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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 June 30, 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
________________________
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 July 28, 2023, the registrant had 33,679,086 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)
June 30, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$42,790 $77,757 
Short-term marketable securities43,406 48,411 
Accounts receivable3,865 4,172 
Inventory1,352 1,757 
Prepaid expenses and other current assets2,329 3,940 
Total current assets93,742 136,037 
Property and equipment, net6,074 6,375 
Operating lease right-of-use assets53,791 56,007 
Restricted cash3,467 3,488 
Other assets 168 
Total assets$157,074 $202,075 
Liabilities and Stockholders’ Equity  
Current liabilities:  
Accounts payable$2,324 $2,419 
Accrued compensation7,387 7,894 
Accrued liabilities3,695 3,464 
Short-term deferred revenue295 109 
Current portion of operating lease liabilities2,246 1,634 
Current portion of finance lease obligations67 116 
Total current liabilities16,014 15,636 
Warrant liability6 5 
Long-term finance lease obligations, less current portion46 53 
Operating lease liabilities, long-term52,931 54,028 
Total liabilities68,997 69,722 
Stockholders’ equity:  
Common stock, $0.0001 par value per share; 100,000,000 and 50,000,000 shares authorized as of June 30, 2023 and December 31, 2022, respectively; 33,408,810 and 30,297,408 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
3 3 
Additional paid-in capital473,855 456,171 
Accumulated other comprehensive loss(101)(774)
Accumulated deficit(385,680)(323,047)
Total stockholders’ equity88,077 132,353 
Total liabilities and stockholders’ equity$157,074 $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 June 30,Six Months Ended June 30,
2023202220232022
Revenues:
Test revenue $3,565 $4,147 $6,990 $7,665 
Contract revenue415 86 467 286 
Total revenues3,980 4,233 7,457 7,951 
Cost of revenues:    
Cost of test revenue3,909 3,236 7,700 6,766 
Cost of contract revenue63 37 93 61 
Total cost of revenues3,972 3,273 7,793 6,827 
Gross profit/(loss)8 960 (336)1,124 
Operating expenses:    
Sales and marketing13,033 15,001 28,450 30,444 
Research and development3,887 6,915 8,296 13,253 
General and administrative15,220 8,878 27,095 17,452 
Total operating expenses32,140 30,794 63,841 61,149 
Loss from operations(32,132)(29,834)(64,177)(60,025)
Other income/(expense):    
Interest income, net763 149 1,545 215 
Change in fair value of warrant liability6 105 (1)122 
Total other income769 254 1,544 337 
Net loss$(31,363)$(29,580)$(62,633)$(59,688)
Weighted average shares outstanding used in computing net loss per share, basic and diluted31,791,736 29,964,849 31,177,886 29,904,972 
Net loss per share of common stock outstanding, basic and diluted$(0.99)$(0.99)$(2.01)$(2.00)
See accompanying notes to unaudited condensed consolidated financial statements.
2

DERMTECH, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Net loss$(31,363)$(29,580)$(62,633)$(59,688)
Unrealized net gain/(loss) on marketable securities and cash equivalents188 (171)673 (741)
Comprehensive loss$(31,175)$(29,751)$(61,960)$(60,429)
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 
Issuance of common stock at a weighted average price of $2.62 through at-the-market offering, net of $0.1 million in issuance costs
1,759,210 — 4,495 — — 4,495 
Issuance of common stock from RSU releases560,689 —  — —  
Unrealized net gain on available-for-sale marketable securities and cash equivalents— — — 188 — 188 
Stock-based compensation— — 7,515 — — 7,515 
Net loss— — — — (31,363)(31,363)
Balance, June 30, 202333,408,810 $3 $473,855 $(101)$(385,680)$88,077 



See accompanying notes to unaudited condensed consolidated financial statements.
4

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, 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 
Issuance of common stock from option exercises and RSU releases88,591 —  — —  
Issuance of common stock from warrant exercises9,219 — 10 — — 10 
Unrealized net loss on available-for-sale marketable securities— — — (171)— (171)
Stock-based compensation— — 4,837 — — 4,837 
Net loss— — — — (29,580)(29,580)
Balance, June 30, 202230,038,447 $3 $445,491 $(865)$(266,052)$178,577 
See accompanying notes to unaudited condensed consolidated financial statements.
5

DERMTECH, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30,
20232022
Cash flows from operating activities:  
Net loss$(62,633)$(59,688)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation936 766 
Change in fair value of warrant liability1 (122)
Amortization of operating lease right-of-use assets2,216 1,109 
Stock-based compensation12,251 8,731 
Amortization of premiums, net of accretion of discounts on marketable securities(202)283 
Loss on disposal of equipment13 285 
Changes in operating assets and liabilities:  
Accounts receivable307 (2,115)
Inventory405 (952)
Prepaid expenses and other current assets1,779 483 
Operating lease liabilities(485)(654)
Accounts payable, accrued liabilities and deferred revenue690 (53)
Accrued compensation(507)2,698 
Net cash used in operating activities(45,229)(49,229)
Cash flows from investing activities:  
Purchases of marketable securities(25,568)(20,171)
Sales and maturities of marketable securities31,448 14,139 
Purchases of property and equipment(1,016)(1,360)
Net cash provided by/(used in) investing activities4,864 (7,392)
Cash flows from financing activities:  
Proceeds from issuance of common stock in connection with at-the-market offering, net4,765  
Proceeds from exercise of common stock warrants 22 
Proceeds from exercise of stock options92 40 
Proceeds from contributions to the Employee Stock Purchase Plan576 515 
Principal repayments of finance lease obligations(56)(60)
Net cash provided by financing activities5,377 517 
Net decrease in cash, cash equivalents and restricted cash(34,988)(56,104)
Cash, cash equivalents and restricted cash, beginning of period81,245 179,907 
Cash, cash equivalents and restricted cash, end of period$46,257 $123,803 
Reconciliation of cash, cash equivalents and restricted cash, end of period:
Cash and cash equivalents$42,790 $120,333 
Restricted cash3,467 3,470 
Total cash, cash equivalents and restricted cash$46,257 $123,803 
Supplemental cash flow information:  
Cash paid for interest on finance lease obligations$2 $7 
Supplemental disclosure of noncash investing and financing activities:  
Purchases of property and equipment recorded in accounts payable$78 $11 
Right-of-use assets obtained in exchange for lease obligations$ $17,059 
Property and equipment acquired under finance leases$ $48 
Change in unrealized net gains/(losses) on available-for-sale marketable securities and cash equivalents$673 $(741)
See accompanying notes to unaudited condensed consolidated financial statements.
6

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 melanoma and management of skin cancer. 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 $385.7 million at June 30, 2023. As of June 30, 2023, cash and cash equivalents totaled approximately $42.8 million and short-term marketable securities totaled approximately $43.4 million. The Company's transition to profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. The timing and amount of the Company's actual expenditures will be based on many factors, including cash flows from operations and the potential growth of our business. The Company may be required to further 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. Considering the restructuring activities (Note 5) implemented in June 2023, the Company believes it has enough capital to fund anticipated operating costs for at least the next twelve months. The Company anticipates that it will need to raise additional capital in order to support its 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 June 30, 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.
7

(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 are 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.
8

The Company periodically updates its estimate of the variable consideration recognized for previously delivered performance obligations. These updates resulted in a decrease of $0.3 million and $0.7 million in revenue for the three and six months ended June 30, 2023, respectively, and an additional $0.1 million and $8,000 in revenue for the three and six months ended June 30, 2022, respectively. 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 services 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 and six months ended June 30, 2023 and 2022 (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Test Revenue
DermTech Melanoma Test$3,565 $4,147 $6,990 $7,665 
Contract Revenue
Adhesive patch kits388 38 424 104 
RNA extractions14  16 110 
Project management fees13 48 27 72 
Total revenues$3,980 $4,233 $7,457 $7,951 
(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 June 30, 2023 and December 31, 2022 was $0.3 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 June 30, 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.
9

(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 $3.5 million and $4.1 million of net test accounts receivable as of June 30, 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 June 30, 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 $0.4 million and $0.1 million of contract accounts receivable as of June 30, 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):
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
Shares issuable upon exercise of common stock warrants709 714 709 714 
Shares issuable upon exercise of stock options1,921 1,758 1,921 1,758 
Shares issuable upon the release of restricted stock units3,562 2,912 3,562 2,912 
6,192 5,384 6,192 5,384 
(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.
10

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 June 30, 2023 were as follows (in thousands):
June 30, 2023
Amortized CostGross Unrealized
Gains
Gross Unrealized
Losses
Estimated
Market
Value
Short-term marketable securities, available-for-sale:
Corporate debt securities$10,048 $ $(78)$9,970 
U.S. government debt securities33,524 99 (187)33,436 
Total short-term marketable securities, available-for-sale$43,572 $99 $(265)$43,406 
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 June 30, 2023, the estimated market value of debt securities with contractual maturities of less than twelve months was $40.8 million; the remaining debt securities that the Company held at that date had an estimated market value of $2.6 million and contractual maturities of up to 18 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 June 30, 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 and six months ended June 30, 2023 and 2022 were not significant.
11

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 30, 2023 aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):
June 30, 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$9,379 $(73)$591 $(5)$9,970 $(78)
U.S. government debt securities16,974 (168)1,964 (19)18,938 (187)
Total short-term marketable securities, available-for-sale$26,353 $(241)$2,555 $(24)$28,908 $(265)
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):
June 30,
2023
December 31,
2022
Prepaid expenses and other current assets:
Prepaid expenses$1,513 $3,207 
Other current assets816 733 
Total prepaid expenses and other current assets$2,329 $3,940 
Property and equipment, gross:
Laboratory equipment$6,305 $6,250 
Computer equipment853 872 
Furniture and fixtures1,247 913 
Leasehold improvements597 1,344 
Total property and equipment, gross9,002 9,379 
Less accumulated depreciation(2,928)(3,004)
Total property and equipment, net$6,074 $6,375 
12

Accrued Compensation and Accrued Liabilities
Condensed consolidated balance sheet details are as follows (in thousands):
June 30,
2023
December 31,
2022
Accrued compensation:
Accrued bonus and commissions$3,778 $3,257 
Accrued salaries and wages3,609 4,637 
Total accrued compensation$7,387 $7,894 
Accrued liabilities:
Accrued consulting services$309 $894 
Customer refund liability980 980 
Restructuring liability 1,730  
Other accrued expenses676 1,590 
Total accrued liabilities$3,695 $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 June 30, 2023 (in thousands):
June 30, 2023
Level 1Level 2Level 3Total
Assets:    
Cash equivalents:
Money market$17,577 $ $ $17,577 
U.S. government debt securities 10,227  10,227 
Total cash equivalents17,577 10,227  27,804 
Marketable securities, available for sale:
Corporate debt securities 9,970  9,970 
U.S. government debt securities 33,436  33,436 
Total marketable securities, available for sale 43,406  43,406 
Total assets measured at fair value on a recurring basis$17,577 $53,633 $ $71,210 
Liabilities:
Warrant liability$ $ $6 $6 
Total liabilities measured at fair value on a recurring basis$ $ $6 $6 
13

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 (as defined below) 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 June 30,Six Months Ended June 30,
2023202220232022
Assumed risk-free interest rate5.40%2.96%
4.35% - 5.40%
2.37% - 2.96%
Assumed volatility133.99%96.21%
123.28% - 133.99%
92.77% - 96.21%
Expected term1.17 years2.17 years
1.17 - 1.42 years
2.17 - 2.42 years
Expected dividend yield
14

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 
Change in fair value of warrant liability(6)
Balance as of June 30, 2023$6 
As of June 30, 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, secured by cash of June 30, 2023 and money market accounts as of December 31, 2022, 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)    Common Stock

On June 2, 2023, the Company filed an amendment to its Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of Delaware to increase the authorized number of shares of common stock of the Company from 50,000,000 to 100,000,000 shares (the “Amended Certificate”). The Amended Certificate was approved by the Company’s stockholders at the 2023 Annual Meeting.
(b)    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.

During the three months ended June 30, 2023, the Company issued an aggregate of 1,759,210 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $2.62 resulting in aggregate gross proceeds of approximately $4.6 million, reduced by $0.1 million issuance costs, resulting in net proceeds to the Company of approximately $4.5 million. For the six months ended June 30, 2023, the Company issued an aggregate of 1,866,661 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $2.68 resulting in aggregate gross proceeds of approximately $5.0 million, reduced by $0.2 million in issuance costs, resulting in net proceeds to the Company of approximately $4.8 million. As of June 30, 2023, $0.5 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 and six months ended June 30, 2023, the Company did not issue any shares pursuant to the 2022 Sales Agreement.
15

(c)    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 June 30, 2023 and December 31, 2022. Private SPAC Warrants that were still owned by the original holder totaled 80,350 as of June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022.
(d)    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 June 30,Six Months Ended June 30,
2023202220232022
Cost of revenue$435 $298 $847 $633 
Sales and marketing1,548 1,067 3,056 2,528 
Research and development676 1,330 1,237 1,825 
General and administrative4,856 2,142 7,111 3,745 
Total stock-based compensation$7,515 $4,837 $12,251 $8,731 

The total compensation cost related to non-vested awards not yet recognized as of June 30, 2023 was $31.2 million, which is expected to be recognized over a weighted average term of 2.43 years.

16

Departure of Former Chief Executive Officer
Stock-based compensation expense for the three and six months ended June 30, 2023 includes accelerated expense of $2.9 million and $3.0 million, respectively, in connection with the transition agreement dated March 1, 2023, between the Company and its former Chief Executive Officer, John Dobak, M.D. (the "Transition Agreement"). The accelerated expense is included within general and administrative expenses in the condensed consolidated statement of operations.
Dr. Dobak resigned from his position as Chief Executive Officer and member of the board of directors of the Company (the "Board") effective May 8, 2023 and agreed to serve as a consultant to the Company on an as needed basis until January 1, 2024. The terms of the Transition Agreement allow for continuing vesting of Dr. Dobak's equity awards through the end of the consulting period on January 1, 2024. At the termination of the consulting period, consistent with Dr. Dobak's change of control and severance plan, he will immediately receive an additional 10 months vesting of equity awards and the period to exercise his vested stock options will be increased from 90 days to 12 months.
The Company assessed the consulting services under the Transition Agreement as nonsubstantive pursuant to ASC 718, Compensation – Stock Compensation (ASC 718) and recognized all stock-based compensation expense related to Dr. Dobak's equity awards vesting in connection with the Transition Agreement upon his resignation.
5.    Commitments and Contingencies
Restructuring Plan

On June 26, 2023, the Board approved a restructuring plan (the “Restructuring Plan”) to prioritize growth opportunities for the DMT, streamline operations, suspend pipeline programs, and significantly reduce overall operating expenses. The Restructuring Plan includes a reduction of the Company’s workforce by approximately 15%. The actions associated with the employee restructuring under the Restructuring Plan are expected to be substantially complete in the third quarter of 2023.

The Company incurred approximately $2.1 million in restructuring charges in connection with the Restructuring Plan for the three and six months ended June 30, 2023, which consist of $1.8 million in charges related to severance payments and employee benefits and $0.3 million in charges related to stock-based compensation for the acceleration of share-based awards. Restructuring charges are included in general and administrative expenses in the condensed consolidated statement of operations.

The restructuring liability as of June 30, 2023 is $1.7 million and is included within accrued liabilities in the condensed consolidated balance sheets.
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 former Chief Commercial Officer, is an employee of EVERSANA. Mr. Wood's last day of employment as Chief Commercial Officer of the Company was July 3, 2023. The Company incurred $0.4 million and $0.9 million in costs for the three months ended June 30, 2023 and 2022, respectively, and $0.9 million and $1.6 million in costs for the six months ended June 30, 2023 and 2022, respectively. Amounts due to EVERSANA were $0.2 million and $0.3 million as of June 30, 2023 and December 31, 2022, respectively.
There were no other related party transactions identified during the three and six months ended June 30, 2023 and 2022.
17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 the MD&A 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 MD&A, 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 and its statements, estimates and expectations regarding the Restructuring Plan, its potential cost savings and any related future effects of the Restructuring Plan, 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 or in this Quarterly Report on Form 10-Q. 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 of melanoma and management of skin cancer. Our technology enhances evaluation of lesions suspicious for melanoma using non-invasive sample collection and detecting genomic markers associated with melanoma to identify higher risk lesions or to rule out melanoma with a 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 DermTech Melanoma Test (“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. We process our tests in our high complexity molecular laboratory that is Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) certified, 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.
18

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.
Restructuring Plan
On June 26, 2023, the board of directors of the Company (the “Board”) approved restructuring actions (the "Restructuring Plan") that are intended to prioritize the significant growth opportunities for the DMT, streamline operations, suspend pipeline programs and significantly reduce overall operating expenses. These restructuring actions primarily related to sales, marketing and general and administrative functions and resulted in a workforce reduction of approximately 15% of the Company’s workforce. The Company currently estimates annualized savings of between $25 million and $30 million upon completion of the Restructuring Plan.

As part of the Restructuring Plan, the Company incurred one-time charges of $2.1 million. The one-time charges consist primarily of severance payments, employee benefits and stock-based compensation for the acceleration of share-based awards. The restructuring liability as of June 30, 2023 is $1.7 million and is included within accrued liabilities in the condensed consolidated balance sheets. The actions associated with the employee restructuring under the Restructuring Plan are expected to be substantially complete in the third quarter of 2023.
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.


19

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.
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. During the three months ended June 30, 2023, the Company issued an aggregate of 1,759,210 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $2.62, net of $0.1 million issuance costs, resulting in net proceeds to the Company of approximately $4.5 million. During the six months ended June 30, 2023, the Company issued an aggregate of 1,866,661 shares of common stock pursuant to the 2020 Sales Agreement at a weighted average purchase price of $2.68, net of $0.2 million issuance costs, resulting in net proceeds of approximately $4.8 million. As of June 30, 2023, $0.5 million is available pursuant to the 2020 Sales Agreement.
20

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 $75.0 million (the "2022 Sales Agreement"). The Company did not issue or sell any shares of common stock pursuant to the 2022 Sales Agreement during 2022 nor the first or second quarter of 2023.
Results of Operations
Three Months Ended June 30, 2023 and June 30, 2022
(In thousands, except per share amounts and billable test revenue samples)Three Months Ended June 30,
20232022$ Change% Change
Revenues:
Test revenue $3,565 $4,147 $(582)(14)%
Contract revenue415 86 329 *
Total revenues3,980 4,233 (253)(6)%
Cost of revenues:
Cost of test revenue3,909 3,236 673 21 %
Cost of contract revenue63 37 26 70 %
Total cost of revenues3,972 3,273 699 21 %
Gross profit960 (952)(99)%
Gross profit as a percent of total revenue— %23 %
Operating expenses:  
Sales and marketing13,033 15,001 (1,968)(13)%
Research and development3,887 6,915 (3,028)(44)%
General and administrative15,220 8,878 6,342 71 %
Total operating expenses32,140 30,794 1,346 %
Loss from operations(32,132)(29,834)(2,298)%
Other income:  
Interest income, net763 149 614 *
Change in fair value of warrant liability105 (99)(94)%
Total other income769 254 515 *
Net loss$(31,363)$(29,580)$(1,783)%
Basic and diluted net loss per share$(0.99)$(0.99)$— — %
Other Operating Data:
Billable test revenue samples17,450 18,320 (870)(5)%
* Absolute value percentage change greater than 100

21

Revenue

Test Revenue
Test revenues decreased $0.6 million, or 14%, to $3.6 million for the three months ended June 30, 2023, compared to $4.1 million for the three months ended June 30, 2022. The decrease in test revenues was primarily driven by a decrease in average selling price from lower collection estimates for certain non-contracted commercial payors and a decrease in billable sample volume. Billable samples decreased to approximately 17,450 for the three months ended June 30, 2023, compared to approximately 18,320 for the three months ended June 30, 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 increased $0.3 million to $0.4 million for the three months ended June 30, 2023, compared to $0.1 million for the three months ended June 30, 2022. The increase is attributable to significant kit shipments made to several pharmaceutical companies. 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.
Cost of Revenue
Cost of revenues increased $0.7 million, or 21%, to $4.0 million for the three months ended June 30, 2023, compared to $3.3 million for the three months ended June 30, 2022. The increase was largely attributable to higher overhead costs pertaining to our new facility and higher lab supply expenses. As of June 30, 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 expense decreased $2.0 million, or 13%, to $13.0 million for the three months ended June 30, 2023 compared to $15.0 million for the three months ended June 30, 2022. The decrease was due to reduced spend around marketing activities, reduced consulting costs and lower employee-related compensation costs. As part of the Restructuring Plan, we expect sales and marketing expenses to be reduced further in the second half of 2023.
Research and Development
R&D expenses decreased $3.0 million, or 44%, to $3.9 million for the three months ended June 30, 2023 compared to $6.9 million for the three months ended June 30, 2022. The decrease was due to reduced compensation costs from lower headcount, lower clinical study costs and lower lab supply spending.
General and Administrative
General and administrative expenses increased $6.3 million, or 71%, to $15.2 million for the three months ended June 30, 2023, compared to $8.9 million for the three months ended June 30, 2022. The increase was primarily due to $2.1 million in costs related to the Restructuring Plan, separation benefits of $3.4 million related to our former CEO, including $2.9 million of stock-based compensation for the acceleration of share-based awards, and higher overhead from our new facility. As part of the Restructuring Plan, we expect general and administrative expenses to be reduced in the second half of 2023.
22

Interest Income, net
Interest income, net of $0.8 million and $0.1 million for the three months ended June 30, 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 June 30, 2023 was a gain of $6,000, compared to a gain of $105,000 for the three months ended June 30, 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.

Six Months Ended June 30, 2023 and June 30, 2022
(In thousands, except per share amounts and billable test revenue samples)Six Months Ended June 30,
20232022$ Change% Change
Revenues:
Test revenue $6,990 $7,665 $(675)(9)%
Contract revenue467 286 181 63 %
Total revenues7,457 7,951 (494)(6)%
Cost of revenues:
Cost of test revenue7,700 6,766 934 14 %
Cost of contract revenue93 61 32 52 %
Total cost of revenues7,793 6,827 966 14 %
Gross (loss) profit(336)1,124 (1,460)*
Gross (loss) profit as a percent of total revenue(5)%14 %
Operating expenses:  
Sales and marketing28,450 30,444 (1,994)(7)%
Research and development8,296 13,253 (4,957)(37)%
General and administrative27,095 17,452 9,643 55 %
Total operating expenses63,841 61,149 2,692 %
Loss from operations(64,177)(60,025)(4,152)%
Other income/(expense):  
Interest income, net1,545 215 1,330 *
Change in fair value of warrant liability(1)122 (123)*
Total other income1,544 337 1,207 *
Net loss$(62,633)$(59,688)$(2,945)%
Basic and diluted net loss per share$(2.01)$(2.00)$(0.01)%
Other Operating Data:
Billable test revenue samples35,250 32,690 2,560 %
* Absolute value percentage change greater than 100

23

Test Revenue
Test revenues decreased $0.7 million, or 9%, to $7.0 million for the six months ended June 30, 2023, compared to $7.7 million for the six months ended June 30, 2022. The decrease in test revenues was primarily driven by a decrease in average selling price from lower collection estimates for certain non-contracted commercial payors, including revenue adjustments for tests run in prior periods, partially offset by increased billable sample volume. Billable samples increased to approximately 35,250 for the six months ended June 30, 2023, compared to approximately 32,690 for the six months ended June 30, 2022.
Contract Revenue
Contract revenues with pharmaceutical companies increased $0.2 million, or 63%, to $0.5 million for the six months ended June 30, 2023, compared to $0.3 million for the six months ended June 30, 2022. Contract revenue can be highly variable as it is dependent on the pharmaceutical customers’ clinical trial progress, which can change due to variability of patient enrollment, drug safety and efficacy and other factors.
Cost of Revenue
Cost of revenues increased $1.0 million, or 14%, to $7.8 million for the six months ended June 30, 2023, compared to $6.8 million for the six months ended June 30, 2022. The increase was largely attributable to a higher billable sample volume in 2023 and higher overhead costs pertaining to our new facility. As of June 30, 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, equipment maintenance, and utilities. 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 decreased $2.0 million, or 7%, to $28.5 million for the six months ended June 30, 2023, compared to $30.4 million for the six months ended June 30, 2022. The decrease was due to reduced spend around marketing activities, reduced consulting costs and lower employee-related compensation costs. As part of the Restructuring Plan, we expect sales and marketing expenses to be reduced further in the second half of 2023.
Research and Development
R&D expenses decreased $5.0 million, or 37%, to $8.3 million for the six months ended June 30, 2023, compared to $13.3 million for the six months ended June 30, 2022. The decrease was due to reduced compensation costs from lower headcount, lower clinical study costs and lower lab supply spending.
General and Administrative
General and administrative expenses increased $9.6 million, or 55%, to $27.1 million for the six months ended June 30, 2023, compared to $17.5 million for the six months ended June 30, 2022. The increase was primarily due to $2.1 million in costs related to the Restructuring Plan, separation benefits of $3.6 million related to our former CEO, including $3.0 million of stock-based compensation for the acceleration of share-based awards, higher employee-compensation related costs and higher overhead from our new facility. As part of the Restructuring Plan, we expect general and administrative expenses to be reduced in the second half of 2023.
Interest Income, net
Interest income, net of $1.5 million and $0.2 million for the six months ended June 30, 2023 and 2022, respectively, consists primarily of interest earned on our short-term marketable securities.
24

Change in Fair Value of Warrant Liability
Change in fair value of warrant liability for the six months ended June 30, 2023 was a loss of $1,000, compared to a gain of $0.1 million for the six months ended June 30, 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 $62.6 million for the six months ended June 30, 2023. As of June 30, 2023, our accumulated deficit was $385.7 million. At the end of 2020, throughout 2021 and the second quarter of 2023, we raised approximately $49.5 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 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.
As of June 30, 2023, our cash and cash equivalents totaled approximately $42.8 million and short-term marketable securities totaled approximately $43.4 million. Based on our current business operations and the Restructuring Plan, 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 ability to successfully execute and realize the intended benefits of the Restructuring Plan;
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.
25

Cash Flow Analysis
(amounts in thousands)Six Months Ended June 30,
20232022
Net cash used in operating activities$(45,229)$(49,229)
Net cash provided by/(used in) investing activities4,864 (7,392)
Net cash provided by financing activities5,377 517 
Net cash used in operating activities for the six months ended June 30, 2023 totaled $45.2 million, primarily driven by the $62.6 million net loss, offset partially by non-cash related items, including $12.3 million in stock-based compensation, $2.2 million in amortization of operating lease ROU assets and $0.9 million in depreciation. In addition, we had a net cash inflow of $2.2 million through net changes in working capital balances driven primarily by cash inflows of $0.3 million due to decreases in accounts receivable, $0.4 million from the decrease in inventory, $1.8 million through the decrease of prepaid expenses and other current assets and $0.7 million through the increase in accounts payable, accrued liabilities and deferred revenue, partially offset by cash outflows of $0.5 million from the increase in accrued compensation and $0.5 million from the increase in operating lease liabilities.
Net cash provided by investing activities for the six months ended June 30, 2023 totaled $4.9 million, which related to the outflow from the purchase of $25.6 million of marketable securities and $1.0 million from the purchase of equipment offset by the inflow from the sales and maturities of marketable securities of $31.4 million.
Net cash provided by financing activities for the six months ended June 30, 2023 totaled $5.4 million, which was driven primarily by $4.8 million in net proceeds raised from the 2020 Sales Agreement and $0.6 million in proceeds from contributions to the 2020 ESPP.
Off-Balance Sheet Arrangements
As of June 30, 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.
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.
26

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 June 30, 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 June 30, 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.
27

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, except for the addition of the following risk factor:

We may fail to achieve the expected cost savings and related benefits from our Restructuring Plan.

On June 26, 2023, the Board approved the Restructuring Plan, which is intended to prioritize the significant growth opportunities for the DMT, streamline operations, suspend pipeline programs and significantly reduce overall operating expenses. The Restructuring Plan primarily relates to sales, marketing and G&A functions and resulted in a workforce reduction of approximately 15% of the Company’s workforce. As part of the Restructuring Plan, the Company incurred one-time charges of $2.2 million in the second quarter of 2023. The one-time charges consist primarily of severance payments, employee benefits and stock-based compensation for the acceleration of share-based awards.

The Company currently estimates annualized savings of between $25 million and $30 million upon completion of the Restructuring Plan. There is no guarantee that the Restructuring Plan will achieve its intended benefits. For example, the Company's cost restructuring efforts may not result in the anticipated savings or other economic benefits, or could result in total costs and expenses that are greater than expected. In addition, the Company may not be able to effectively realize all the cost savings anticipated by the Restructuring Plan and may incur termination and other costs not previously contemplated, which could be material. The Restructuring Plan may cause disruption to the Company's business operations. For example, the Restructuring Plan resulted in the loss of a number of long-term employees, which could result in the loss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across the organization, all of which could adversely affect the Company's operations. In addition, the Restructuring Plan could negatively impact the Company's ability to attract, integrate, retain and motivate key employees.
28

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
3.1X
3.2


10-K001-381183/11/20
10.1*^8-K/A001-381187/13/23
10.2*8-K001-381186/05/23
10.3*^8-K001-381185/09/23
10.4*8-K001-381185/09/23
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 June 30, 2023 has been formatted in Inline XBRL.
X
*Management contract or compensatory plan or arrangement
^Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the SEC.
** 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.
29

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: August 3, 2023
By:/s/ Bret Christensen
Bret Christensen
Chief Executive Officer
(Principal Executive Officer)
Date: August 3, 2023
By:/s/ Kevin Sun
Kevin Sun
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
EX-3.1 2 dmtkex31amendedandrestated.htm EX-3.1 Document

Exhibit 3.1


AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

CONSTELLATION ALPHA CAPITAL CORP.

(originally incorporated on August 27, 2019 under the name Constellation Alpha Capital Corp.)

FIRST: The name of the Corporation is DermTech, Inc.

SECOND: The address of the Corporation’s registered office in the State of Delaware is 251 Little Falls Drive, in the City of Wilmington, County of New Castle 19808. The name of its registered agent at such address is Corporation Service Company.

THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of all classes of stock that the Corporation shall have authority to issue is 55,000,000 shares, consisting of (i) 50,000,000 shares of Common Stock, $0.0001 par value per share (“Common Stock”), and (ii) 5,000,000 shares of Preferred Stock, $0.0001 par value per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

A. COMMON STOCK.

1.General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series.

2.Voting. The holders of the Common Stock shall have voting rights at all meetings of stockholders, each such holder being entitled to one vote for each share thereof held by such holder; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (which, as used herein, shall mean the certificate of incorporation of the Corporation, as amended from time to time, including the terms of any certificate of designations of any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation. There shall be no cumulative voting.

The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

3.Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend or other rights of any then outstanding Preferred Stock.

4.Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential or other rights of any then outstanding Preferred Stock.




B. PREFERRED STOCK.

Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law.

Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate of designations relating thereto in accordance with the General Corporation Law of the State of Delaware, to determine and fix the number of shares of such series and such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to any other series of Preferred Stock to the extent permitted by law.

The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority of the voting power of the capital stock of the Corporation entitled to vote thereon, voting as a single class, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

FIFTH: Except as otherwise provided herein, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation.

SIXTH: In furtherance and not in limitation of the powers conferred upon it by the General Corporation Law of the State of Delaware, and subject to the terms of any series of Preferred Stock, the Board of Directors shall have the power to adopt, amend, alter or repeal the By-laws of the Corporation by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. The stockholders may not adopt, amend, alter or repeal the By-laws of the Corporation, or adopt any provision inconsistent therewith, unless such action is approved, in addition to any other vote required by this Certificate of Incorporation, by the affirmative vote of the holders of at least seventy-five percent (75%) of the votes that all the stockholders would be entitled to cast in any annual election of directors or class of directors. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article SIXTH.

SEVENTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the General Corporation Law of the State of Delaware is amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended.

EIGHTH: The Corporation shall provide indemnification as follows:

1.Actions, Suits and Proceedings Other than by or in the Right of the Corporation. The Corporation shall indemnify each person who was or is a party or threatened to be made a party to any threatened, pending or completed






action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), liabilities, losses, judgments, fines (including excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974), and amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

2.Actions or Suits by or in the Right of the Corporation. The Corporation shall indemnify any Indemnitee who was or is a party to or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made under this Section 2 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless, and only to the extent, that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses (including attorneys’ fees) which the Court of Chancery of Delaware or such other court shall deem proper.

3.Indemnification for Expenses of Successful Party. Notwithstanding any other provisions of this Article EIGHTH, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article EIGHTH, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, Indemnitee shall be indemnified against all expenses (including attorneys’ fees) actually and reasonably incurred by or on behalf of Indemnitee in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to Indemnitee, (ii) an adjudication that Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by Indemnitee,

(iv)an adjudication that Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that Indemnitee had reasonable cause to believe his or her conduct was unlawful, Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

4.Notification and Defense of Claim. As a condition precedent to an Indemnitee’s right to be indemnified, such Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee for which indemnity will or could be sought unless the Corporation has confirmed to the Indemnitee that it is aware of such action, suit, proceeding or investigation and that indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to Indemnitee. After notice from the Corporation to Indemnitee of its election so to assume such defense, the Corporation shall not be liable to Indemnitee for any legal or other expenses subsequently incurred by Indemnitee in connection with such action, suit, proceeding or investigation, other than as provided below






in this Section 4. Indemnitee shall have the right to employ his or her own counsel in connection with such action, suit, proceeding or investigation, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) counsel to Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and Indemnitee in the conduct of the defense of such act