0001651944-23-000045.txt : 20230504 0001651944-23-000045.hdr.sgml : 20230504 20230504163338 ACCESSION NUMBER: 0001651944-23-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 51 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230504 DATE AS OF CHANGE: 20230504 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38118 FILM NUMBER: 23889383 BUSINESS ADDRESS: STREET 1: 12340 EL CAMINO REAL CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 858-450-4222 MAIL ADDRESS: STREET 1: 12340 EL CAMINO REAL CITY: SAN DIEGO STATE: CA ZIP: 92130 FORMER COMPANY: FORMER CONFORMED NAME: Constellation Alpha Capital Corp. DATE OF NAME CHANGE: 20150827 10-Q 1 dmtk-20230331.htm 10-Q dmtk-20230331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________
FORM 10-Q
________________________
Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
oTRANSITION 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)
________________________
Delaware84-2870849
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
12340 El Camino Real,
San Diego ,CA
92130
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (858) 450-4222
11099 N. Torrey Pines Road, Suite 100, La Jolla, CA 92037
(Former name, former address and former fiscal year, if changed since last report)
________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per shareDMTK
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 x No o
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 x No o
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 fileroAccelerated filero
Non-accelerated filerxSmaller reporting companyx
Emerging growth companyo
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 28, 2023, the registrant had 31,089,911 shares of common stock, $0.0001 par value per share, outstanding.


Table of Contents
Page
i

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
DERMTECH, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
March 31, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$48,438 $77,757 
Short-term marketable securities56,340 48,411 
Accounts receivable3,690 4,172 
Inventory1,574 1,757 
Prepaid expenses and other current assets2,348 3,940 
Total current assets112,390 136,037 
Property and equipment, net6,262 6,375 
Operating lease right-of-use assets54,800 56,007 
Restricted cash3,501 3,488 
Other assets168 168 
Total assets$177,121 $202,075 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable$1,680 $2,419 
Accrued compensation7,556 7,894 
Accrued liabilities4,807 3,464 
Short-term deferred revenue242 109 
Current portion of operating lease liabilities1,756 1,634 
Current portion of finance lease obligations97 116 
Total current liabilities16,138 15,636 
Warrant liability12 5 
Long-term finance lease obligations, less current portion49 53 
Operating lease liabilities, long-term53,680 54,028 
Total liabilities69,879 69,722 
Stockholders’ equity:  
Common stock, $0.0001 par value per share; 50,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 31,088,911 and 30,297,408 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
3 3 
Additional paid-in capital461,845 456,171 
Accumulated other comprehensive loss(289)(774)
Accumulated deficit(354,317)(323,047)
Total stockholders’ equity107,242 132,353 
Total liabilities and stockholders’ equity$177,121 $202,075 
See accompanying notes to unaudited condensed consolidated financial statements.
1

DERMTECH, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31,
20232022
Revenues:
Test revenue $3,425 $3,518 
Contract revenue52 200 
Total revenues3,477 3,718 
Cost of revenues:  
Cost of test revenue3,791 3,530 
Cost of contract revenue30 24 
Total cost of revenues3,821 3,554 
Gross (loss) profit(344)164 
Operating expenses:  
Sales and marketing15,417 15,443 
Research and development4,409 6,338 
General and administrative11,875 8,574 
Total operating expenses31,701 30,355 
Loss from operations(32,045)(30,191)
Other income/(expense):  
Interest income, net782 66 
Change in fair value of warrant liability(7)17 
Total other income775 83 
Net loss$(31,270)$(30,108)
Weighted average shares outstanding used in computing net loss per share, basic and diluted30,557,216 29,836,072 
Net loss per share of common stock outstanding, basic and diluted$(1.02)$(1.01)
See accompanying notes to unaudited condensed consolidated financial statements.
2

DERMTECH, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
Three Months Ended March 31,
20232022
Net loss$(31,270)$(30,108)
Unrealized net gain/(loss) on marketable securities and cash equivalents485 (570)
Comprehensive loss$(30,785)$(30,678)
See accompanying notes to unaudited condensed consolidated financial statements.
3

DERMTECH, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share and per share data)
(Unaudited)
Common stockAdditional
paid-in
capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
stockholders’
equity
SharesAmount
Balance, December 31, 202230,297,408 $3 $456,171 $(774)$(323,047)$132,353 
Issuance of common stock at a weighted average price of $3.68 through at-the-market offering, net of $0.1 million issuance costs
107,451 — 270 — — 270 
Issuance of common stock from option exercises and RSU releases510,027 — 92 — — 92 
Issuance of common stock from Employee Stock Purchase Plan174,025 — 576 — — 576 
Unrealized net gain on available-for-sale marketable securities and cash equivalents— — — 485 — 485 
Stock-based compensation— — 4,736 — — 4,736 
Net loss— — — — (31,270)(31,270)
Balance, March 31, 202331,088,911 $3 $461,845 $(289)$(354,317)$107,242 

Common stockAdditional
paid-in
capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
stockholders’
equity
SharesAmount
Balance, December 31, 202129,772,922 $3 $436,183 $(124)$(206,364)$229,698 
Issuance of common stock from option exercises and RSU releases109,275 — 40 — — 40 
Issuance of common stock from warrant exercises11,101 — 12 — — 12 
Issuance of common stock from Employee Stock Purchase Plan47,339 — 515 — — 515 
Unrealized net loss on available-for-sale marketable securities— — — (570)— (570)
Stock-based compensation— — 3,894 — — 3,894 
Net loss— — — — (30,108)(30,108)
Balance, March 31, 202229,940,637 $3 $440,644 $(694)$(236,472)$203,481 

See accompanying notes to unaudited condensed consolidated financial statements.
4

DERMTECH, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended March 31,
20232022
Cash flows from operating activities:  
Net loss$(31,270)$(30,108)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation466 372 
Change in fair value of warrant liability7 (17)
Amortization of operating lease right-of-use assets1,207 435 
Stock-based compensation4,736 3,894 
Amortization of premiums, net of accretion of discounts on marketable securities(6)713 
Gain on disposal of equipment(29) 
Changes in operating assets and liabilities:  
Accounts receivable482 (1,148)
Inventory183 (283)
Prepaid expenses and other current assets1,592 (94)
Operating lease liabilities(227)(271)
Accounts payable, accrued liabilities and deferred revenue1,169 161 
Accrued compensation(338)1,523 
Net cash used in operating activities(22,028)(24,823)
Cash flows from investing activities:  
Purchases of marketable securities(16,481)(13,656)
Sales and maturities of marketable securities9,044 6,769 
Purchases of property and equipment(757)(646)
Net cash used in investing activities(8,194)(7,533)
Cash flows from financing activities:  
Proceeds from issuance of common stock in connection with at-the-market offering, net270  
Proceeds from exercise of common stock warrants 12 
Proceeds from exercise of stock options92 40 
Proceeds from contributions to the Employee Stock Purchase Plan576 515 
Principal repayments of finance lease obligations(22)(40)
Net cash provided by financing activities916 527 
Net decrease in cash, cash equivalents and restricted cash(29,306)(31,829)
Cash, cash equivalents and restricted cash, beginning of period81,245 179,907 
Cash, cash equivalents and restricted cash, end of period$51,939 $148,078 
Reconciliation of cash, cash equivalents and restricted cash, end of period:
Cash and cash equivalents$48,438 $145,053 
Restricted cash3,501 3,025 
Total cash, cash equivalents and restricted cash$51,939 $148,078 
Supplemental cash flow information:  
Cash paid for interest on finance lease obligations$1 $3 
Supplemental disclosure of noncash investing and financing activities:  
Purchases of property and equipment recorded in accounts payable$16 $318 
Right-of-use assets obtained in exchange for lease obligations$ $15,755 
Change in unrealized net gains/(losses) on available-for-sale marketable securities and cash equivalents$485 $(570)
See accompanying notes to unaudited condensed consolidated financial statements.
5

DERMTECH, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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.
The Company is a 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 called the DermTech Smart Sticker™ (the “Smart Sticker”) in order to collect individual biological information for commercial applications in the medical diagnostic field.
The Company has incurred operating losses since inception and has an accumulated deficit of $354.3 million at March 31, 2023. As of March 31, 2023, cash and cash equivalents totaled approximately $48.4 million and short-term marketable securities totaled approximately $56.3 million. The Company's transition to profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. If events or circumstances occur such that change operating plans, the Company may be required to reduce operating expenses, which could have an adverse impact its ability to achieve intended business objectives. The Company's management believes that currently available resources will provide sufficient funds to meet operating plans for at least the next twelve months from the issuance of our unaudited condensed consolidated financial statements. While we believe we have enough capital to fund anticipated operating costs for at least the next twelve months, we anticipate that we will need to raise additional capital in order to support our planned operations and to continue developing and commercializing genomic tests.
(b)    Basis of Presentation
The condensed consolidated financial statements include the accounts of DermTech, Inc. and its subsidiary. All intercompany balances and transactions among the consolidated entity have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements and accompanying notes do not include all the information and disclosures required by U.S. GAAP for complete financial statements and should be read together with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.
The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. As of March 31, 2023, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
6

(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 but not limited to those related to test revenue, stock-based compensation, short-term marketable securities, accounts receivable, accrued bonus, warrant liability, right-of-use (“ROU”) assets and the realization of deferred tax assets. Actual results may differ from those estimates.
(d)    Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and available-for-sale marketable securities. The Company invests its cash balances in major financial institutions that it believes have high credit quality and are insured with the Federal Deposit Insurance Corporation (“FDIC”). At times throughout the year, cash deposits might exceed FDIC insurance limits. The Company has not experienced any losses and does not believe it is exposed to any significant credit risk.
(e)    Revenue Recognition
The Company’s revenue is generated from two revenue streams: contract revenue and test revenue. The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“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.
The Company recognizes revenue from its test and contract services in accordance with the core principles and key aspects considered by the Company. These considerations are described in detail below, first for test revenue and then for contract revenue.
Test Revenue
The Company generates revenues from its DermTech Melanoma Test or “DMT” which may consist at the option of the ordering clinician of either (i) the DMT or (ii) the DMT with TERT test, which assists a clinician’s diagnosis of melanoma in patients. The Company provides prescribing clinicians with its Smart Sticker 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 Smart Sticker collection kit be sent to the patient’s home for a clinician-guided remote sample collection of ambiguous pigmented skin lesions. A patient can also initiate the process by downloading the Company’s telemedicine app, DermTech Connect, which uses store-and-forward technology to allow the patient to take a picture of a suspicious lesion with their phone and have the picture reviewed by an independent clinician who is subscribing to the DermTech Connect platform to assess the suspicious lesion, and if medically necessary, order a DMT and send a collection kit to the patient. The DermTech Connect app and telemedicine service is currently available in most states where permitted by law and applicable standards of practice guidelines. Once the sample is collected by the patient via the telemedicine solution or by a healthcare clinician in person, it is returned to the Company’s CLIA laboratory for analysis. The patient’s ribonucleic acid (“RNA”) and deoxyribonucleic acid (“DNA”) are extracted from the Smart Sticker and analyzed using gene expression and sequencing technology to determine if the pigmented skin lesion contains certain genomic features indicative of melanoma. Upon completion of the gene expression analysis, test results are provided to the clinician indicating whether the sample collected is indicative of melanoma or not.
7

The Company periodically updates its estimate of the variable consideration recognized for previously delivered performance obligations. These updates resulted in a decrease of $0.5 million for the three months ended March 31, 2023 and a decrease of $0.1 million for the three months ended March 31, 2022. These amounts included (i) adjustments for actual collections versus estimated variable consideration as of the beginning of the reporting period and (ii) cash collections and the related recognition of revenue in the current period for tests delivered in prior periods due to the release of the constraint on variable consideration, offset by (iii) reductions in revenue for the accrual for reimbursement claims and settlements.
Contract Revenue
Contract revenue is generated from the sale of laboratory services and Smart Stickers 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 Smart Sticker, assay development for research partners and RNA extraction, isolation, expression, amplification and detection, including data analysis and reporting. Contract revenue can be highly variable in any period as it is closely linked to the clinical trial progress of the Company’s biopharma customers.
(a) Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by revenue source during the three months ended March 31, 2023 and 2022 (in thousands):
Three Months Ended March 31,
20232022
Test Revenue
DermTech Melanoma Test$3,425 $3,518 
Contract Revenue
Adhesive patch kits36 66 
RNA extractions2 110 
Project management fees14 24 
Total revenues$3,477 $3,718 
(b) Deferred Revenue and Remaining Performance Obligations
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 historical agreements that produced contract revenue, the Company received 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 Smart Stickers 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. Upfront fees that are estimated to be recognized as revenue more than one year from the date of collection are classified as long-term deferred revenue. Short-term deferred revenue as of March 31, 2023 and December 31, 2022 was $0.2 million and $0.1 million, respectively. As of December 31, 2022, the Company reclassified $1.0 million of short-term deferred revenue to accrued liabilities for a customer refund obligation in connection with cancellation of future services.
Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing agreements. For agreements that have an original duration of one year or less, the Company has elected the practical expedient applicable to such agreements and does not disclose the remaining performance obligations at the end of each reporting period. As of March 31, 2023, the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed agreements with an original duration of one year or more was immaterial.
8

(f)    Accounts Receivable
Test Accounts Receivable
Due to the nature of the Company’s test revenue, it can take a significant amount of time to collect upon billed tests. 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 tests 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 $3.6 million and $4.1 million of net test accounts receivable as of March 31, 2023 and December 31, 2022, 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 March 31, 2023, the Company did not maintain any reserves over contract receivables as they relate to 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 $0.1 million and $0.1 million of contract accounts receivable as of March 31, 2023 and December 31, 2022, respectively.
(g)    Net Loss Per Share
Basic and diluted net loss per share of common stock is determined by dividing net loss applicable to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Because there is a net loss attributable to holders of common stock during the periods presented, the outstanding common stock warrants, stock options and restricted stock units (“RSUs”) have been excluded from the calculation of diluted loss per share of common stock 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.
Outstanding anti-dilutive securities not included in diluted net loss per share (in thousands):
March 31,
20232022
Shares issuable upon exercise of common stock warrants709 724 
Shares issuable upon exercise of stock options1,523 1,654 
Shares issuable upon the release of restricted stock units4,011 2,333 
6,243 4,711 
(h)    Accounting Pronouncements Issued But Not Yet Effective
In June 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03“). Under the guidance of ASU 2022-03, a contractual restriction on the sale of an equity security is not considered in measuring the security’s fair value. ASU 2022-03 also requires certain disclosures for equity securities that are subject to contractual restrictions. For public business entities, the provisions of ASU 2022-03 are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024 and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is still evaluating the impact of this pronouncement on the consolidated financial statements.
The Company does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on its condensed consolidated financial statements or disclosures.
9

2.    Balance Sheet Details
Short-Term Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of debt securities classified as available-for-sale securities by major security type and class of security as of March 31, 2023 were as follows (in thousands):
March 31, 2023
Amortized CostGross Unrealized
Gains
Gross Unrealized
Losses
Estimated
Market
Value
Short-term marketable securities, available-for-sale:
Corporate debt securities$11,028 $3 $(150)$10,881 
U.S. government debt securities45,644 119 (304)45,459 
Total short-term marketable securities, available-for-sale$56,672 $122 $(454)$56,340 
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of debt securities classified as available-for-sale securities by major security type and class of security as of December 31, 2022 were as follows (in thousands):
December 31, 2022
Amortized CostGross Unrealized
Gains
Gross Unrealized
Losses
Estimated
Market
Value
Short-term marketable securities, available-for-sale:
Corporate debt securities$13,535 $2 $(236)$13,301 
Municipal debt securities1,001  (8)993 
U.S. government debt securities34,675 10 (568)34,117 
Total short-term marketable securities, available-for-sale$49,211 $12 $(812)$48,411 
As of March 31, 2023, the estimated market value of debt securities with contractual maturities of less than twelve months was $49.0 million; the remaining debt securities that the Company held at that date had an estimated market value of $7.3 million and contractual maturities of up to 21 months. As of December 31, 2022, the estimated market value of debt securities with contractual maturities of less than twelve months was $40.2 million; the remaining debt securities that the Company held at that date had an estimated market value of $8.2 million and contractual maturities of up to 23 months.
The Company evaluates securities with unrealized losses to determine whether such losses, if any, are due to credit-related factors. It was determined that no credit losses existed as of March 31, 2023 or December 31, 2022, because the change in market value for those securities in an unrealized loss position has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. Gross realized gains and losses on the Company’s debt securities for the three months ended March 31, 2023 and 2022 were not significant.
10

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2023 aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
March 31, 2023
Less Than 12 Months12 Months or GreaterTotal
Fair Value Gross Unrealized LossFair ValueGross Unrealized LossFair ValueGross Unrealized Loss
Short-term marketable securities, available-for-sale:
Corporate debt securities$9,050 $(150)$ $ $9,050 $(150)
U.S. government debt securities19,043 (235)5,767 (69)24,810 (304)
Total short-term marketable securities, available-for-sale$28,093 $(385)$5,767 $(69)$33,860 $(454)
The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2022, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
December 31, 2022
Less Than 12 Months12 Months or GreaterTotal
Fair Value Gross Unrealized LossFair ValueGross Unrealized LossFair ValueGross Unrealized Loss
Short-term marketable securities, available-for-sale:
Corporate debt securities$6,533 $(105)$5,503 $(131)$12,036 $(236)
Municipal securities  992 (8)992 (8)
U.S. government debt securities10,907 (196)19,026 (372)29,933 (568)
Total short-term marketable securities, available-for-sale$17,440 $(301)$25,521 $(511)$42,961 $(812)
Prepaid Expenses and Property and Equipment, Net
Condensed consolidated balance sheet details are as follows (in thousands):
March 31,
2023
December 31,
2022
Prepaid expenses and other current assets:
Prepaid expenses$1,688 $3,207 
Other current assets660 733 
Total prepaid expenses and other current assets$2,348 $3,940 
Property and equipment, gross:
Laboratory equipment$5,147 $6,250 
Computer equipment894 872 
Furniture and fixtures1,102 913 
Leasehold improvements2,549 1,344 
Total property and equipment, gross9,692 9,379 
Less accumulated depreciation(3,430)(3,004)
Total property and equipment, net$6,262 $6,375 
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Accrued Compensation and Accrued Liabilities
Condensed consolidated balance sheet details are as follows (in thousands):
March 31,
2023
December 31,
2022
Accrued compensation:
Accrued bonus and commissions$3,168 $3,257 
Accrued salaries and wages4,388 4,637 
Total accrued compensation$7,556 $7,894 
Accrued liabilities:
Accrued consulting services$2,145 $894 
Customer refund liability1,505 980 
Other accrued expenses1,157 1,590 
Total accrued liabilities$4,807 $3,464 

3. Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. 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.
The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2023 (in thousands):
March 31, 2023
Level 1Level 2Level 3Total
Assets:    
Cash equivalents:
Money market$20,747 $ $ $20,747 
Corporate debt securities 529  529 
U.S. government debt securities 5,979  5,979 
Total cash equivalents20,747 6,508  27,255 
Marketable securities, available for sale:
Corporate debt securities 10,881  10,881 
U.S. government debt securities 45,459  45,459 
Total marketable securities, available for sale 56,340  56,340 
Total assets measured at fair value on a recurring basis$20,747 $62,848 $ $83,595 
Liabilities:
Warrant liability$ $ $12 $12 
Total liabilities measured at fair value on a recurring basis$ $ $12 $12 
12

The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2022 (in thousands):
December 31, 2022
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money Market$9,365 $ $ $9,365 
Corporate debt securities 7,374  7,374 
U.S. government debt securities 18,396  18,396 
Total cash equivalents9,365 25,770  35,135 
Marketable securities, available for sale:
Corporate debt 13,301  13,301 
Municipal debt securities 993  993 
U.S. government debt securities 34,117  34,117 
Total marketable securities, available for sale 48,411  48,411 
Total assets measured at fair value on a recurring basis$9,365 $74,181 $ $83,546 
Liabilities:
Warrant liability$ $ $5 $5 
Total liabilities measured at fair value on a recurring basis$ $ $5 $5 

The Company’s marketable debt securities are classified as available-for-sale securities based on management's intentions and are at Level 2 of the fair value hierarchy, as these investment securities are valued based upon quoted prices for identical or similar instruments in markets that are not active. The Company has classified marketable securities with original maturities of greater than one year as short-term investments based upon the Company’s ability to use all of those marketable securities to satisfy the liquidity needs of the Company’s current operations.
The fair value of the Private SPAC Warrants was determined using the Black-Scholes-Merton valuation model and included an unobservable input: expected volatility. Expected volatility is considered by the Company to be an unobservable input and is calculated using a weighted average of historical volatilities of a combination of the Company and peer companies, due to the lack of sufficient historical data of the Company’s own stock price. The model also incorporated several observable assumptions at each valuation date, including the price of the Company’s common stock on the date of valuation, the remaining contractual term of the warrant and the risk-free interest rate over the remaining term.
The following assumptions were used to calculate the fair value of the Company’s warrant liability using the Black-Scholes-Merton valuation model:
Three Months Ended March 31,
20232022
Assumed risk-free interest rate4.35%2.37%
Assumed volatility123.28%92.77%
Expected term1.42 years2.42 years
Expected dividend yield
The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities (in thousands):
Balance as of December 31, 2022$5 
Change in fair value of warrant liability7 
Balance as of March 31, 2023$12 
13

As of March 31, 2023 and December 31, 2022, the Company maintains letters of credit of $3.5 million and $3.5 million, respectively, related to its lease arrangements, which are secured by money market accounts in accordance with certain of its lease agreements. The amounts are recorded at fair value using Level 1 inputs and included as restricted cash in the condensed consolidated balance sheets.
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
4.    Stockholders’ Equity
(a)    At-The-Market Offering
On November 10, 2020, the Company entered into a sales agreement (the “2020 Sales Agreement”) with Cowen and Company, LLC (“Cowen”) relating to the sale of shares of the Company’s common stock from time to time with an aggregate offering price of up to $50.0 million. Through December 31, 2021, the Company issued an aggregate of 1,482,343 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $30.05, net of $1.6 million in issuance costs resulting in net proceeds to the Company of approximately $42.9 million. During 2022, the Company did not issue or sell any shares of common stock pursuant to the 2020 Sales Agreement. For the three months ended March 31, 2023, the Company issued an aggregate of 107,451 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $3.68 resulting in aggregate gross proceeds of approximately $0.4 million, reduced by $0.1 million in issuance costs, resulting in net proceeds to the Company of approximately $0.3 million. As of March 31, 2023, $5.1 million is available pursuant to the 2020 Sales Agreement.

On August 8, 2022, the Company entered into a second sales agreement (the “2022 Sales Agreement”) with Cowen relating to the sale of shares of the Company’s common stock from time to time with an aggregate offering price of up to $75.0 million under a second at-the-market offering program. For the three months ended March 31, 2023, the Company did not issue any shares pursuant to the 2022 Sales Agreement.
(b)    Warrants
SPAC Warrants
The Company previously issued a total of 14,936,250 SPAC warrants (the "SPAC Warrants") to purchase common stock in public and private placement offerings, which were consummated on June 23, 2017. As part of the public offering, the Company issued 14,375,000 warrants (the "Public SPAC Warrants") and, as part of the private placement offering, the Company issued 561,250 warrants (the "Private SPAC Warrants"). The SPAC Warrants have a five-year life from the date the Business Combination was consummated, and every four SPAC Warrants entitle the holder to purchase one whole share of common stock at an exercise price of $23.00 per whole share.
The Private SPAC Warrants are identical to the Public SPAC Warrants, but they (i) are exercisable either for cash or on a cashless basis at the holder’s option, (ii) are not redeemable by the Company as long as such warrants are held by the initial purchasers or their affiliates and permitted transferees, and (iii) may be subject to the limitations on exercise as specified in the warrant agreement. As a result of these difference in features between the Public SPAC Warrants and Private SPAC Warrants, the Company concluded that the Private SPAC Warrants should be classified as a liability, if still held by the original Private SPAC Warrant holder, and marked to market each financial reporting period in the Company’s statement of operations.
In 2021, a total of 12,120,397 SPAC Warrants were exercised, resulting in the Company’s issuance of 3,030,092 shares of common stock and the receipt of $69.7 million in gross proceeds. Outstanding SPAC Warrants totaled 2,815,853 as of March 31, 2023 and December 31, 2022. Private SPAC Warrants that were still owned by the original holder totaled 80,350 as of March 31, 2023 and December 31, 2022.
14

Placement Agent Warrants
In connection with several of DermTech Operations’ financings that took place between 2015 and 2018, DermTech Operations engaged a registered placement agent to assist in marketing and selling common and preferred units. From 2015 to 2016, DermTech Operations issued 168,522 seven-year warrants to purchase one share of common stock each at an exercise price of $8.68 per share. From 2016 to 2018, DermTech Operations issued 72,658 seven-year warrants to purchase one share of common stock at an exercise price of $9.54 per share. In 2020, the Company issued 15,724 seven-year warrants to purchase one share of common stock at an exercise price of $9.54 per share in connection with the Company’s 2018 bridge note financing. Outstanding placement agent warrants totaled 4,510 as of March 31, 2023 and December 31, 2022.
(c)    Stock-Based Compensation
Stock-based compensation expense for employee options, RSUs, the purchase rights issued under the DermTech, Inc. 2020 Employee Stock Purchase Plan, as amended (the “2020 ESPP”), and consultant options was recorded in the condensed consolidated statements of operations as follows (in thousands):
Three Months Ended March 31,
20232022
Cost of revenue$412 $335 
Sales and marketing1,508 1,188 
Research and development561 768 
General and administrative2,255 1,603 
Total stock-based compensation$4,736 $3,894 
The total compensation cost related to non-vested awards not yet recognized as of March 31, 2023 was $31.7 million, which is expected to be recognized over a weighted average term of 2.18 years.
5.    Contingencies
Legal Proceedings
From time to time, the Company may be subject to legal proceedings and claims arising in the ordinary course of business. Management does not believe that the outcome of any of these matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
6.    Related Party Transactions
During 2022 and 2023, the Company engaged EVERSANA Life Science Services, LLC and its subsidiary Intouch Group, LLC (collectively, “EVERSANA”) to provide certain marketing services to the Company. Leana Wood, the spouse of Todd Wood, the Company’s Chief Commercial Officer, is an employee of EVERSANA. The Company incurred $0.5 million and $0.7 million in costs for the three months ended March 31, 2023 and 2022, respectively. Amounts due to EVERSANA were $0.5 million and $0.3 million as of March 31, 2023 and December 31, 2022, respectively.
There were no other related party transactions identified during the three months ended March 31, 2023 and 2022.
15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Discussion and Analysis of Financial Condition and Results of Operations of DermTech, Inc. (together with its subsidiaries, “DermTech,” “we,” “us,” “our” or the “Company”) should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, (the “SEC”) on March 2, 2023.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are intended to be covered by the “safe harbor” created by those sections. All statements, other than statements of historical facts, contained in this report, including statements regarding DermTech’s or its management’s intentions, beliefs, expectations and strategies for the future, are forward looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” "might," “will,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “potential,” “could,” “would,” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements are made as of the date of this report, deal with future events, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in those forward-looking statements. The risks and uncertainties that could cause actual results to differ materially are more fully described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. We may disclose changes to risk factors or additional risk factors from time to time in our future filings with the SEC. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.
Overview
We are a molecular diagnostic company developing and marketing novel non-invasive genomics tests to aid in the diagnosis and management of skin cancer, inflammatory skin diseases, and aging-related skin conditions. Our technology enhances early melanoma detection by non-invasively detecting genomic markers associated with melanoma to identify higher risk lesions at their earliest stages to rule out melanoma with a greater than 99% negative predictive value ("NPV") (Gerami et al. J Am Acad Dermatol. 2017; Skelsey et al. SKIN. 2021). Our scalable genomics assays have been designed to work with our adhesive patch, the DermTech Smart StickerTM (the “Smart Sticker”) which is used to non-invasively collect skin tissue samples for analysis.
We are initially commercializing tests that will address unmet needs in the diagnostic pathway of pigmented skin lesions, such as moles or dark colored skin spots. The DMT facilitates the clinical assessment of pigmented skin lesions for melanoma. We initially marketed this test directly to a concentrated group of dermatologists and are currently expanding marketing efforts to a broader group of clinicians and to a small group of primary care providers. The application of our Smart Sticker to collect samples non-invasively may allow us to eventually market the DMT to primary care physicians more broadly, beyond integrated primary care networks, and expand our efforts through telemedicine channels. We process our tests in our high complexity molecular laboratory that is certified under CLIA, College of American Pathologists accredited and New York licensed. We also provide laboratory services to several pharmaceutical companies that access our technology on a contract basis for their clinical trials or other studies to advance new drugs.
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Events, Trends and Uncertainties
The DMT without the additional test for the presence of telomerase reverse transcriptase gene driver mutations (“TERT”) (formerly known as PLAplus) became eligible for Medicare reimbursement on February 10, 2020. Each reference to the DMT in this paragraph refers only to the DMT without the add-on test for TERT. In late October 2019, the American Medical Association provided us with a Proprietary Laboratory Analyses Code (“PLA Code”). Pricing of $760 for the PLA Code was published on December 24, 2019 as part of the Clinical Laboratory Fee Schedule for 2020. The final Local Coverage Determination (“LCD”) expanded the coverage proposal in the draft LCD from one to two tests per date of service, and it allows clinicians to order the DMT if they have sufficient skill and experience to decide whether a pigmented lesion should be biopsied. Our local Medicare Administrative Contractor, Noridian, has issued its own LCD (“Noridian’s LCD”) announcing coverage of the DMT. Even though the effective date of Noridian’s LCD was June 7, 2020, Noridian began reimbursing us for the DMT as of February 10, 2020. With Medicare coverage granted, we have the opportunity to approach commercial payors, and, as a result, we believe that the DMT may generate significant revenues in the future. No LCD currently covers the optional add-on test for TERT available to those ordering the DMT.
Despite the grant of Medicare coverage for the DMT (without the add-on test for TERT), uncertainty surrounds commercial payor reimbursement, including governmental and commercial payors, of any test incorporating new technology, including tests developed using our technologies. Because each payor generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse our tests, seeking payor approvals is a time-consuming and costly process. We cannot be certain that coverage for our current tests and our planned tests will be provided in the future by additional commercial payors or that existing policy decisions or reimbursement levels will remain in place or be fulfilled under existing terms and provisions. If we cannot obtain or maintain coverage and reimbursement from private and governmental payors, such as Medicare and Medicaid, for our current tests, or new tests or test enhancements, our ability to generate revenues could be limited. This may have a material adverse effect on our business, financial condition, results of operation and cash flows.
Contract Revenue
Contract revenues with pharmaceutical companies relate to ongoing clinical trial contracts and new contracts. Contract revenue can be highly variable as it is dependent on the pharmaceutical customers’ clinical trial progress, which can be difficult to forecast due to variability of patient enrollment, drug safety and efficacy and other factors. Many of our historical contracts with third parties were structured to contain milestone billing payments, which typically are advance payments on work yet to be performed. These advanced payments are structured to help fund operations and are included in deferred revenue as the work has not yet been performed. These advance payments will remain in deferred revenue until we process the laboratory portion of the contracts allowing us to recognize the revenue.
Supply Chain and Inflationary Environment
Global supply chain disruptions and the higher inflationary environment have resulted in higher prices, which could impact our liquidity, business, financial condition and results of operations.
Financial Overview
Revenue
We generate revenue through laboratory services that are billed to Medicare, private medical insurance companies and pharmaceutical companies who order our laboratory services, which can include sample collection kits, test development, patient segmentation and stratification, genomic analysis, data analysis and reporting. Our revenue is generated from two revenue streams: test revenue and contract revenue. Test revenue can be highly variable as it is based on payments received by government and private insurance payors that are and are not under contract and can vary based on patient insurance coverage, deductibles and co-pays. As much of our test revenue is driven by the samples that are sent by physicians to our central lab for testing, a key performance measure for us is samples that are received and processed by our central lab successfully, also known as billable samples. We are currently prioritizing volume in geographies where we have payer coverage versus overall volume growth as one factor to potentially increase average selling price and help preserve our cash runway. We recently stopped testing samples from pediatric patients and certain Fitzpatrick skin types based on guidance from our lab accrediting organization. We are working on a plan to reintroduce testing for these cohorts with extremely low prevalence of melanoma. Based on these factors, we expect test volumes in 2023 to be affected.

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Our laboratory services are ordered by customers on projects that may span over several years, which makes our contract revenue highly variable. Segments of these contracts may be increased, delayed or eliminated based on the success of our customers’ clinical trials or other factors.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses are primarily related to our specialty field sales force, market research, reimbursement efforts, conference attendance, public relations, advertising and general marketing.
Research and Development Expenses
Our research and development ("R&D") expenses consist primarily of salaries and fringe benefits, clinical trials, consulting costs, facilities costs, laboratory costs, equipment expense and depreciation. We also conduct clinical trials to validate the performance characteristics of our tests and to show medical cost benefit in support of our reimbursement efforts.
General and Administrative Expenses
Our general and administrative expenses consist of senior management compensation, consulting, legal, billing and collections, human resources, information technology, accounting, insurance, and general business expenses.
Financing Activities
2020 At-The-Market Offering
On November 10, 2020, the Company entered into a sales agreement with Cowen and Company, LLC ("Cowen") relating to the sale of shares of the Company’s common stock from time to time with an aggregate offering price of up to $50.0 million (the "2020 Sales Agreement"). Through December 31, 2021, the Company issued an aggregate of 1,482,343 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $30.05, net of $1.6 million in issuance costs resulting in net proceeds to the Company of approximately $42.9 million. During 2022, the Company did not issue or sell any shares of common stock pursuant to the 2020 Sales Agreement. For the three months ended March 31, 2023, the Company issued an aggregate of 107,451 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $3.68 resulting in net proceeds of approximately $0.3 million. As of March 31, 2023, $5.1 million is available pursuant to the 2020 Sales Agreement.
2022 At-The-Market Offering
On August 8, 2022, the Company entered into a sales agreement with Cowen relating to the sale of shares of the Company’s common stock from time to time with an aggregate offering price of up to $75.0 million (the "2022 Sales Agreement"). The Company did not issue or sell any shares of common stock pursuant to the 2022 Sales Agreement during 2022 nor the first quarter of 2023.
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Results of Operations
Three Months Ended March 31, 2023 and March 31, 2022
(In thousands, except per share amounts and billable test revenue samples)Three Months Ended March 31,
20232022$ Change% Change
Revenues:
Test revenue $3,425 $3,518 $(93)(3)%
Contract revenue52 200 (148)(74)%
Total revenues3,477 3,718 (241)(6)%
Cost of revenues:
Cost of test revenue3,791 3,530 261 %
Cost of contract revenue30 24 25 %
Total cost of revenues3,821 3,554 267 %
Gross (loss) profit(344)164 (508)*
Gross (loss) profit as a percent of total revenue(10)%%
Operating expenses:  
Sales and marketing15,417 15,443 (26)— %
Research and development4,409 6,338 (1,929)(30)%
General and administrative11,875 8,574 3,301 39 %
Total operating expenses31,701 30,355 1,346 %
Loss from operations(32,045)(30,191)(1,854)%
Other income/(expense):  
Interest income, net782 66 716 *
Change in fair value of warrant liability(7)17 (24)*
Total other income775 83 692 *
Net loss$(31,270)$(30,108)$(1,162)%
Basic and diluted net loss per share$(1.02)$(1.01)$(0.01)%
Other Operating Data:
Billable test revenue samples17,800 14,370 3,430 24 %
* Absolute value percentage change greater than 100

Revenue

Test Revenue
Test revenues decreased $0.1 million, or 3%, to $3.4 million for the three months ended March 31, 2023 compared to $3.5 million for the three months ended March 31, 2022. The decrease in test revenues was primarily driven by a decrease in average selling price, partially offset by increased billable sample volume. Billable samples increased to approximately 17,800 for the three months ended March 31, 2023 compared to approximately 14,370 for the three months ended March 31, 2022. Sample volume is dependent on two major factors: the number of clinicians who order a test in any given quarter and the number of tests ordered by each clinician during the period. The number of ordering clinicians and the utilization per clinician can vary based on a number of factors, including the types of skin cancer conditions presented to clinicians, clinician reimbursement, office workflow, market awareness, clinician education and other factors.
Contract Revenue
Contract revenues with pharmaceutical companies decreased $0.1 million, or 74%, to $0.1 million for the three months ended March 31, 2023, compared to $0.2 million for the three months ended March 31, 2022. Contract revenues can be highly variable as it is dependent on the pharmaceutical customers’ clinical trial progress, which can be difficult to forecast due to variability of patient enrollment, drug safety and efficacy and other factors.
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Cost of Revenue
Cost of revenues increased $0.3 million, or 8%, to $3.8 million for the three months ended March 31, 2023 compared to $3.6 million for the three months ended March 31, 2022. The increase was largely attributable to a higher billable sample volume in 2023, higher overhead costs, one-time moving costs pertaining to our new facility, partially offset by streamlined laboratory processes. As of March 31, 2023, a large portion of the costs of revenue are fixed, and these costs include the CLIA facility, quality assurance, management and supervision and equipment calibration and depreciation. The variable cost of revenue expenses incurred primarily relate to compensation-related costs for our laboratory scientists and technicians, laboratory supplies, shipping costs and Smart Sticker collection kits. We remain committed to continuing the automation of our laboratory processes in order to become more cost efficient and productive.
Operating Expenses
Sales and Marketing
Sales and marketing expenses were flat at $15.4 million for the three months ended March 31, 2023 and $15.4 million for the three months ended March 31, 2022.
Research and Development
R&D expenses decreased $1.9 million, or 30%, to $4.4 million for the three months ended March 31, 2023 compared to $6.3 million for the three months ended March 31, 2022. The decrease was due to lower compensation costs from reduced headcount, lower lab supply spending and lower clinical study costs.
General and Administrative
General and administrative expenses increased $3.3 million, or 39%, to $11.9 million for the three months ended March 31, 2023 compared to $8.6 million for the three months ended March 31, 2022. The increase was primarily due to higher overhead from our new facility and higher employee compensation related costs as we added infrastructure such as information technology, legal and billing resources throughout 2022.
Interest Income, net
Interest income, net of $0.8 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, consists primarily of interest earned on our short-term marketable securities.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability for the three months ended March 31, 2023 was a loss of $7,000 compared to a gain of $17,000 for the three months ended March 31, 2022. The change in fair value of warrant liability is calculated by adjusting the value of the outstanding Private SPAC Warrants held by original holders to the current market value at each reporting period.
Liquidity and Capital Resources
We have never been profitable and have historically incurred substantial net losses, including net losses of $116.7 million for the twelve months ended December 31, 2022 and $31.3 million for the three months ended March 31, 2023. As of March 31, 2023, our accumulated deficit was $354.3 million. At the end of 2020, throughout 2021 and the first quarter of 2023, we raised approximately $44.9 million in gross proceeds facilitated through our at-the-market offering. In addition, we completed an underwritten public offering in January 2021, which raised a total of $143.7 million in gross proceeds. We have historically financed operations through private placement and public equity offerings.
We expect our losses to continue as a result of costs relating to ongoing R&D expenses, general and administrative expenses and sales and marketing costs for existing and planned products. These losses have had, and will continue to have, an adverse effect on our working capital. Because of the numerous risks and uncertainties associated with our commercialization and development efforts, we are unable to predict when we will become profitable, and we may never become profitable. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.
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As of March 31, 2023, our cash and cash equivalents totaled approximately $48.4 million and short-term marketable securities totaled approximately $56.3 million. Based on our current business operations, we believe our current cash, cash equivalents and short-term marketable securities will be sufficient to meet our anticipated cash requirements for at least the next 12 months. While we believe we have enough capital to fund anticipated operating costs for at least the next 12 months, we expect to incur significant additional operating losses over at least the next several years. We anticipate that we will raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements in order to support our planned operations and to continue developing and commercializing genomic tests. We may also consider raising additional capital in the future to expand our business and to pursue strategic investments. Our present and future funding requirements will depend on many factors, including:
our revenue growth rate and ability to generate cash flows from operating activities;
our sales and marketing and R&D activities;
effects of competing technological and market developments;
costs of and potential delays in product development;
changes in regulatory oversight applicable to our tests; and
timing of and costs related to future international expansion.
There can be no assurances as to the availability of additional financing or the terms upon which additional financing may be available to us. If we are unable to obtain sufficient funding at acceptable terms, we may be forced to significantly curtail our operations, and lack of sufficient funding may have a material adverse impact on our ability to continue as a going concern.
Cash Flow Analysis
(amounts in thousands)Three Months Ended March 31,
20232022
Net cash used in operating activities$(22,028)$(24,823)
Net cash used in investing activities(8,194)(7,533)
Net cash provided by financing activities916 527 

Net cash used in operating activities for the three months ended March 31, 2023 totaled $22.0 million, primarily driven by the $31.3 million net loss, offset partially by non-cash related items, including $4.7 million in stock-based compensation, $1.2 million in amortization of operating lease ROU assets and $0.5 million in depreciation. In addition, we had a net cash inflow of $2.9 million through net changes in working capital balances driven primarily by cash inflows of $0.5 million due to decreases in accounts receivable, $1.6 million through the decrease of prepaid expenses and other current assets and $1.3 million through the increase accrued liabilities, partially offset by cash outflows of $0.3 million from the increase in accrued compensation and $0.7 million from the increase in accounts payable.
Net cash used in investing activities for the three months ended March 31, 2023 totaled $8.2 million, which related to the outflow from the purchase of $16.5 million of marketable securities and $0.8 million from the purchase of equipment offset by the inflow from the sales and maturities of marketable securities of $9.0 million. Additional laboratory equipment investment will be needed to install complex automation systems and other genomic testing equipment needed to expand testing capacity.
Net cash provided by financing activities for the three months ended March 31, 2023 totaled $0.9 million, which was driven primarily by $0.6 million in proceeds from contributions to the 2020 ESPP.
Off-Balance Sheet Arrangements
As of March 31, 2023, we did not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Critical Accounting Policies and Significant Judgments and Estimates
Critical accounting policies, significant judgments and estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Recent Accounting Pronouncements
See Item 1 of Part I, Note 1(h) of the condensed consolidated financial statements herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures.
Disclosure controls and procedures enable us to record, process, summarize and report information required to be included in our Exchange Act filings within the required time period. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the periodic reports filed with the SEC is accumulated and communicated to our management, including our principal executive, financial and accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2023, the Company’s disclosure controls and procedures were effective as of such date for this purpose.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitation on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings.
Item 1A. Risk Factors.
There have not been any material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 6. Exhibits.
The following documents are filed as part of this Form 10-Q.
Exhibit
No.
DescriptionFiled
Herewith
FormIncorporated
by Reference
File No.
Date Filed
3.110-Q001-3811811/10/20
3.2


10-K001-381183/11/20
10.1*X
31.1X
31.2X
32.1**X
101.INSInline XBRL Instance DocumentX
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 has been formatted in Inline XBRL.
X
*Management contract or compensatory plan or arrangement
** This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language in such filing.
23

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DermTech, Inc.
Date: May 4, 2023
By:/s/ John Dobak
John Dobak, M.D.
Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 2023
By:/s/ Kevin Sun
Kevin Sun
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EX-10.1 2 ex101ceotransitionagreement.htm EX-10.1 Document
Exhibit 10.1
DermTech, Inc.



March 1, 2023
PERSONAL AND CONFIDENTIAL
BY HAND
John Dobak, M.D.
Dear John:
The purpose of this letter (the “Transition Agreement”) is to set forth our agreements concerning your anticipated transition from DermTech, Inc. (the “Company”).
1.Employment through Transition Period. You and the Company have agreed that you will remain employed as the Company’s President and Chief Executive Officer (“CEO”) until the earliest to occur of (a) the Company’s retention of a new CEO; and (b) September 30, 2023 (the “Separation Date”), subject to the terms and conditions of this Transition Agreement and your agreement to deliver, as set forth in paragraph 9 of this Transition Agreement, a supplemental waiver and release (the “Supplemental Release”) as a condition of the receipt of benefits as outlined herein. The period between your signing this Transition Agreement and the Separation Date is the “Transition Period.” During the Transition Period, you will continue to receive your usual salary and benefits, a grant of 56,407 RSUs as your 2023 stock grant (subject to quarterly vesting), and you shall continue to vest in Company equity and you shall be eligible to receive a bonus as outlined in this Transition Agreement.
2.Key Objectives During Transition Period. During the Transition Period, the Company expects that you will fully perform all of your existing job duties, and you will cooperate in all respects as requested by the Company with the Company’s efforts to recruit and engage a new CEO. You will at all times comply with all Company policies and procedures and you will continue reporting to the Company’s Board of Directors (the “Board”).
3.Resignations on the Separation Date. You agree that, as additional consideration for this Transition Agreement, and as a material covenant thereof, you shall resign your positions as President and CEO and your position as a Director of the Board, on the Separation Date and you shall resign any other positions you hold with the Company and any Company affiliates. The Company shall provide you with at least five (5) days advance notice of your Separation Date.
4.Agreements Concerning the Separation Date and Severance. If you sign (and do not revoke) this Transition Agreement, and sign but do not revoke the Supplemental Release provided for in paragraph 9 of this Transition Agreement, in addition to employing you until the Separation Date, and paying your salary, benefits and the continued vesting of your equity through the Separation Date:
(a) The Company will make a severance payment to you in accordance with the Participation Agreement under the DermTech, Inc. Change in Control and Severance Plan (the “Plan”) in an amount equivalent to 12 months of your current base salary, or a total of $597,400 less applicable payroll withholdings, in a single lump sum payment within thirty (30) days following the effective date of the Supplemental Release (subject to the provisions of IRC§ 409a).
(b)Pursuant to the Plan, the Company will pay the Company portion of your premiums to participate in its group health insurance program pursuant to COBRA (if you elect COBRA) for a maximum period of 12 months following the Separation Date, provided, however, that you continue to pay the employee portion of such premiums and further, such payments shall cease if you become eligible for similar coverage under another group health insurance program.


John Dobak, M.D.
Page 2


(c)Pursuant to the Plan, the Company may pay to you a bonus, in the event the Board determines you have met your objectives for the period you continue to be employed as the Company’s President and CEO (the “Bonus Payment”), which determination shall be solely at the discretion of the Company’s Board. Such Bonus Payment, if any, will be made less applicable payroll withholdings, and shall be paid if at all within thirty days of the effective date of the Supplemental Release.
(d)The Company will pay up to $5,000 to reimburse you for reasonable legal fees incurred in connection with your counsel’s review and advice concerning this Transition Agreement.
5.Equity/No other Compensation Due. You will continue to vest in your equity as provided on Schedule A annexed hereto. You shall receive accelerated vesting and an extension of the time to exercise your vested equity as set forth on Schedule A. Other than the agreements concerning equity as set forth on Schedule A, you agree and acknowledge that you have no right to, nor do you own, any other equity interest in the Company or its affiliates, and you will make no claim to such equity in the future. You understand that other than the compensation specifically set forth in this Transition Agreement, you will not be eligible for any other compensation from the Company.
6.Covenant of Cooperation/Consultant Services. Immediately following the Separation Date, you shall transition to the status of a Consultant to the Company, as such term is defined in the Company’s 2020 Equity Plan. You shall continue as a Consultant until January 1, 2024 (the “Consultant Services Period”). In connection therewith, you agree that you shall fully cooperate with the Company as requested during the Consultant Services Period, which cooperation shall include responding to inquiries from the Company’s Board or management team, being reasonably available to participate in meetings (telephonic, in person and virtual) regarding Company matters, and cooperating in any litigation or witness-related matters, or investigative matters, upon reasonable advance notice. You shall receive no additional compensation for such services. For avoidance of doubt, you shall continue to vest in any equity as set forth on Schedule A. Your relationship with the Company shall terminate at the conclusion of the Consultant Services Period.
7.Other Agreements.
(a)You agree that no later than two business days after the Separation Date you will return to the Company all Company documents (whether in hard copy or electronic form and any copies thereof) and property (including, without limitation, all cell phones, laptops and other company equipment), and that you shall abide by the provisions of the Confidential Information and Invention Assignment Agreement you executed (the “Confidentiality Agreement”), the terms of which shall survive the signing of this Transition Agreement. Further, you agree that you will abide by any and all common law and/or statutory obligations relating to protection and non-disclosure of the Company’s trade secrets and/or confidential and proprietary documents and information.
(b)You agree that, to the extent permitted by law (and subject to S.B. 331), and unless otherwise publicly disclosed pursuant to law, all information relating in any way to this Transition Agreement, including the terms and amount of financial consideration provided for in this Transition Agreement, shall be held confidential by you and shall not be publicized or disclosed to any person (other than an immediate family member, legal counsel or financial advisor, provided that any such individual to whom disclosure is made agrees to be bound by these confidentiality obligations), business entity or government agency (except as mandated by state or federal law), except that nothing in this paragraph shall prohibit you from participating in an investigation with a state or federal agency if requested by the agency to do so.
(c)You will not make any statements that are professionally or personally disparaging about, or adverse to, the interests of the Company (including its former or current officers, directors, employees and consultants) including, but not limited to, any statements that disparage any person, product, service, finances, financial condition, capability or any other aspect of the business of the Company, and that you will not engage in any conduct which could reasonably be expected to harm professionally or personally the reputation of the Company (including its former or current officers, directors, employees and consultants) (except pursuant to S.B. 311 or as otherwise mandated by state or federal law).