0001564590-20-036916.txt : 20200805 0001564590-20-036916.hdr.sgml : 20200805 20200805170847 ACCESSION NUMBER: 0001564590-20-036916 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20200805 DATE AS OF CHANGE: 20200805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DermTech, Inc. CENTRAL INDEX KEY: 0001651944 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 842870849 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-237991 FILM NUMBER: 201078519 BUSINESS ADDRESS: STREET 1: 11099 N. TORREY PINES ROAD STREET 2: SUITE 100 CITY: LA JOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 858-450-4222 MAIL ADDRESS: STREET 1: 11099 N. TORREY PINES ROAD STREET 2: SUITE 100 CITY: LA JOLLA STATE: CA ZIP: 92037 FORMER COMPANY: FORMER CONFORMED NAME: Constellation Alpha Capital Corp. DATE OF NAME CHANGE: 20150827 424B3 1 dmtk-424b3.htm 424B3 Q2 10Q MAY 11 PROSPECTUS dmtk-424b3.htm

 

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-237991

 

PROSPECTUS SUPPLEMENT NO. 4

To Prospectus dated May 11, 2020

 

 

6,627,685 Shares of Common Stock

This prospectus supplement No. 4 supplements the prospectus dated May 11, 2020, or the Prospectus, relating to the proposed resale or other disposition from time to time of up to 6,627,685 shares of DermTech, Inc., or the Company, common stock, $0.0001 par value per share, or the Common Stock, as follows: (i) an aggregate of up to 2,467,724 shares of Common Stock issued in connection with a private placement, or the 2020 PIPE Financing, on March 4, 2020; (ii) an aggregate of up to 2,588 shares of Common Stock issued in connection with the exercise of certain of the Placement Agent Warrants (as defined in the Prospectus) and certain of the Series C Warrants (as defined in the Prospectus); (iii) an aggregate of up to 3,198,949 shares of Common Stock that are issuable upon the conversion of outstanding shares of the Series B‑1 Convertible Preferred Stock of the Company that were issued in the 2020 PIPE Financing; (iv) an aggregate of up to 523,814 shares of Common Stock that are issuable upon the conversion of outstanding shares of the Series B‑2 Convertible Preferred Stock of the Company that were issued in the 2020 PIPE Financing and (v) an aggregate of up to 434,610 shares of Common Stock underlying the outstanding Placement Agent Warrants and Series C Warrants, or collectively the Warrants, held by certain selling securityholders. The Company is not selling any securities under the Prospectus and will not receive any of the proceeds from the sale of securities by the selling securityholders, except that the Company may receive up to approximately $4,003,916 in aggregate gross proceeds from the exercise of the Warrants, if the Warrants are exercised for cash (and, as applicable, not on a cashless basis), based on the per share exercise price of the Warrants.

This prospectus supplement incorporates into the Prospectus the information contained in our attached quarterly report on Form 10-Q, which was filed with the Securities and Exchange Commission on August 5, 2020.

You should read this prospectus supplement in conjunction with the Prospectus, including any supplements and amendments thereto.  This prospectus supplement is qualified by reference to the Prospectus except to the extent that the information in the prospectus supplement supersedes the information contained in the Prospectus. This prospectus supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus, including any supplements and amendments thereto.

The selling securityholders or their assignees or successors-in-interest may offer and sell the shares of Common Stock described in the Prospectus in a number of different ways and at varying prices. We provide more information about how a selling securityholder may sell its shares of Common Stock in the section titled “Plan of Distribution” appearing in the Prospectus.

Our Common Stock is listed on the Nasdaq Capital Market under the symbol “DMTK.” On August 4, 2020, the last reported sale price of our Common Stock was $12.03 per share.

_______________________

AN INVESTMENT IN OUR COMMON STOCK INVOLVES RISKS. SEE THE SECTION ENTITLED “RISK FACTORS” BEGINNING ON PAGE 29 OF THIS PROSPECTUS SUPPLEMENT.

_______________________

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

_______________________

The date of this prospectus supplement is August 5, 2020 

 

 


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to                       

Commission File Number: 001-38118

 

DERMTECH, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-2870849

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

11099 N. Torrey Pines Road, Suite 100

La Jolla, CA

92037

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (858) 450-4222

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

DMTK

 

The Nasdaq Capital Market

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days   Yes  ☒    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  

As of July 31, 2020, the registrant had 18,229,364 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

29

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 6.

Exhibits

57

Signatures

58

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DERMTECH, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,102

 

 

$

15,374

 

Accounts receivable

 

 

722

 

 

 

680

 

Inventory

 

 

83

 

 

 

35

 

Prepaid expenses and other current assets

 

 

547

 

 

 

1,061

 

Total current assets

 

 

62,454

 

 

 

17,150

 

Property and equipment, net

 

 

2,069

 

 

 

977

 

Other assets

 

 

167

 

 

 

84

 

Total assets

 

$

64,690

 

 

$

18,211

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

813

 

 

$

1,609

 

Accrued compensation

 

 

1,264

 

 

 

1,142

 

Accrued liabilities

 

 

1,305

 

 

 

218

 

Deferred revenue

 

 

1,017

 

 

 

1,390

 

Deferred underwriting fees

 

 

1,363

 

 

 

1,363

 

Total current and total liabilities

 

 

5,762

 

 

 

5,722

 

Commitments and contingencies:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value per share; 1,250 Series A

   shares authorized as of June 30, 2020 and December 31, 2019; 1,231 shares

   issued and outstanding at June 30, 2020 and December 31, 2019; $8.1 million

   and $7.6 million liquidation preference at June 30, 2020 and December 31, 2019

 

 

 

 

 

 

Series B-2 convertible preferred stock, $0.0001 par value per share; 525 and zero

   Series B-2 shares authorized as of June 30, 2020 and December 31, 2019; 524

   and zero shares issued and outstanding at June 30, 2020 and December 31, 2019;

   $6.9 million and zero liquidation preference at June 30, 2020 and December 31,

   2019

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 50,000,000 shares authorized as of

   June 30, 2020 and December 31, 2019; 18,229,364 and 12,344,818 shares

   issued and outstanding at June 30, 2020 and December 31, 2019

 

 

2

 

 

 

1

 

Additional paid-in capital

 

 

166,455

 

 

 

103,599

 

Accumulated deficit

 

 

(107,529

)

 

 

(91,111

)

Total stockholders’ equity

 

 

58,928

 

 

 

12,489

 

Total liabilities, convertible preferred stock and stockholders’ equity

 

$

64,690

 

 

$

18,211

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

1


 

DERMTECH, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assay revenue

 

$

648

 

 

$

285

 

$

1,445

 

 

$

520

 

Contract revenue

 

 

196

 

 

 

329

 

 

956

 

 

 

690

 

Total revenues

 

 

844

 

 

 

614

 

 

2,401

 

 

 

1,210

 

Cost of revenues

 

 

1,445

 

 

 

686

 

 

2,648

 

 

 

1,320

 

Gross profit/(loss)

 

 

(601

)

 

 

(72

)

 

(247

)

 

 

(110

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

3,433

 

 

 

1,032

 

 

6,377

 

 

 

1,896

 

Research and development

 

 

864

 

 

 

518

 

 

1,761

 

 

 

1,090

 

General and administrative

 

 

4,529

 

 

 

1,706

 

 

8,043

 

 

 

3,235

 

Total operating expenses

 

 

8,826

 

 

 

3,256

 

 

16,181

 

 

 

6,221

 

Loss from operations

 

 

(9,427

)

 

 

(3,328

)

 

(16,428

)

 

 

(6,331

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/(expense)

 

 

10

 

 

 

(324

)

 

10

 

 

 

(2,292

)

Other expense

 

 

 

 

 

(40

)

 

 

 

 

(224

)

Total other income/(expense)

 

 

10

 

 

 

(364

)

 

10

 

 

 

(2,516

)

Net loss and comprehensive loss

 

$

(9,417

)

 

$

(3,692

)

$

(16,418

)

 

$

(8,847

)

Weighted average shares outstanding used in computing net loss

   per share, basic and diluted

 

 

16,149,496

 

 

 

4,419,781

 

 

14,625,069

 

 

 

4,415,553

 

Net loss per common share outstanding, basic and diluted

 

$

(0.58

)

 

$

(0.84

)

$

(1.12

)

 

$

(2.00

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

DERMTECH, INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Six Months Ended June 30, 2020 & June 30, 2019

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Series C

convertible

preferred stock

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

(deficit)

 

Balance, December 31, 2018

 

 

1,524,122

 

 

$

 

 

 

 

4,411,567

 

 

$

1

 

 

$

66,021

 

 

$

(71,377

)

 

$

(5,355

)

Cumulative effect adjustment of

   accounting method change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(45

)

 

 

(45

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

258

 

 

 

 

 

 

258

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,156

)

 

 

(5,156

)

Balance, March 31, 2019

 

 

1,524,122

 

 

$

 

 

 

 

4,411,567

 

 

$

1

 

 

$

66,279

 

 

$

(76,578

)

 

$

(10,298

)

Issuance of common stock from option

   exercises

 

 

 

 

 

 

 

 

 

37,264

 

 

 

 

 

 

41

 

 

 

 

 

 

41

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

258

 

 

 

 

 

 

258

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,692

)

 

 

(3,692

)

Balance, June 30, 2019

 

 

1,524,122

 

 

$

 

 

 

 

4,448,831

 

 

$

1

 

 

$

66,578

 

 

$

(80,270

)

 

$

(13,691

)

 

 

 

Series A

convertible

preferred stock

 

 

 

Series B-1

convertible

preferred stock

 

 

 

Series B-2

convertible

preferred stock

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Total

stockholders’

equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

(deficit)

 

Balance, December 31, 2019

 

 

1,231

 

 

$

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

 

 

12,344,818

 

 

$

1

 

 

$

103,599

 

 

$

(91,111

)

 

$

12,489

 

Issuance of common stock at $10.50

   per share, net of $2.0 million in

   issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,467,724

 

 

 

 

 

 

23,891

 

 

 

 

 

 

23,891

 

Issuance of Series B-1 convertible

   preferred stock at $10,500 per

   share, net of $2.6 million in

   issuance costs

 

 

 

 

 

 

 

 

 

3,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,971

 

 

 

 

 

 

30,971

 

Issuance of Series B-2 convertible

   preferred stock at $10,500 per share,

   net of $0.4 million in issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

524

 

 

 

 

 

 

 

 

 

 

 

 

 

5,071

 

 

 

 

 

 

5,071

 

Issuance of common stock from

   option exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85,061

 

 

 

 

 

 

253

 

 

 

 

 

 

253

 

Issuance of common stock from

   warrant exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,098

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

Issuance costs in connection with

   Form S-1 registration statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

 

 

 

(77

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,022

 

 

 

 

 

 

1,022

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,001

)

 

$

(7,001

)

Balance, March 31, 2020

 

 

1,231

 

 

$

 

 

 

 

3,199

 

 

$

 

 

 

 

524

 

 

$

 

 

 

 

14,899,701

 

 

$

1

 

 

$

164,741

 

 

$

(98,112

)

 

$

66,630

 

Conversion of Series B-1 convertible

   preferred stock to common stock

 

 

 

 

 

 

 

 

 

(3,199

)

 

 

 

 

 

 

 

 

 

 

 

 

 

3,198,949

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Issuance of common stock from option

   exercises and RSU releases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81,277

 

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Issuance of common stock from

   warrant exercises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,437

 

 

 

 

 

 

471

 

 

 

 

 

 

471

 

Issuance costs in connection with

   Form S-1 registration statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,125

 

 

 

 

 

 

1,125

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,417

)

 

$

(9,417

)

Balance, June 30, 2020

 

 

1,231

 

 

$

 

 

 

 

 

 

$

 

 

 

 

524

 

 

$

 

 

 

 

18,229,364

 

 

$

2

 

 

$

166,455

 

 

$

(107,529

)

 

$

58,928

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

DERMTECH, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,418

)

 

$

(8,847

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

148

 

 

 

38

 

Stock-based compensation

 

 

2,147

 

 

 

515

 

Amortization of debt discount and issuance costs

 

 

 

 

 

1,832

 

Change in fair value of derivative liability

 

 

 

 

 

224

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(42

)

 

 

142

 

Inventory

 

 

(48

)

 

 

(3

)

Prepaid expenses and other current assets

 

 

432

 

 

 

(36

)

Accounts payable and accrued compensation

 

 

(712

)

 

 

685

 

Accrued liabilities and deferred revenue

 

 

713

 

 

 

190

 

Net cash used in operating activities

 

 

(13,780

)

 

 

(5,260

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,201

)

 

 

(12

)

Net cash used in investing activities

 

 

(1,201

)

 

 

(12

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in connection with private placement

   offering, net

 

 

23,889

 

 

 

 

Proceeds from issuance of Series B-1 Convertible Preferred Stock, net

 

 

30,968

 

 

 

 

Proceeds from issuance of Series B-2 Convertible Preferred Stock, net

 

 

5,071

 

 

 

 

Payments of issuance costs in connection with Form S-1 registration statement

 

 

(77

)

 

 

 

Proceeds from exercise of common stock warrants

 

 

482

 

 

 

 

Proceeds from exercise of stock options

 

 

376

 

 

 

41

 

Proceeds from convertible notes payable

 

 

 

 

 

2,600

 

Net cash provided by financing activities

 

 

60,709

 

 

 

2,641

 

Net increase/(decrease) in cash and cash equivalents

 

 

45,728

 

 

 

(2,631

)

Cash and cash equivalents, beginning of period

 

 

15,374

 

 

 

4,753

 

Cash and cash equivalents, end of period

 

$

61,102

 

 

$

2,122

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Purchases of property and equipment recorded in accounts payable

 

$

39

 

 

 

 

      Debt discount and derivative liability at issuance of convertible notes payable

 

 

 

 

$

270

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

DERMTECH, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. The Company and a Summary of its Significant Accounting Policies

(a)

Nature of Operations

On August 29, 2019, DermTech, Inc., formerly known as Constellation Alpha Capital Corp, (the “Company”), and DermTech Operations, Inc., formerly known as DermTech, Inc., (“DermTech Operations”), consummated the transactions contemplated by the Agreement and Plan of Merger, dated as of May 29, 2019, by and among the Company, DT Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and DermTech Operations. The Company refers to this agreement, as amended by that certain First Amendment to Agreement and Plan of Merger dated as of August 1, 2019, as the Merger Agreement. Pursuant to the Merger Agreement, Merger Sub merged with and into DermTech Operations, with DermTech Operations surviving as a wholly-owned subsidiary of the Company. The Company refers to this transaction as the Business Combination. In connection with and two days prior to the completion of the Business Combination, the Company domesticated from the British Virgin Islands to Delaware. DermTech Operations changed its name from DermTech, Inc. to DermTech Operations, Inc. shortly before the completion of the Business Combination. On August 29, 2019, immediately following the completion of the Business Combination, the Company changed its name from Constellation Alpha Capital Corp. to DermTech, Inc., and then effected a one-for-two reverse stock split of its common stock (“Reverse Stock Split”).

The Company is an emerging growth molecular diagnostic company developing and marketing its Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) laboratory services including molecular pathology tests to facilitate the diagnosis of dermatologic conditions including melanoma. The Company has developed a proprietary, non-invasive technique for sampling the surface layers of the skin using an adhesive patch in order to collect individual biological information for commercial applications in the medical diagnostic field.

During and following the first and second quarters of 2020, there has been a widespread worldwide impact from the COVID-19 pandemic. The Company is considered an essential business due to the importance of early melanoma detection, which has allowed the Company’s CLIA laboratory to remain fully operational. The Company has implemented additional safety measures and social distancing with its CLIA laboratory operations and has transitioned administrative functions to working remotely. Beginning in March 2020 and continuing through the second quarter of 2020, the ongoing COVID-19 pandemic has reduced patient access to clinician offices for in-person testing, which has resulted in a reduced volume of billable samples received during the second quarter of 2020. The Company expects the impact to billable sample volume to continue until patient access to in-person testing fully resumes or telemedicine options are more widely adopted. Additionally, the ongoing COVID-19 pandemic has negatively affected and will continue to negatively affect the Company’s pharmaceutical customers’ clinical trials. The extent of such effect on the Company’s future revenue is uncertain and will depend on the duration and extent of the effects of the ongoing COVID-19 pandemic on the Company’s pharmaceutical customers’ clinical trials.

(b)

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.

(c)

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the amounts of revenues and expenses reported during the period. On an ongoing basis, management evaluates these estimates and judgments, including those related to assay revenue, stock-based compensation, accounts receivable and the realization of deferred tax assets. Actual results may differ from those estimates.

(d)

Cash and Cash Equivalents

The Company considers all highly liquid investments with remaining maturities of three months or less when purchased to be cash equivalents. The Company maintains its cash balances at banks and financial institutions. The balances are insured up to the legal limit. The Company maintains cash balances that may, at times, exceed this insured limit.

5


 

(e)

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Leasehold improvements are depreciated over the shorter of the remaining term of the lease or the useful life of the asset. The Company recorded depreciation expense of $0.1 million and $19,000 for the three months ended June 30, 2020 and 2019, respectively, and $0.1 million and $38,000 during the six months ended June 30, 2020 and 2019, respectively. No property or equipment was disposed of during the three or six months ended June 30, 2020 and 2019. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events or changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the three or six months ended June 30, 2020 and 2019.

(f)

Research and Development

Costs incurred in connection with research and development (“R&D”) activities are expensed as incurred. R&D expenses consist of (i) employee-related expenses, including salaries, benefits, travel and stock compensation expense; (ii) and facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other supplies.

The Company expenses all costs as incurred in connection with patent applications (including direct application fees and the legal and consulting expenses related to making such applications), and such costs are included in general and administrative expenses.

(g)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. As of June 30, 2020, the Company maintained $61.1 million in a sweep account, which maintains cash balances throughout various interest bearing bank accounts under the $250,000 insurance limit provided by the Federal Deposit Insurance Corporation for one federally insured financial institution. The Company has not experienced any losses in such accounts.

(h)

Income Taxes

The Company provides for federal and state income taxes on the asset and liability approach which requires deferred tax assets and liabilities to be recognized based on temporary differences between the condensed consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s valuation allowance is based on available evidence, including its current year and prior year operating losses, evaluation of positive and negative evidence with respect to certain specific deferred tax assets including evaluation sources of future taxable income to support the realization of the deferred tax assets. The Company has established a full valuation allowance on the deferred tax assets as of June 30, 2020.

Current and deferred tax assets and liabilities are recognized based on the tax positions taken or expected to be taken in the Company’s income tax returns. U.S. GAAP requires that the tax benefits of an uncertain tax position can only be recognized when it is more likely than not that the tax position will be sustained upon examination by the relevant taxing authority. Tax benefits related to tax positions that do not meet this criterion are not recognized in the condensed consolidated financial statements, of which there are none.

The Company recognizes interest and penalties related to income tax matters in income tax expense.

(i)

Revenue Recognition

The Company’s revenue is generated from two revenue streams: contract revenue and assay revenue. The Company accounts for revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, and accounts for revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”). The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The ASC 606 revenue recognition model consists of the following five steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

6


 

Assay Revenue

The Company generates revenues from its Pigmented Lesion Assay (“PLA”) and Nevome services it provides to healthcare clinicians in various states throughout the United States to assist in a clinician’s diagnosis of melanoma. The Company provides prescribing clinicians with its adhesive sample collection kits to perform non-invasive skin biopsies of clinically ambiguous pigmented skin lesions on patients. The Company also offers clinicians a telemedicine solution where they can request the PLA collection kit be sent to the patient’s home for a clinician-guided remote collection on ambiguous pigmented skin lesions. Once the sample is collected by the healthcare clinician or the patient via the telemedicine solution, it is returned to the Company’s CLIA laboratory for analysis. The patient RNA and deoxyribonucleic acid (“DNA”) is extracted from the adhesive patch collection kit and analyzed using gene expression technology to determine if the pigmented skin lesion contains certain genomic features indicative of melanoma. Upon completion of the gene expression analysis, a final report is drafted and provided to the dermatologists detailing the test results for the pigmented skin lesion indicating whether the sample collected is indicative of melanoma or not.

Contract Revenue

Contract revenue is generated from the sale of laboratory services and adhesive sample collection kits to third party companies through contract research agreements. Revenues are generated from providing gene expression tests to facilitate the development of drugs designed to treat dermatologic conditions. The provision of gene expression services may include sample collection using the Company’s patented adhesive patch biopsy devices, assay development for research partners, ribonucleic acid (“RNA”) isolation, expression, amplification and detection, including data analysis and reporting.

(a) Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by revenue source during the three and six months ended June 30, 2020 and 2019, respectively, (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Assay Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PLA Test

 

$

648

 

 

$

285

 

 

$

1,445

 

 

$

520

 

Contract Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adhesive Patch kits

 

 

24

 

 

 

169

 

 

 

38

 

 

 

335

 

RNA Extractions

 

 

94

 

 

 

85

 

 

 

764

 

 

 

200

 

Project Management Fees

 

 

78

 

 

 

75

 

 

 

154

 

 

 

153

 

Other

 

 

 

 

 

 

 

 

 

 

 

2

 

Total Revenue

 

$

844

 

 

$

614

 

 

$

2,401

 

 

$

1,210

 

 

(b) Contract Balances and Deferred Revenue

The timing of revenue recognition, billings and cash collections results in billed accounts receivable and deferred revenue on the condensed consolidated balance sheets.

In a majority of agreements that produce contract revenue, the Company receives a substantial up-front payment and additional payments upon the achievement of various milestones over the life of the agreement. This results in deferred revenue and is relieved upon delivery of the applicable adhesive patch kits or RNA extraction results. Changes in accounts receivable and deferred revenue were not materially impacted by any other factors.

The Company records a deferred revenue liability if a customer pays consideration before the Company transfers a good or service to the customer. Deferred revenue primarily represents upfront milestone payments, for which consideration is received prior to when goods/services are completed or delivered. Deferred revenue at June 30, 2020 and December 31, 2019 was $1.0 million and $1.4 million, respectively.

7


 

(j)

Accounts Receivable

Assay Accounts Receivable

Due to the nature of the Company’s assay revenue, it can take a significant amount of time to collect upon billed PLA services. The Company prepares an analysis on reimbursement collections and data obtained for each financial reporting period to determine the amount of receivables to be recorded relating to PLA services performed in the applicable period. The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are written off when all efforts to collect the balance have been exhausted. Adjustments for implicit price concessions attributable to variable consideration are incorporated into the measurement of the accounts receivable balances. The Company recorded $0.7 million and $0.5 million of gross assay accounts receivable as of June 30, 2020 and December 31, 2019, respectively.

Contract Accounts Receivable

Contract accounts receivable are recorded at the net invoice value and are not interest bearing. The Company reserves specific receivables if collectability is no longer reasonably assured, and as of June 30, 2020, the Company did not maintain any reserve over contract receivables as they deal with large established credit worthy customers. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve. The Company recorded $36,000 and $0.3 million of contract accounts receivable as of June 30, 2020 and December 31, 2019, respectively.

(k)

Freight and Shipping Costs

The Company records outbound freight and shipping costs for its contract and assay revenues in cost of revenues.

(l)

Comprehensive Income / (Loss)

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

(m)

Segment Reporting

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

(n)

Net Loss Per Share

Basic and diluted net loss per common share is determined by dividing net loss applicable to common shareholders by the weighted average common shares outstanding during the period. Because there is a net loss attributable to common shareholders during the three and six months ended June 30, 2020 and 2019, the outstanding common stock warrants, stock options, restricted stock units and preferred stock have been excluded from the calculation of diluted loss per common share because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted loss per share are the same. Diluted net loss per common share for the six months ended June 30, 2020 excludes the effect of anti-dilutive equity instruments including 1,139,194 shares of common stock issuable upon conversion of the Company’s preferred stock, 4,153,631 shares of common stock issuable upon the exercise of outstanding common stock warrants and 1,798,900 shares of common stock issuable upon the exercise of stock options and release of restricted stock units (“RSUs”). Diluted net loss per common share for the six months ended June 30, 2019 excludes the effect of anti-dilutive equity instruments including 1,524,122 shares of common stock issuable upon conversion of the Company’s preferred stock, 646,886 shares of common stock issuable upon the exercise of outstanding warrants and 1,567,011 shares of common stock issuable upon the exercise of stock options and release of RSUs. The Company did not consider a two-class method of loss per share given that the Company’s convertible participating securities do not participate in losses.

8


 

(o)

Stock-Based Compensation

Effective January 1, 2020, the Company elected an accounting policy change to no longer estimate forfeitures in connection with expense recognition of stock options and RSUs. All stock options and RSUs granted on or subsequent to January 1, 2020 will recognize forfeitures when they occur in accordance with Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718). In addition, effective January 1, 2020, the Company has elected to recognize stock-based compensation expense over the requisite service period of options and awards on a ratable basis. The Company believes that the recognition of stock-based compensation on a ratable basis is more aligned with their business practices of granting options and awards. The accounting policy change does not have a material effect on the Company’s condensed consolidated financial statements.

Compensation costs associated with stock option awards and other forms of equity compensation are measured at the grant-date fair value of the awards and recognized over the requisite service period of the awards on a ratable basis.

The Company grants stock options to purchase common stock to employees with exercise prices equal to the fair market value of the underlying stock, as determined by the board of directors, management and outside valuation experts prior to the Business Combination. The board of directors and outside valuation experts determined the fair value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks the Company faced at the time, the preferences of the Company’s debt holders and preferred stockholders, and the lack of liquidity of the Company’s common stock. Subsequent to the close of the Business Combination, the fair market value of stock options is based on the closing stock price on the grant date.

The fair value of each stock option award is estimated using the Black-Scholes-Merton valuation model. Such value is recognized as expense over the requisite service period using the ratable method. The expected term of options is based on the simplified method which defines the expected term as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The expected volatility of stock options is based upon the historical volatility of a number of related publicly traded companies in similar stages of development as well as the volatility of the Company’s common stock. The risk-free interest rate is based on the average yield of U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future.

The Company accounts for stock options to non-employees using the fair value approach. The fair value of these options is measured using the Black-Scholes-Merton option pricing model, reflecting the same assumptions applied to employee options, other than expected life, which is assumed to be the remaining contractual life of the award. Options that are granted to employees generally have a requisite service period of three to four years. Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable, and non-forfeitable on the date of grant.

RSUs are considered restricted stock. The fair value of restricted stock is equal to the fair market value of the underlying stock, as determined by the board of directors, management and input from outside valuation experts prior to the Business Combination. Subsequent to the close of the Business Combination, the fair market value of RSUs is based on the closing stock price on the grant date. The Company recognizes stock-based compensation expense based on the fair value on a ratable basis over the requisite service periods of the awards. RSUs that are granted to employees have a requisite service period typically between two and four years.

All stock options and RSUs granted prior to January 1, 2020 will maintain the estimated forfeiture approach and will be recognized over the requisite service period using the straight-line method.

The fair value of each option for employees was estimated on the date of grant using the following assumptions:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Assumed risk-free interest rate

 

0.43% - 0.44%

 

 

2.24%

 

 

0.43% - 1.69%

 

 

2.24% - 2.51%

 

Assumed volatility

 

68.34%

 

 

73.20%

 

 

64.03% - 68.34%

 

 

72.30% - 73.20%

 

Expected option term

 

5.55 - 6.25

 

 

6.08

 

 

5.04 - 6.25

 

 

6.04 - 6.08

 

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company recorded stock-based compensation expense for employee options, RSUs, common stock warrants, and consultant options of $1.1 million and $0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $2.1 million and $0.5 million for the six months ended June 30, 2020 and 2019, respectively. The total compensation cost related to non-vested awards not yet recognized at June 30, 2020 was $12.6 million, which is expected to be recognized over a weighted average term of 3.13 years. 

9


 

(p)

Fair Value Measurements

The Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no other assets or liabilities that were measured at fair value on a recurring basis as of June 30, 2020 or December 31, 2019. The Company believes the carrying amount of cash and cash equivalents, accounts payable and accrued expenses approximate their estimated fair values due to the short-term nature of these accounts.

(q)

Accounting Pronouncement Recently Adopted

In June 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, Compensation-Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, which simplifies accounting for nonemployee share-based payment transactions to now include share-based payment transactions for acquiring goods and services from nonemployees. This new standard is effective for interim and annual periods beginning December 15, 2019 and early adoption is permitted. The Company adopted this guidance on January