 and $10.40 over the past five business days, Constellation expects the trading value of such shares to be substantially lower upon the closing of the business combination because $24 million of Constellation capital

 

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stock has been subscribed for, at a price per share of common stock of $3.25 (on an as-converted basis), by investors in the PIPE financing that is expected to close concurrently with the closing of the business combination. Given the foregoing, Constellation believes any attempt to quantify the value of the immediate vesting of the DermTech stock options and restricted stock units described above could be misleading to investors.

Ownership Interests

Restricted Common Stock Unit Awards

Certain of DermTech’s executive officers and directors hold restricted common stock unit awards as set forth below. In connection with the merger, Constellation will assume each of the below awards, and each such award shall become the right to receive a number of shares of Constellation common stock pursuant to the terms of the Merger Agreement.

 

Name and Title

   Restricted DermTech
Common Stock Units
 

John Dobak, Chief Executive Officer and Director

     268,135  

Steven Kemper, Chief Financial Officer

     125,064  

Burkhard Jansen, Chief Medical Officer

     81,860  

Zuxu Yao, Chief Scientific Officer

     68,762  

Matt Posard, Chairman of the Board

     27,539  

Gary Jacobs, Director

     28,293  

Cynthia Collins, Director

     15,075  

Gene Salkind, Director

     13,073  

Herm Rosenman, Director

     30,482  

Scott Pancoast, Director

     30,153  

 

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Stock Options

Certain of DermTech’s directors and executive officers hold options to purchase shares of DermTech common stock as set forth below. In connection with the merger, Constellation will assume each of the below options, and each such option shall become an option to acquire a number of shares of Constellation common stock pursuant to the terms of the Merger Agreement.

 

Optionholder Name and Title

   Grant Date      Expiration
Date
     Exercise
Price ($)
     Number of Shares
of Common

Stock Underlying
Option as of

July 31
     Number of Shares
Vested as of

July 31
 

John Dobak, Chief Executive Officer and Director

     11/7/2013        11/7/2023      $ 0.63        68,697        68,697  
     11/7/2013        11/7/2023      $ 0.63        68,697        68,697  
     2/25/2014        2/25/2024      $ 0.63        147,495        147,495  
     1/4/2019        1/4/2029      $ 0.65        236,201        29,525  

Steven Kemper, Chief Financial Officer

     1/4/2019        1/4/2029      $ 0.65        64,642        8,080  

Burkhard Jansen, Chief Medical Officer

     11/7/2013        11/7/2023      $ 0.63        1,748        1,748  
     2/25/2014        2/25/2024      $ 0.63        3,175        3,175  
     9/12/2014        9/12/2024      $ 0.63        3,415        3,415  
     9/12/2014        9/12/2024      $ 0.63        10,243        10,243  
     3/14/2016        3/14/2026      $ 4.03        36,580        32,008  
     1/4/2019        1/4/2029      $ 0.65        46,482        5,810  

Zuxu Yao, Chief Scientific Officer

     6/4/2015        6/4/2025      $ 0.63        15,317        15,317  
     3/14/2016        3/14/2026      $ 4.03        40,842        35,737  
     1/4/2019        1/4/2029      $ 0.65        59,131        6,998  

Matt Posard, Chairman of the Board

     9/21/2016        9/21/2026      $ 4.03        16,705        16,705  
     1/4/2019        1/4/2029      $ 0.65        22,847        2,856  

Gary Jacobs, Director

     11/7/2013        11/7/2023      $ 0.63        6,870        6,870  
     1/2/2014        1/2/2024      $ 0.63        1,190        1,190  
     1/2/2014        1/2/2024      $ 0.63        1,190        1,190  
     2/25/2014        2/25/2024      $ 0.63        6,870        6,870  
     1/4/2019        1/4/2029      $ 0.65        22,678        2,835  

Cynthia Collins, Director

     1/4/2019        1/4/2029      $ 0.65        18,471        2,309  

Gene Salkind, Director

     11/7/2013        11/7/2023      $ 0.63        4,122        4,122  
     1/2/2014        1/2/2024      $ 0.63        1,190        1,190  
     2/25/2014        2/25/2024      $ 0.63        4,122        4,122  
     1/4/2019        1/4/2029      $ 0.65        11,039        1,380  

Herm Rosenman, Director

     1/4/2019        1/4/2029      $ 0.65        19,837        2,480  

Scott Pancoast, Director

     11/7/2013        11/7/2023      $ 0.63        6,870        6,870  
     2/25/2014        2/25/2024      $ 0.63        6,870        6,870  
     1/4/2019        1/4/2029      $ 0.65        23,199        2,900  

Todd Wood, Chief Commercial Officer

     1/4/2019        1/4/2029      $ 0.65        234,670        0  

 

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Warrants

Certain of DermTech’s directors and executive officers hold warrants to purchase shares of DermTech common stock as set forth below. In connection with the merger, Constellation will assume each of the below warrants, and each such warrant shall become a warrant to acquire a number of shares of Constellation common stock pursuant to the terms of the Merger Agreement.

 

Warrantholder Name and Title

   Issue Date      Expiration
Date
     Exercise
Price ($)
     Number of Shares
of Common
Stock Underlying
Warrant
     Number of Shares
Vested as of
June 10, 2019
 

John Dobak, Chief Executive Officer and Director

     2/25/2014        2/25/2024      $ 0.63        15,873        15,873  

Steven Kemper, Chief Financial Officer

     12/17/2013        12/17/2023      $ 0.63        22,557        22,557  

Management Following the Business Combination

As described elsewhere in this proxy statement/prospectus/information statement, including in the section entitled “Management Following the Business Combination” beginning on page 225 of this proxy statement/prospectus/information statement, certain of DermTech’s directors and executive officers are expected to become directors and executive officers of the combined company upon the closing of the business combination.

Named Executive Officer Compensation

Please see the section entitled “Management Following the Business Combination” beginning on page 225 of this proxy statement/prospectus/information statement for details regarding the compensation paid to DermTech’s executive officers.

Indemnification and Insurance

Under the Merger Agreement, from and after the closing of the merger, Constellation must fulfill and honor in all respects the obligations of DermTech and Constellation existing prior to the date of the Merger Agreement to indemnify DermTech’s and Constellation’ present and former directors and officers and their heirs, executors and assigns.

In accordance with the Merger Agreement, the certificate of incorporation and bylaws of Constellation, as the surviving corporation in the merger, shall contain provisions at least as favorable with respect to indemnification as are presently set forth in the certificate of incorporation and bylaws of DermTech, and the provisions relating to the indemnification and elimination of liability for monetary damages set forth in the certificate of incorporation and bylaws of DermTech shall not be amended, repealed or otherwise modified for a period of six years’ time from the closing of the merger in a manner that would adversely affect the rights thereunder of individuals who, at or prior to the closing of the merger, were officers, directors, employees, fiduciaries or agents of DermTech.

The Merger Agreement also provides that DermTech will maintain director and officer liability insurance coverage on DermTech’s existing directors and officers for six years from the closing.

Limitations on Liability and Indemnification

Pursuant to the terms of the Merger Agreement, the certificate of incorporation and bylaws of the combined company will contain provisions no less favorable with respect to indemnification than are set forth in the current certificate of incorporation of DermTech, and such provisions will not be amended or otherwise modified for a

 

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period of six years from the effective time of the business combination in any manner that would affect adversely the rights of individuals who, at or prior to the closing of the merger, were directors, officers, employees, fiduciaries or agents of DermTech, unless required by law.

In addition, the combined company will use its reasonable best efforts to maintain in effect for six years from the closing of the business combination, the current DermTech directors’ and officers’ liability insurance policies with respect to matters occurring prior to the closing of the business combination.

Treatment of Capital Stock/Stock Options/Warrants/Restricted Stock Units/Convertible Notes

At the effective time of the business combination, all of the shares of DermTech common stock and DermTech preferred stock will be cancelled and automatically converted into the right to receive the Merger Consideration (as defined in the section of this proxy statement/prospectus/information statement entitled “The Business Combination – Merger Consideration”), except for shares of capital stock held by DermTech stockholders who will have properly demanded their appraisal rights and exercised and perfected their dissenters’ rights for such holder’s DermTech common stock and/or DermTech preferred stock. All shares of DermTech common stock and DermTech preferred stock held in treasury by DermTech or owned by any direct or indirect wholly owned subsidiary of DermTech immediately prior to the effective time of the business combination will be terminated and cancelled upon consummation of the business combination without any consideration.

Each share of common stock of Merger Sub issued and outstanding immediately prior to the effective time of the business combination will be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of DermTech, and no further rights in DermTech common stock or DermTech preferred stock will be acknowledged in connection with the conversion.

All stock options and warrants of DermTech, whether vested or unvested, and the stock option plan of DermTech will be assumed by Constellation, and each such option or warrant of DermTech will become an option or warrant to acquire, respectively, on the same terms and conditions as were applicable under such option of DermTech or warrant of DermTech, the same number of shares of Constellation common stock multiplied by the Exchange Ratio, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement.

All restricted stock units of DermTech, whether vested or unvested, will be assumed by Constellation and will have the right to receive on the same terms and conditions as were applicable under such restricted stock units of DermTech, the same number of shares of Constellation common stock multiplied by the Exchange Ratio, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement.

The outstanding principal and accrued but unpaid interest of outstanding convertible promissory notes issued by DermTech prior to June 5, 2019 will convert into shares of DermTech common stock immediately prior to the consummation of the business combination at a price per share equal to 70% of the lesser of (i) $3.75 and (ii) the offering price per share of the PIPE, which is $3.25 multiplied by the quotient resulting from dividing 16,000,000 by the number of fully diluted shares of DermTech as of immediately after the conversion of all then outstanding DermTech bridges notes and immediately prior to the consummation of the business combination. The aggregate principal amount of such notes as of the date hereof is $6,800,000.

The outstanding principal and accrued but unpaid interest of outstanding convertible promissory notes issued by DermTech between June 5, 2019 and June 10, 2019 will convert into shares of DermTech common stock immediately prior to the consummation of the business combination. The price per share at which such convertible promissory notes will convert depends on whether the consummation of the business combination occurs before or after September 25, 2019. If the consummation of the business combination occurs prior to September 25, 2019, the price per share at which such notes will convert will equal the lesser of (i) $3.37 and (ii) 90% of the offering price per share of the PIPE, which is $3.25, multiplied by the quotient resulting from dividing 16,000,000 by the number of fully diluted shares of DermTech as of immediately prior to the

 

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consummation of the business combination (including any DermTech shares to be issued pursuant to outstanding promissory notes converting immediately prior to the consummation of the business combination and any DermTech shares underlying all outstanding options, restricted stock unit awards and warrants). If the consummation of the business combination occurs after September 25, 2019, the price per share at which such notes will convert will equal the lesser of (i) $2.62 and (ii) 70% of the offering price per share of the PIPE multiplied by the quotient described in the preceding sentence. Constellation would be able to complete the business combination after September 23, 2019 if it obtained the requisite shareholder approval to its memorandum and articles of association to extend the deadline for completing the business combination to a later date after calling a special meeting of its shareholders to vote on the proposed amendment to its memorandum and articles of association.

Form of the Business Combination

Upon the terms and subject to the conditions of the Merger Agreement and in accordance with the DGCL, Constellation and DermTech will enter into a business combination transaction pursuant to which Merger Sub will merge with and into DermTech, with DermTech surviving the merger as a wholly owned subsidiary of Constellation.

Merger Consideration

The Merger Agreement provides that, at the effective time of the business combination, all of the outstanding shares of DermTech common stock and DermTech preferred stock will be cancelled and automatically converted into the right to receive an aggregate amount of 16,000,000 shares of Constellation common stock (subject to adjustment for any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market, and only to the extent necessary to meet such listing requirements), less the total number of shares of Constellation common stock that can be acquired or received pursuant to outstanding DermTech options, restricted stock units and warrants having an exercise price per share of less than $3.80 as of May 29, 2019, or the In The Money Securities, such calculation to be set forth in the final Allocation Schedule to the Merger Agreement. The Constellation common stock to be issued in connection with the Merger Agreement in accordance with its terms and as described herein is referred to as the Merger Consideration.

It is currently anticipated that, at the closing of the business combination, the above exchange ratio will be approximately 1.16 shares of Constellation common stock for each share of DermTech capital stock outstanding (including any DermTech shares issued pursuant to promissory notes converting into DermTech common stock immediately prior to the closing of the business combination) or issuable upon exercise of the In The Money Securities (prior to giving effect to any reverse stock split or other adjustment that may be effected for the purpose of meeting the initial listing requirements of the Nasdaq Capital Market), or the Exchange Ratio. The Exchange Ratio is subject to change due to, among other items, the actual closing date of the business combination, the number of outstanding shares of DermTech capital stock as of the closing date, the number of In The Money Securities as of the closing date and any reverse split or other adjustment to the Constellation common stock prior to the closing of the business combination.

Regulatory Approvals

Consummation of the business combination is conditioned upon, among other things, receipt of certain regulatory approvals and regulatory filings.

Constellation must comply with applicable federal and state securities laws and the rules and regulations of the Nasdaq Capital Market in connection with the issuance of shares of Constellation common stock and the filing of this proxy statement/prospectus/information statement with the SEC.

 

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Tax Treatment of the Business Combination

DermTech and Constellation intend for the business combination to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. DermTech and Constellation each will use its commercially reasonable efforts to cause the business combination to qualify, and agree not to, and not to permit or cause any affiliate or any subsidiary of DermTech or Constellation to, take any action which to its knowledge could reasonably be expected to prevent or impede the business combination from qualifying, as a “reorganization” within the meaning of Section 368(a) of the Code.

Material U.S. Federal Income Tax Consequences of the Business Combination

The following is a description of the material U.S. federal income tax consequences of the business combination that are applicable to U.S. Holders (as defined below) of DermTech common stock who exchange shares of DermTech common stock for shares of Constellation common stock in the business combination and hold their shares as capital assets. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to particular U.S. Holders in light of their particular circumstances. This discussion does not address special tax rules applicable to particular U.S. Holders, such as: dealers in securities or foreign currencies; banks; insurance companies; financial institutions; mutual funds; real estate investment trusts; regulated investment companies; tax-exempt organizations; pass-through entities such as partnerships, S corporations, disregarded entities for federal income tax purposes and limited liability companies (and investors therein); persons who are not U.S. Holders; stockholders who are subject to the alternative minimum tax provisions of the Code; persons who hold their shares as part of a hedge, wash sale, synthetic security, conversion transaction, or other integrated transaction; persons that have a functional currency other than the U.S. dollar; traders in securities who elect to apply a mark-to-market method of accounting; persons who hold shares of DermTech common stock that may constitute “qualified small business stock” under Section 1202 of the Code or as “Section 1244 stock” for purposes of Section 1244 of the Code; persons who acquired their shares of stock in a transaction subject to the gain rollover provisions of Section 1045 of the Code; persons who acquired their shares of stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan or through the exercise of a warrant or conversion rights under convertible instruments; and certain expatriates or former citizens or longterm residents of the United States. DermTech stockholders subject to special tax rules that are described in this paragraph are urged to consult their own tax advisors regarding the consequences to them of the business combination.

If an entity that is treated as a partnership for U.S. federal income tax purposes holds DermTech common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partners of partnerships or other pass-through entities holding shares of DermTech common stock should consult their tax advisors regarding the tax consequences of the business combination.

This discussion does not address the tax consequences to DermTech stockholders under any state, local or foreign tax laws or the U.S. federal estate or gift, Medicare net investment income, or alternative minimum tax provisions of the Code. It also does not discuss the tax consequences of transactions occurring prior to, concurrently with or after the business combination (whether or not such transactions are undertaken in connection with the business combination), including, without limitation, the Domestication, the exercise of stock options or warrants in anticipation of the business combination. No ruling from the Internal Revenue Service, or the IRS, has been or will be requested in connection with the business combination and DermTech stockholders should be aware that the IRS could adopt a position which could be sustained by a court contrary to that set forth in this discussion.

This discussion is based upon current provisions of the Code, existing and proposed U.S. Treasury Regulations promulgated thereunder, and current administrative rulings and court decisions, all as in effect as of the date hereof and all of which are subject to differing interpretations or change. Any change, which may be retroactive, could alter the tax consequences to DermTech stockholders as described in this summary.

 

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In connection with the filing of the registration statement of which this proxy statement/prospectus/information statement is a part, Greenberg Traurig, LLP will deliver to Constellation and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. will deliver to DermTech opinions that (i) the statements under the section titled “The Business Combination—Material U.S. Federal Income Tax Consequences of the Business Combination” beginning on page 96 of this proxy statement/prospectus/information statement constitute the opinions of Greenberg and Mintz and (ii) the business combination will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, respectively. In rendering their opinions, counsel assume that the statements and facts concerning the business combination set forth in this proxy statement/prospectus/information statement and in the Merger Agreement, are true and accurate in all respects, and that the business combination will be completed in accordance with this proxy statement/prospectus/information statement and the merger agreement. Counsels’ opinions also assume the truth and accuracy of certain representations and covenants as to factual matters made by Constellation, DermTech and Merger Sub in tax representation letters provided to counsel. In addition, counsel base their tax opinions on the law in effect on the date of the opinions and assume that there will be no change in applicable law between such date and the time of the business combination. If any of these assumptions is inaccurate, the tax consequences of the merger could differ from those described in this proxy statement/prospectus/information statement.

Definition of “U.S. Holder”

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of DermTech common stock that is, for United States federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or any other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

 

   

a trust if either (i) a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more United States persons (within the meaning of Section 7701(a)(30) of the Code) are authorized or have the authority to control all substantial decisions of such trust, or (ii) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a United States person under applicable U.S. Treasury Regulations; or an estate, the income of which is subject to U.S. federal income tax regardless of its source.

Treatment of DermTech Stockholders Who Are U.S. Holders in the Business Combination

In the opinions of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and Greenberg Traurig, LLP, respectively, the business combination will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Therefore, DermTech stockholders generally will not recognize gain or loss upon the exchange of their DermTech common stock for Constellation common stock. DermTech stockholders generally will obtain a basis in the Constellation common stock they receive in the business combination equal to their basis in the DermTech common stock exchanged therefor. The holding period of the shares of Constellation common stock received by a DermTech stockholder in the business combination will include the holding period of the shares of DermTech common stock surrendered in exchange therefor.

We have not sought a ruling from the IRS as to any U.S. federal income tax consequences described herein. The IRS may disagree with the descriptions of U.S. federal income tax consequences contained herein, and its determination may be upheld by a court. Any such determination could subject a U.S. Holder to adverse U.S. federal income tax consequences that would be different than those described herein. If the business combination is not treated as a “reorganization” within the meaning of Section 368(a) of the Code, then each U.S. Holder of DermTech common stock generally will be treated as exchanging its DermTech common stock in a fully taxable transaction in exchange for Constellation common stock. DermTech stockholders will generally recognize capital gain or loss in such exchange equal to the difference between a DermTech stockholder’s adjusted tax basis in the

 

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DermTech common stock surrendered in the business combination and the fair market value of the Constellation common stock. Any recognized capital gain or capital loss will be long-term capital gain or capital loss if the U.S. Holder has held the shares of DermTech common stock for more than one year. The deductibility of capital losses is subject to limitations.

For purposes of the above discussion, DermTech stockholders who acquired their DermTech common stock at different times or for different prices should consult their tax advisors regarding the manner in which gain or loss should be determined in their specific circumstances.

Holders of DermTech common stock are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the business combination in light of their personal circumstances and the consequences to them under state, local and non-U.S. tax laws and other federal tax laws.

Reporting Requirements

Because the business combination is a “reorganization” within the meaning of Section 368(a) of the Code, each U.S. Holder who receives shares of Constellation common stock in the business combination is required to retain permanent records pertaining to the business combination, and make such records available to any authorized IRS officers and employees. Such records should specifically include information regarding the amount, basis, and fair market value of all transferred property, and relevant facts regarding any liabilities assumed or extinguished as part of such “reorganization.” Additionally, U.S. Holders who owned immediately before the business combination at least one percent (by vote or value) of the total outstanding stock of DermTech are required to attach a statement to their tax returns for the year in which the business combination is consummated that contains the information listed in Treasury Regulation Section 1.368-3(b). Such statement must include the U.S. Holder’s tax basis in such holder’s DermTech common stock surrendered in the business combination, the fair market value of such stock, the date of the business combination and the name and employer identification number of each of DermTech and Constellation. U.S. Holders are urged to consult with their tax advisors to comply with these rules.

The foregoing summary is of a general nature only and is not intended to be, and should not be construed to be, legal, business or tax advice to any particular DermTech stockholder. This summary does not take into account your particular circumstances and does not address consequences that may be particular to you. Therefore, you should consult your tax advisor regarding the particular consequences of the business combination to you.

Nasdaq Capital Market Listing

Constellation’s common stock and warrants are currently listed on the Nasdaq Capital Market under the symbols “CNAC” and “CNACW,” respectively. Constellation intends to (i) to the extent required by the rules and regulations of the Nasdaq Capital Market, prepare and submit to the Nasdaq Capital Market a notification form for the listing of the shares of Constellation common stock and warrants to be issued in connection with the business combination, and to cause such shares and warrants to be approved for listing (subject to official notice of issuance) on or prior to the business combination; and (ii) to the extent required by Nasdaq Marketplace Rule 5110, file an initial listing application for the shares of Constellation common stock issued in connection with the business combination and to cause such listing application to be approved prior to the business combination. Under the Merger Agreement, each of Constellation’s and DermTech’s obligation to complete the business combination is subject to the satisfaction or waiver, at or prior to the business combination, of various conditions, including a condition that the shares of Constellation common stock be approved for listing on the Nasdaq Capital Market as of the closing date of the business combination. If such application is accepted, Constellation anticipates that its common stock and warrants will be listed on the Nasdaq Capital Market following the closing of the business combination under the trading symbols “DMTK” and “DMTKW,” respectively.

 

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Anticipated Accounting Treatment

The business combination will be accounted for as a reverse merger in accordance with U.S. GAAP. Under this method of accounting, Constellation will be treated as the “acquired” company for financial reporting purposes. This determination was primarily based on DermTech’s stockholders expecting to have a majority of the voting power of the combined company, DermTech comprising the ongoing operations of the combined company, DermTech comprising a majority of the governing body of the combined company, and DermTech’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the business combination will be treated as the equivalent of DermTech issuing stock for the net assets of Constellation, accompanied by a recapitalization. The net assets of Constellation will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the business combination will be those of DermTech.

Appraisal Rights and Dissenters’ Rights

Delaware Law

If the merger is completed, DermTech stockholders who do not deliver a written consent approving the merger are entitled to appraisal rights under Section 262 of the DGCL, provided that they comply with the conditions established by Section 262. Shareholders of Constellation are not entitled to appraisal rights under Delaware law in connection with the merger.

The discussion below is not a complete summary regarding an DermTech stockholder’s appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which is attached as Annex G. Stockholders intending to exercise appraisal rights should carefully review Annex G. Failure to follow precisely any of the statutory procedures set forth in Annex G may result in a termination or waiver of these rights. This summary does not constitute legal or other advice, nor does it constitute a recommendation that DermTech stockholders exercise their appraisal rights under Delaware law.

Under Section 262 of the DGCL, or Section 262, where a merger is adopted by stockholders by written consent in lieu of a meeting of stockholders pursuant to Section 228 of the DGCL, either the constituent corporation before the effective date of the merger or the surviving corporation, within 10 days after the effective date of the merger, must notify each stockholder of the constituent corporation entitled to appraisal rights of the approval of the merger, the effective date of the merger and that appraisal rights are available.

If the merger is completed, within 10 days after the effective date of the merger DermTech will notify its stockholders that the merger has been approved, the effective date of the merger and that appraisal rights are available to any stockholder who has not approved the merger. Holders of shares of DermTech capital stock who desire to exercise their appraisal rights must deliver a written demand for appraisal to DermTech within 20 days after the date of mailing of that notice, and that stockholder must not have delivered a written consent approving the merger. A demand for appraisal must reasonably inform DermTech of the identity of the stockholder and that such stockholder intends thereby to demand appraisal of the shares of DermTech capital stock held by such stockholder. Failure to deliver a written consent approving the merger will not in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262. All demands for appraisal should be addressed to DermTech, Inc., 11099 N. Torrey Pines Road, #100, La Jolla, CA 92037, Attention: Steven Kemper, and should be executed by, or on behalf of, the record holder of shares of DermTech capital stock. ALL DEMANDS MUST BE RECEIVED BY DERMTECH WITHIN 20 DAYS AFTER THE DATE DERMTECH MAILS A NOTICE TO ITS STOCKHOLDERS NOTIFYING THEM THAT THE MERGER HAS BEEN APPROVED, THE EFFECTIVE DATE OF THE MERGER AND THAT APPRAISAL RIGHTS ARE AVAILABLE TO ANY STOCKHOLDER WHO HAS NOT APPROVED THE MERGER.

If an DermTech stockholder fails to deliver a written demand for appraisal within the time period specified above, the stockholder will be entitled to receive the merger consideration for its shares of DermTech capital

 

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stock as provided for in the Merger Agreement, but the DermTech stockholder will have no appraisal rights with respect to its shares of DermTech capital stock.

To be effective, a demand for appraisal by a holder of shares of DermTech capital stock must be made by, or in the name of, the registered stockholder, fully and correctly, as the stockholder’s name appears on the stockholder’s stock certificate(s). Beneficial owners who do not also hold the shares of record may not directly make appraisal demands to DermTech. The beneficial owner must, in these cases, have the registered owner, such as a broker, bank or other custodian, submit the required demand in respect of those shares. If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a custodian for others, may exercise the record owner’s right of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner. In addition, the stockholder must continuously hold the shares of record from the date of making the demand through the effective time of the merger.

If you hold your shares of DermTech capital stock in a brokerage account or in other custodian form and you wish to exercise appraisal rights, you should consult with your bank, broker or other custodian to determine the appropriate procedures for the making of a demand for appraisal by the custodian.

At any time within 60 days after the effective time of the merger, any stockholder who has demanded an appraisal, but has neither commenced an appraisal proceeding or joined an appraisal proceeding as a named party, has the right to withdraw such stockholder’s demand and accept the terms of the merger by delivering a written withdrawal to DermTech. If, following a demand for appraisal, you have withdrawn your demand for appraisal in accordance with Section 262, you will have the right to receive the merger consideration for your shares of DermTech capital stock.

Within 120 days after the effective date of the merger, any stockholder who has delivered a demand for appraisal in accordance with Section 262 will, upon written request to the surviving corporation, be entitled to receive a written statement setting forth the aggregate number of shares not voted in favor of the Merger Agreement and with respect to which demands for appraisal rights have been received and the aggregate number of holders of these shares. This written statement will be mailed to the requesting stockholder within 10 days after the stockholder’s written request is received by the surviving corporation or within 10 days after expiration of the period for delivery of demands for appraisal, whichever is later. Within 120 days after the effective date of the merger, either the surviving corporation or any stockholder who has delivered a demand for appraisal in accordance with Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all such stockholders. Upon the filing of the petition by a stockholder, service of a copy of the petition must be made upon the surviving corporation. The surviving corporation has no obligation to file a petition in the Delaware Court of Chancery in the event there are dissenting stockholders, and DermTech, which is expected to be the surviving corporation, has no present intent to file a petition in the Delaware Court of Chancery. Accordingly, the failure of a stockholder to file a petition within the period specified could nullify the stockholder’s previously written demand for appraisal.

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Delaware Court of Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to

 

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the value of their shares have not been reached by the surviving corporation. After notice to dissenting stockholders who demanded appraisal of their shares, the Delaware Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Delaware Court of Chancery may require the stockholders who have demanded appraisal for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

After determination of the stockholders entitled to appraisal of their shares, the Delaware Court of Chancery will appraise the “fair value” of the shares owned by those stockholders. This value will be exclusive of any element of value arising from the accomplishment or expectation of the merger, but may include a fair rate of interest, if any, upon the amount determined to be the fair value.

In determining fair value, and, if applicable, a fair rate of interest, the Delaware Court of Chancery is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.”

Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that this exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”

You should be aware that the fair value of your shares as determined under Section 262 could be more than, the same as, or less than the value that you are entitled to receive under the terms of the Merger Agreement.

When the value is determined, the Delaware Court of Chancery will direct the payment of the value, with interest thereon accrued during the pendency of the proceeding, if the Delaware Court of Chancery so determines, to the stockholders entitled to receive the same, upon surrender by the holders of the certificates representing those shares. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter only upon the sum of (i) the difference, if any, between the amount so paid and the fair value of the shares subject to appraisal as determined by the Delaware Court of Chancery and (ii) interest theretofore accrued, unless paid at that time.

Costs of the appraisal proceeding may be imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Delaware Court of Chancery as the Court deems equitable in the circumstances. Upon the application of a stockholder, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. In the absence of such a determination of assessment, each party bears its own expenses. Any stockholder who had demanded appraisal rights will not, after the effective time of the merger, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior to the effective time; however, if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the terms of the merger within 60 days after the effective time of the merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the merger consideration for shares of his

 

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or her DermTech capital stock pursuant to the Merger Agreement. Any withdrawal of a demand for appraisal made more than 60 days after the effective time of the merger may only be made with the written approval of the surviving corporation. No appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any stockholder without the approval of the court.

Failure to follow the steps required by Section 262 for perfecting appraisal rights may result in the loss of appraisal rights. In view of the complexity of Section 262, stockholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

Consideration to be Paid in the Business Combination

The consideration to DermTech stockholders will be in the form of shares of Constellation common stock, except in the instance that a DermTech stockholder who has properly demanded their appraisal rights and exercised and perfected their dissenters’ rights for such holder’s DermTech common stock and/or DermTech preferred stock. See the section entitled “The Business Combination – Merger Consideration” beginning on page 108 of this proxy statement/prospectus/information statement.

Interests of the Constellation Directors and Executive Officers in the Business Combination

In considering the recommendation of the Constellation board of directors with respect to the approval of the business combination, Constellation shareholders should be aware that certain members of the board of directors and executive officers of Constellation have interests in the business combination that may be different from, or in addition to, interests they may have as Constellation shareholders. The Constellation board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective decisions to approve the Merger Agreement, the business combination and related transactions, and to recommend that the Constellation shareholders approve the same.

These interests include, among other things:

 

   

the beneficial ownership of Constellation’s sponsor of an aggregate of 3,882,500 ordinary shares, which shares would become worthless if Constellation does not complete a business combination within the applicable time period, as Constellation’s initial shareholders have waived any right to redemption with respect to these ordinary shares. Such shares have an aggregate market value of approximately $40,378,000 based on the closing price of the ordinary shares of $10.40 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor of warrants to purchase 212,500 ordinary shares, which warrants would expire and become worthless if Constellation does not complete a business combination within the applicable time period. Such warrants have an aggregate market value of approximately $12,750 based on the closing price of Constellation’s warrants of $0.06 on Nasdaq on July 31, 2019;

 

   

the beneficial ownership of Constellation’s sponsor of rights to receive 42,500 ordinary shares, which rights will become worthless if Constellation does not complete a business combination within the applicable time period. Such rights have an aggregate market value of approximately $8,725 based on the closing price of Constellation’s rights of $0.2053 on Nasdaq on July 31, 2019; and

 

   

as of July 31, 2019, Constellation’s initial shareholders have advanced approximately $94,559 to Constellation for operating expenses. Such advances will be repaid only if Constellation completes a business combination.

These interests may influence Constellation’s directors in making their recommendation that you vote in favor of the approval of the business combination.

 

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Named Executive Officer Compensation

Constellation’s current executive officers do not receive compensation for their services.

Please see the section entitled “Management Following the Business Combination” for details regarding the compensation paid to DermTech’s executive officers.

Ownership Interests

Please see the sections entitled “Principal Stockholders of DermTech” and “Principal Shareholders of Constellation” for information regarding the ownership interests of their respective directors and officers.

Directors and Officers of the Combined Company Following the Business Combination

Pursuant to the Merger Agreement, the combined company’s board of directors will consist of eight members designated by DermTech, or the DermTech Appointees, immediately after the effective time of the business combination. Each current director of Constellation that will no longer be a member of the combined company’s board of directors after the effective time of the business combination will resign effective as of the effective time of the business combination. From and after the effective time of the business combination, the combined company’s board of directors will maintain an independent audit committee, and it is anticipated that the DermTech Appointees will allow the combined company’s board of directors to comply with the requisite Nasdaq independence requirements and all applicable securities laws. It is anticipated that the combined company’s board of directors will include the following DermTech Appointees: Matt Posard, Gary Jacobs, Scott R. Pancoast, Herm Rosenman, Gene Salkind, M.D., Cynthia Collins, Enrico Picozza and John Dobak, M.D. Effective as of the effective time of the business combination, DermTech will direct the combined company’s board of directors to appoint each of the following indivdiduals as executive officers of the combined company:

 

Name

  

Title

John Dobak, M.D.    Chief Executive Officer and Director
Steven Kemper, CPA, MBA    Chief Financial Officer, Treasurer, and Secretary
Burkhard Jansen, M.D.    Chief Medical Officer
Todd Wood    Chief Commercial Officer
Zuxu Yao, Ph.D.    Chief Scientific Officer

Directors Compensation

Constellation’s directors did not receive any compensation of any kind during the year ended March 31, 2019. Following the closing of the business combination, the combined company will reevaluate its non-employee director compensation policy, including the types and terms of compensation to be awarded to each such non-employee director.

Potential Actions to Secure Requisite Shareholder/Stockholder Approvals

In connection with the execution of the Merger Agreement, Constellation and certain key stockholders of DermTech have entered a stockholder support agreement, or the Stockholder Support Agreement, providing that, among other things, such stockholders of DermTech will vote their shares of DermTech common stock and DermTech preferred stock in favor of the Merger Agreement, the business combination and the other transactions contemplated by the Merger Agreement.

DermTech will seek the irrevocable written consent of DermTech stockholders as is required to approve and adopt the business combination; such approval requires the holders of: (i) a majority of the outstanding shares of the capital stock of DermTech, and (ii) 70% of the outstanding shares of DermTech preferred stock, to each

 

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affirmatively vote in favor of the approval and adoption of the business combination. The stockholders of DermTech may approve the Merger Agreement by written consent and no additional approval or vote from any holders of any class or series of stock of DermTech will be necessary to adopt and approve the business combination. Such written consent will be obtained by DermTech within forty-eight hours of the registration statement on Form S-4 being declared effective by the SEC.

Pursuant to the Merger Agreement, Constellation will hold a shareholder meeting to consider approving and adopting: (i) the business combination; (ii) the issuance of Constellation common stock as contemplated by the Merger Agreement; (iii) the Domestication; (iv) the Interim Charter; (v) the final certificate of incorporation to replace the Interim Charter; (vi) the combined company’s Bylaws; (vii) the assumption of the DermTech Plan and (viii) any other proposals the parties deem necessary to effectuate the business combination or as may be mutually agreed upon by Constellation and DermTech.

In connection with the Constellation shareholder vote to approve the proposed business combination, Constellation’s sponsor, directors, officers or advisers or their respective affiliates may privately negotiate transactions to purchase ordinary shares of Constellation from Constellation shareholders who would have otherwise elected to have their ordinary shares redeemed in conjunction with the business combination for a per-share pro rata portion of the trust account. None of Constellation’s sponsor, directors, officers or advisors or their respective affiliates will make any such purchases when they are in possession of any material non-public information not disclosed to the seller. Such a purchase would include a contractual acknowledgement that such shareholder, although still the record holder of the ordinary shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. In the event that Constellation’s sponsor, directors, officers or advisors or their affiliates purchase shares in privately negotiated transactions from public shareholders who have already elected to exercise their redemption rights, such selling shareholders would be required to revoke their prior elections to redeem their ordinary shares. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per-share pro rata portion of the trust account. The purpose of these purchases would be to increase the number of ordinary shares voted in favor of the proposals to be voted on by the shareholders.

 

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THE MERGER AGREEMENT

The following is a summary of the material terms of the Merger Agreement. A copy of the Merger Agreement is attached as Annex A to this proxy statement/prospectus/information statement and is incorporated by reference into this proxy statement/prospectus/information statement. The Merger Agreement has been attached to this proxy statement/prospectus/information statement to provide you with information regarding its terms. It is not intended to provide any other factual information about Constellation, DermTech or Merger Sub. The following description does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement. You should refer to the full text of the Merger Agreement for details of the business combination and the terms and conditions of the Merger Agreement.

The Merger Agreement contains representations and warranties that Constellation and Merger Sub, on the one hand, and DermTech, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Merger Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Merger Agreement. While Constellation and DermTech do not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Merger Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about Constellation or DermTech, because they were made as of specific dates, may be intended merely as a risk allocation mechanism between Constellation, Merger Sub and DermTech and are modified by the disclosure schedules.

Structure of the Business Combination

Upon the terms and subject to the conditions of the Merger Agreement and in accordance with the DGCL, Constellation and DermTech will enter into a business combination transaction pursuant to which Merger Sub will merge with and into DermTech, with DermTech surviving the merger as a wholly owned subsidiary of Constellation.

Domestication

The Merger Agreement provides that at least two business days prior to the closing of the business combination, Constellation will re-domicile out of the British Virgin Islands and continue as a company incorporated in the State of Delaware pursuant to Section 184 of the BVI Companies Act and Section 388 of the DGCL.

Completion and Effectiveness of the Business Combination

The merger is to become effective by the filing of a certificate of merger with the Delaware Secretary of State and will be effective immediately upon such filing.

The parties will hold a closing, on a date to be specified by Constellation and DermTech, following the satisfaction or waiver (to the extent such waiver is permitted by applicable law) of the conditions set forth in the Merger Agreement (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions at such time), but in no event later than the second business day after the satisfaction or waiver, if legally permissible, of each of the conditions to the completion of the business combination (or on such other date, time or place as Constellation and DermTech may mutually agree to in writing).

 

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At the effective time of the business combination, all the property, rights, privileges, immunities, powers, franchises, licenses and authority of DermTech and Merger Sub will vest in the combined company, and all debts, liabilities, obligations, restrictions, disabilities and duties of each of DermTech and Merger Sub will become the debts, liabilities, obligations, restrictions, disabilities and duties of the combined company.

If the business combination is not consummated by September 23, 2019, either Constellation or DermTech may terminate the Merger Agreement.

Merger Consideration and Exchange Ratio

Please see the section entitled “The Business Combination – Merger Consideration” on page 108 of this proxy statement/prospectus/information statement for a description of the consideration being paid to the stockholders of DermTech in connection with the Merger Agreement.

Determination of Constellation Net Cash

After (i) giving effect to the exercise of redemption rights (provided under the Current Charter) by any holder of Constellation common stock and all payments related to such exercise and (ii) adding the amount of any proceeds received from any financing consummated after the date of the Merger Agreement and prior to or at the effective time of the business combination, including any proceeds received from the PIPE, Constellation will have at least $15,000,000 of cash held either in or outside of the Trust Account (none of which shall be redeemable pursuant to any redemption rights provided under the Current Charter, Interim Charter or otherwise) at the effective time of the business combination.

Treatment of Capital Stock/Stock Options/Warrants/Restricted Stock Units/Convertible Notes

Please see the section entitled “The Business Combination – Treatment of Capital Stock/Stock Options/Warrants/Restricted Stock Units/Convertible Notes” on page 107 of this proxy statement/prospectus/information statement for a description of the treatment of DermTech capital stock, stock options, warrants, restricted stock units and outstanding convertible promissory notes in connection with the Merger Agreement.

Procedures for Exchanging DermTech Stock Certificates

Constellation will deposit with Continental Stock Transfer & Trust Company, for the benefit of the holders of DermTech common stock and DermTech preferred stock entitled to receive a portion of the Merger Consideration, certificates representing the number of shares of Constellation common stock sufficient to deliver the aggregate Merger Consideration as of the effective time of the business combination.

As soon as reasonably practicable after the effective time of the business combination (no later than ten days following the closing of the business combination), Constellation will use its reasonable best efforts to cause Continental Stock Transfer & Trust Company to mail to each DermTech stockholder entitled to receive the Merger Consideration, a letter of transmittal for use in effecting the surrender of such holder’s DermTech stock certificates in exchange for the applicable consideration to be received by such holder in the business combination. Risk of loss and title to the DermTech stock certificates will remain with the holder until proper delivery of such certificates to Continental Stock Transfer & Trust Company.

After the effective time of the business combination, holders of certificates representing shares of DermTech common stock outstanding immediately prior to the effective time of the business combination will have no rights with respect to such shares, except as otherwise provided in the Merger Agreement or by applicable law.

Fractional Shares

No fractional shares of Constellation common stock are contemplated to be issued pursuant to the Merger Agreement.

 

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Representations and Warranties

The Merger Agreement contains customary representations and warranties of Constellation, DermTech, and Merger Sub, relating to their respective businesses and, in the case of Constellation, its public filings. The accuracy of each party’s representations and warranties, subject to a materiality or a material adverse effect standard, is a condition to completing the business combination.

Constellation, DermTech and Merger Sub have qualified certain of the representations and warranties by a materiality or a material adverse effect standard. The Merger Agreement defines a “material adverse effect”:

 

   

With respect to DermTech, any event, circumstance, change or effect that, individually or in the aggregate with all other events, circumstances, changes and effects, is or is reasonably likely to: (i) be materially adverse to the business, condition (financial or otherwise), assets, liabilities, business plans or results of operations of DermTech and any of its subsidiaries, taken as a whole; or (ii) prevent or materially delay consummation of any of the transactions contemplated under the Merger Agreement or otherwise prevent or materially delay DermTech from performing its obligations under the Merger Agreement; provided, however, that clause (i) will not include any event, circumstance, change or effect resulting from changes in general economic conditions or changes in securities markets in general that do not have a materially disproportionate effect (relative to other industry participants) on DermTech or any of its subsidiaries.

 

   

With respect to Constellation, any event, circumstance, change or effect that, individually or in the aggregate with all other events, circumstances, changes and effects, is or is reasonably likely to: (i) be materially adverse to the business, condition (financial or otherwise), assets, liabilities, business plans or results of operations of Constellation and any of its subsidiaries taken as a whole; or (ii) prevent or materially delay consummation of any of the transactions contemplated under the Merger Agreement or otherwise prevent or materially delay Constellation from performing its obligations under the Merger Agreement; provided, however, that clause (i) will not include any event, circumstance, change or effect resulting from changes in general economic conditions or changes in securities markets in general that do not have a materially disproportionate effect (relative to other industry participants) on Constellation or any of its subsidiaries.

In addition, the representations and warranties by DermTech have been qualified by information that DermTech set forth in the DermTech disclosure schedules that DermTech provided in connection with the Merger Agreement; the information contained in these schedules modifies, qualifies and creates exceptions to the representations and warranties in the Merger Agreement and are subject to the materiality and material adverse effect standards described in the Merger Agreement, which may differ from what may be viewed as material by you.

DermTech has made representations and warranties about itself to Constellation and Merger Sub regarding the following:

 

   

Organization and Qualification of DermTech and its Subsidiaries

 

   

Certificate of Incorporation and Bylaws

 

   

Capitalization

 

   

Authority Relative to the Merger Agreement

 

   

No Conflict; Required Filings and Consents

 

   

Permits; Compliance

 

   

Financial Statements

 

   

Absence of Certain Changes or Events

 

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Absence of Litigation

 

   

Employee Benefit Plans

 

   

Labor and Employment Matters

 

   

Real Property; Title to Assets

 

   

Intellectual Property

 

   

Taxes

 

   

Environmental Matters

 

   

Material Contracts

 

   

Insurance

 

   

Board Approval; Vote Required

 

   

Customers and Suppliers

 

   

Inventories

 

   

Certain Business Practices

 

   

Interested Party Transactions

 

   

Brokers

Constellation and Merger Sub have also made other representations and warranties to DermTech regarding the following:

 

   

Corporate Organization

 

   

Certificate of Incorporation and By-laws

 

   

Capitalization

 

   

Authority Relative to the Merger Agreement

 

   

No Conflict; Required Filings and Consents

 

   

Compliance

 

   

SEC Filings; Financial Statements

 

   

Absence of Certain Changes or Events

 

   

Absence of Litigation

 

   

Board Approval; Vote Required

 

   

No Prior Operations of Merger Sub

 

   

Brokers

 

   

Constellation Trust Account

 

   

Taxes

Conduct of Business Pending the Business Combination

DermTech has agreed that, prior to the effective time of the business combination or the earlier termination of the Merger Agreement, except as expressly contemplated by any other provision of the Merger Agreement or any ancillary agreements, unless Constellation otherwise consents in writing, DermTech and its subsidiaries: (i) will

 

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carry on their respective businesses in the ordinary and usual course consistent with past practice; and (ii) will use its reasonable efforts to preserve substantially intact their current business organizations, keep available the services of their current officers and key employees and consultants and maintain their existing relationships with those having significant business relationships with them. In addition, DermTech has agreed to not take a litany of material actions, as set forth in detail in the Merger Agreement, during the period between the signing of the Merger Agreement and the closing of the business combination without the prior written consent of Constellation. Constellation has also agreed to not take certain material actions during this period, as set forth in detail in the Merger Agreement, without the prior written consent of DermTech.

Conditions to the Completion of the Business Combination

Conditions to Each Party’s Obligation to Complete the Business Combination

 

   

The Domestication occurred and Constellation delivered to DermTech reasonably sufficient evidence of such;

 

   

A registration statement on Form S-4 has been declared effective by the SEC, no order suspending the effectiveness of the registration statement has been issued, and no proceeding for that purpose was initiated by the SEC;

 

   

DermTech received the requisite stockholder approval of the business combination;

 

   

The proposals presented at the special meeting of Constellation’s shareholders were approved and adopted;

 

   

No governmental authority has enacted, issued, promulgated, enforced or entered any law, rule, regulation, judgment, decree, executive order or award which is then in effect and has the effect of making the business combination or transactions thereunder illegal or otherwise prohibiting consummation of the business combination or transactions thereunder;

 

   

Any waiting period (and any extension thereof) applicable to the consummation of the business combination under the HSR Act has expired or been terminated;

 

   

All consents, approvals and authorizations legally required to be obtained to consummate the business combination have been obtained from all governmental authorities;

 

   

Immediately prior to or at the effective time of the business combination, Constellation has at least $15,000,000 of cash; and

 

   

The shares of Constellation common stock continue to be listed on the Nasdaq Capital Market as of the closing of the business combination.

Conditions to the Obligations of Constellation and Merger Sub to Complete the Business Combination

 

   

DermTech’s representations and warranties relating to capitalization are true and correct in all respects as of the closing of the business combination, except where any such representation and warranty expressly speaks of an earlier date, other than de minimis errors therein;

 

   

DermTech’s representations and warranties relating to: (i) organization and qualification; (ii) authority relative to the Merger Agreement; (iii) absence of certain changes or events; (iv) taxes; (v) approval of the board of directors of DermTech and the approval required from DermTech’s stockholders; and (vi) brokers are true and correct in all material respects as of the closing of the business combination, and all other of DermTech’s representations and warranties are to be true and correct in all respects as of the closing of the business combination, except where any such representation and warranty expressly speaks of an earlier date and without giving effect to any limitation as to “materiality” or material adverse effect, with respect to DermTech;

 

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DermTech performed or complied in all material respects with all agreements and covenants under the Merger Agreement;

 

   

No material adverse effect, with respect to DermTech, has occurred between signing and the closing of the business combination;

 

   

DermTech delivered to Constellation a certificate signed by the president of DermTech, certifying satisfaction of the aforementioned conditions;

 

   

Constellation received from each affiliate (within the meaning of Rule 145 of the Securities Act) of DermTech, an executed copy of the affiliate letter attached as an exhibit to the Merger Agreement;

 

   

All consents from third parties under any material contract or instrument, to which DermTech or any of its subsidiaries is a party, or by which it is bound as a result of the business combination will have been obtained;

 

   

All members of the board of directors of DermTech (other than those identified by Constellation as continuing directors) have executed written resignations effective as of the closing of the business combination;

 

   

DermTech, on or prior to the closing of the business combination, has delivered to Constellation a properly executed certification that shares of DermTech are not “U.S. real property interests” in accordance with the regulations under Sections 897 and 1445 of the Code, together with a notice to the IRS (which will be filed by Constellation with the IRS following the closing of the business combination) in accordance with the provisions of Treasury Regulation Sections 1.897-2(h)(2);

 

   

DermTech has delivered or caused to be delivered to Constellation a schedule, or the Allocation Schedule, setting forth a list of each of the DermTech stockholders, the number of shares of DermTech common stock, DermTech preferred stock, options, restricted stock units and warrants of DermTech held by each such stockholder, the total Merger Consideration payable to each such stockholder and the total number of shares of Constellation common stock that can be acquired or received pursuant to the options, restricted stock units or warrants of DermTech for each such stockholder, at least three business days prior to the closing of the business combination. The Allocation Schedule shall have also set forth the number of In the Money Securities and the names of the holders of such In The Money Securities;

 

   

Certain DermTech stockholders, on or prior to the closing of the business combination, have entered into, executed and delivered a registration rights agreement, or the Registration Rights Agreement;

 

   

Certain DermTech stockholders, on or prior to the closing of the business combination, have entered into, executed and delivered a lock-up agreement, or the Lock-up Agreement;

 

   

The number of dissenting shares is not in excess of 10% of the total outstanding shares of both the DermTech common stock and DermTech preferred stock;

 

   

DermTech has (i) converted all debt amounts under each of its outstanding convertible notes into shares of DermTech common stock in accordance with the terms and conditions of each such convertible note and (ii) delivered to Constellation reasonable evidence of each such conversion of the convertible notes; and

 

   

DermTech has (i) converted all debt amounts under each of the Interim Convertible Notes into shares of DermTech common stock in accordance with the terms and conditions of each such Interim Convertible Note and (ii) delivered to Constellation reasonable evidence of each such conversion of the Interim Convertible Notes. Interim Convertible Notes are defined as certain convertible notes entered into by DermTech between signing and closing of the business combination having an aggregate principal amount of up to $3,000,000.

 

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Conditions to the Obligations of DermTech to Complete the Business Combination.

 

   

Constellation’s and Merger Sub’s representations and warranties relating to: (i) corporate organization; (ii) absence of certain changes or events; (iii) authority relative to the Merger Agreement; (iv) approval of the Constellation board of directors and vote of the holders necessary for approval; and (v) brokers, are true and correct in all material respects as though made on or as of the closing of the business combination; all other representations and warranties of Constellation contained in the Merger Agreement are true and correct in all material respects as of the closing of the business combination, as though made on and as of the closing of the business combination, except to the extent expressly made as of an earlier date, in which case as of such earlier date (provided that any representation or warranty that is qualified by materiality or material adverse effect, with respect to Constellation, are true and correct in all respects as of the closing of the business combination, or as of such particular earlier date, as the case may be);

 

   

Constellation and Merger Sub have performed and complied with, in all material respects, their respective agreements and covenants under the Merger Agreement;

 

   

No material adverse effect, with respect to Constellation, has occurred between signing of the Merger Agreement and the closing of the business combination; and

 

   

Constellation has delivered to DermTech a certificate signed by the chief executive officer of Constellation, certifying satisfaction of the aforementioned conditions.

No DermTech Solicitation

No Solicitation. Until the effective time of the business combination or, if earlier, the valid termination of the Merger Agreement, DermTech cannot directly or indirectly (whether through its subsidiaries or any agents, employees, representatives or affiliates of DermTech or any of its subsidiaries): (i) initiate, solicit, encourage or take any action to facilitate any DermTech Acquisition Proposal (as defined below); (ii) engage in discussions or negotiations regarding, or provide access to properties, books and records or any confidential information or data of DermTech to any person in connection with any DermTech Acquisition Proposal; (iii) engage in, cooperate with, assist or participate in or facilitate discussion, negotiation, inquiries, proposals or offers or other efforts that would reasonably be expected to lead to any DermTech Acquisition Proposal; (iv) amend or grant any waiver or release under any standstill or similar agreement with respect to any class of equity securities of DermTech or any of its subsidiaries; (v) approve, endorse or recommend, or propose publicly to approve, endorse or recommend, any DermTech Acquisition Proposal; (vi) approve, endorse, recommend, execute or enter into any agreement in principle, letter of intent, memorandum of understanding, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other written arrangement relating to any Company Acquisition Proposal or any proposal that would reasonably be expected to lead to any DermTech Acquisition Proposal; or (vii) resolve or agree to do any of the foregoing or otherwise authorize or permit any of its representatives to take any such action. DermTech has agreed to, and agrees to cause its subsidiaries and their representatives to, immediately cease and terminate all existing discussions, negotiations and solicitations (other than with the parties to the Merger Agreement) in connection with any DermTech Acquisition Proposal.

Notification of a DermTech Acquisition Proposal. DermTech will promptly (and, in any event, within 24 hours) notify Constellation of the receipt of any DermTech Acquisition Proposal after the date of the Merger Agreement. As used in this context, DermTech Acquisition Proposal means any: (i) proposal or offer with respect to a merger, joint venture, partnership, consolidation, dissolution, liquidation, tender offer, recapitalization, reorganization, share exchange, business combination or similar transaction involving DermTech or any of its subsidiary; and (ii) acquisition by any person, or pr