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2022-04-30

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

Mark One)

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

For the quarterly period ended March 31, 2022

OR

 

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

For the transition period from              to                       

Commission File Number: 001-38118

 

DERMTECH, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

84-2870849

(State or other jurisdiction of

incorporation or organization)

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

11099 N. Torrey Pines Road, Suite 100

La Jolla, CA

92037

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

DMTK

 

The Nasdaq Capital Market

 

 

 

 

 

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

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

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

 

Large accelerated filer

 

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of April 28, 2022, the registrant had 29,940,637 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

1

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

2

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021

3

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

29

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

30

 

Signatures

31

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DERMTECH, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,053

 

 

$

176,882

 

Short-term marketable securities

 

 

54,053

 

 

 

48,449

 

Accounts receivable

 

 

4,995

 

 

 

3,847

 

Inventory

 

 

763

 

 

 

480

 

Prepaid expenses and other current assets

 

 

3,260

 

 

 

3,166

 

Total current assets

 

 

208,124

 

 

 

232,824

 

Property and equipment, net

 

 

5,141

 

 

 

4,549

 

Operating lease right-of-use assets

 

 

23,065

 

 

 

7,744

 

Restricted cash

 

 

3,025

 

 

 

3,025

 

Other assets

 

 

167

 

 

 

167

 

Total assets

 

$

239,522

 

 

$

248,309

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,575

 

 

$

2,880

 

Accrued compensation

 

 

6,643

 

 

 

5,120

 

Accrued liabilities

 

 

3,041

 

 

 

1,227

 

Short-term deferred revenue

 

 

1,350

 

 

 

1,380

 

Current portion of operating lease liabilities

 

 

1,703

 

 

 

1,453

 

Current portion of finance lease obligations

 

 

112

 

 

 

121

 

Total current liabilities

 

 

14,424

 

 

 

12,181

 

Warrant liability

 

 

129

 

 

 

146

 

Long-term finance lease obligations, less current portion

 

 

105

 

 

 

136

 

Operating lease liabilities, long-term

 

 

21,383

 

 

 

6,148

 

Total liabilities

 

 

36,041

 

 

 

18,611

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   March 31, 2022 and December 31, 2021; 29,940,637 and 29,772,922 shares

   issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

440,644

 

 

 

436,183

 

Accumulated other comprehensive loss

 

 

(694

)

 

 

(124

)

Accumulated deficit

 

 

(236,472

)

 

 

(206,364

)

Total stockholders’ equity

 

 

203,481

 

 

 

229,698

 

Total liabilities and stockholders’ equity

 

$

239,522

 

 

$

248,309

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

1


DERMTECH, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

Assay revenue

 

$

3,518

 

 

$

2,190

 

Contract revenue

 

 

200

 

 

 

334

 

Total revenues

 

 

3,718

 

 

 

2,524

 

Cost of revenues:

 

 

 

 

 

 

 

 

Cost of assay revenue

 

 

3,530

 

 

 

1,971

 

Cost of contract revenue

 

 

24

 

 

 

31

 

Total cost of revenues

 

 

3,554

 

 

 

2,002

 

Gross profit

 

 

164

 

 

 

522

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

15,443

 

 

 

6,512

 

Research and development

 

 

6,338

 

 

 

2,251

 

General and administrative

 

 

8,574

 

 

 

5,172

 

Total operating expenses

 

 

30,355

 

 

 

13,935

 

Loss from operations

 

 

(30,191

)

 

 

(13,413

)

Other income/(expense):

 

 

 

 

 

 

 

 

Interest income, net

 

 

66

 

 

 

34

 

Change in fair value of warrant liability

 

 

17

 

 

 

(1,689

)

Total other income/(expense)

 

 

83

 

 

 

(1,655

)

Net loss

 

$

(30,108

)

 

$

(15,068

)

Weighted average shares outstanding used in computing net

   loss per share, basic and diluted

 

 

29,836,072

 

 

 

27,152,868

 

Net loss per share of common stock outstanding, basic and

   diluted

 

$

(1.01

)

 

$

(0.55

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

2


DERMTECH, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Net loss

 

$

(30,108

)

 

$

(15,068

)

Unrealized net (loss)/gain on short-term marketable securities

 

 

(570

)

 

 

9

 

Comprehensive loss

 

$

(30,678

)

 

$

(15,059

)

 

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 stock

 

 

Additional

paid-in

 

 

Accumulated

other

comprehensive

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

deficit

 

 

equity

 

Balance, December 31, 2021

 

 

29,772,922

 

 

$

3

 

 

$

436,183

 

 

$

(124

)

 

$

(206,364

)

 

$

229,698

 

Issuance of common stock from option exercises

   and RSU releases

 

 

109,275

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Issuance of common stock from warrant exercises

 

 

11,101

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Issuance of common stock from Employee Stock

   Purchase Plan

 

 

47,339

 

 

 

 

 

 

515

 

 

 

 

 

 

 

 

 

515

 

Unrealized net loss on short-term marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

(570

)

 

 

 

 

 

(570

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,894

 

 

 

 

 

 

 

 

 

3,894

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,108

)

 

 

(30,108

)

Balance, March 31, 2022

 

 

29,940,637

 

 

$

3

 

 

$

440,644

 

 

$

(694

)

 

$

(236,472

)

 

$

203,481

 

 

 

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

other

comprehensive

 

 

Accumulated

 

 

Total

stockholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

income/(loss)

 

 

deficit

 

 

equity

 

Balance, December 31, 2020

 

 

20,740,413

 

 

$

2

 

 

$

189,868

 

 

$

(1

)

 

$

(128,029

)

 

$

61,840

 

Issuance of common stock at a price of $29.50,

   net of $9.1 million in issuance costs

 

 

4,872,881

 

 

 

1

 

 

 

134,581

 

 

 

 

 

 

 

 

 

134,582

 

Issuance of common stock from option exercises

   and RSU releases

 

 

176,673

 

 

 

 

 

408

 

 

 

 

 

 

 

 

 

408

 

Issuance of common stock from warrant exercises

 

 

3,089,325

 

 

 

 

 

 

72,081

 

 

 

 

 

 

 

 

 

72,081

 

Issuance of common stock from Employee Stock

   Purchase Plan

 

 

39,960

 

 

 

 

 

 

392

 

 

 

 

 

 

 

 

 

392

 

Unrealized net gain on short-term marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,172

 

 

 

 

 

 

 

 

 

2,172

 

Reclassification of warrant liability due to Private

   SPAC Warrants not held by original holder

 

 

 

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

411

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,068

)

 

 

(15,068

)

Balance, March 31, 2021

 

 

28,919,252

 

 

$

3

 

 

$

399,913

 

 

$

8

 

 

$

(143,097

)

 

$

256,827

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

DERMTECH, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(30,108

)

 

$

(15,068

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

372

 

 

 

206

 

Change in fair value of warrant liability

 

 

(17

)

 

 

1,689

 

Amortization of operating lease right-of-use assets

 

 

435

 

 

 

290

 

Stock-based compensation

 

 

3,894

 

 

 

2,172

 

Amortization of premiums, net of accretion of discounts on marketable securities

 

 

713

 

 

 

137

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,148

)

 

 

(374

)

Inventory

 

 

(283

)

 

 

(175

)

Prepaid expenses and other current assets

 

 

(94

)

 

 

62

 

Operating lease liabilities, net

 

 

(271

)

 

 

(10

)

Accounts payable, accrued liabilities and deferred revenue

 

 

161

 

 

 

375

 

Accrued compensation

 

 

1,523

 

 

 

(20

)

Net cash used in operating activities

 

 

(24,823

)

 

 

(10,716

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(13,656

)

 

 

(1,203

)

Maturities of marketable securities

 

 

6,769

 

 

 

1,000

 

Purchases of property and equipment

 

 

(646

)

 

 

(12

)

Net cash used in investing activities

 

 

(7,533

)

 

 

(215

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in connection with public follow-on offering, net

 

 

 

 

 

134,582

 

Proceeds from exercise of common stock warrants

 

 

12

 

 

 

69,923

 

Proceeds from exercise of stock options

 

 

40

 

 

 

408

 

Proceeds from contributions to the employee stock purchase plan

 

 

515

 

 

 

392

 

Principal repayments of finance lease obligations

 

 

(40

)

 

 

(27

)

Net cash provided by financing activities

 

 

527

 

 

 

205,278

 

Net (decrease)/increase in cash, cash equivalents and restricted cash

 

 

(31,829

)

 

 

194,347

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

179,907

 

 

 

24,248

 

Cash, cash equivalents and restricted cash, end of period

 

$

148,078

 

 

$

218,595

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest on finance lease obligations

 

$

3

 

 

$

4

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment recorded in accounts payable

 

$

318

 

 

$

586

 

Reclassification of warrant liability due to Private SPAC Warrants not held by original holder

 

$

 

 

$

411

 

Cashless exercise of common stock warrants

 

$

 

 

$

2,158

 

Right-of-use assets obtained in exchange for lease obligations

 

$

15,755

 

 

$

2,831

 

Change in net unrealized (losses)/gains on short-term marketable securities

 

$

(570

)

 

$

9

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


 

 

DERMTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1.

The Company and a Summary of its Significant Accounting Policies

(a)

Nature of Operations

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

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

From the end of the first quarter of 2020 and through the first quarter of 2022, there has been a widespread worldwide impact from the COVID-19 pandemic. The Company is considered an essential business due to the importance of early melanoma detection, which has allowed the Company’s CLIA laboratory to remain fully operational. The Company implemented additional safety measures in accordance with Centers for Disease Control and Prevention (“CDC”), Occupational Safety and Health Administration (“OSHA”) and other guidance within its CLIA laboratory operations. Additionally, and during this time, the Company transitioned administrative functions to predominantly remote work. Beginning in March 2020 and continuing through the first quarter of 2022, the ongoing COVID-19 pandemic has reduced patient access to clinician offices for in-person testing and reduced access by the Company’s sales force for in-office sales calls, which has resulted in a reduced volume of billable samples received during the first quarter of 2022 relative to the Company’s pre-pandemic expectations. The Company expects the ongoing COVID-19 pandemic to continue to adversely impact billable sample volume until patient access to in-person testing fully resumes, in-office access by the Company’s sales force returns to pre-pandemic levels, or telemedicine options are more widely adopted. Additionally, the ongoing COVID-19 pandemic has negatively affected and may continue to negatively affect the Company’s pharmaceutical customers’ clinical trials. The extent to which the COVID-19 pandemic will effect the Company’s future revenue is uncertain and will depend on the duration and extent of the effects of the ongoing COVID-19 pandemic on the Company’s pharmaceutical customers’ clinical trials.

(b)

Basis of Presentation

The condensed consolidated financial statements include the accounts of DermTech, Inc. and its subsidiaries. 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 Securities and Exchange Commission (“SEC”), 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, 2021. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.

The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the unaudited condensed consolidated financial statements. As of March 31, 2022, 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, 2021.

6


 

 

(c)

Reclassifications

Certain prior period information on the condensed consolidated statement of cash flows has been reclassified to conform to the current year presentation. These reclassifications did not have an impact on net cash flows.

 

(d)

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 assay 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.

 

(e)

Cash, Cash Equivalents and Restricted Cash

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

Restricted cash consists of cash deposited with a financial institution as collateral for the Company’s letters of credit for its facility leases. Restricted cash is classified as noncurrent based on the terms of the underlying lease arrangement.

The following table provides a reconciliation of cash, cash equivalents and restricted cash that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

 

 

Three Months Ended March 31,

2022

 

 

Three Months Ended March 31,

2021

 

 

 

Beginning of

period

 

 

End of

period

 

 

Beginning of

period

 

 

End of

period

 

Cash and cash equivalents

 

$

176,882

 

 

$

145,053

 

 

$

24,248

 

 

$

218,595

 

Restricted cash

 

 

3,025

 

 

 

3,025

 

 

 

 

 

 

 

Total cash, cash equivalents and restricted cash reported

   in the condensed consolidated statements of cash flows

 

$

179,907

 

 

$

148,078

 

 

$

24,248

 

 

$

218,595

 

 

7


 

 

(f)

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation. Property and equipment consists mainly of assets such as leasehold improvements, office, computer and laboratory equipment, including laboratory equipment acquired under finance lease arrangements. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Leasehold improvements are depreciated over the shorter of the remaining term of the lease or the useful life of the asset. The Company recorded depreciation expense of $0.4 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively, which includes amortization of laboratory equipment acquired under finance leases (previously referred to as “capital leases”) of $20,000 and $17,000 for the three months ended March 31, 2022 and 2021, respectively.

Amortization of assets that are recorded under finance leases in depreciation expense is included in cost of revenues on the condensed consolidated statement of operations. Gross assets recorded under finance leases were $0.4 million as of March 31, 2022 and December 31, 2021. Accumulated amortization associated with finance leases were $0.1 million as of March 31, 2022 and December 31, 2021. Maintenance and repairs are expensed as incurred, and material improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the condensed consolidated statements of operations in the period realized. The Company disposed of $8,000 and $0.1 million as of equipment for the three months ended March 31, 2022 and 2021, respectively. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events or changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the three months ended March 31, 2022 and 2021.

(g)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. As of March 31, 2022, the Company maintained $100.1 million in a sweep account, which includes cash balances throughout various interest bearing bank accounts under the $250,000 insurance limit provided by the Federal Deposit Insurance Corporation for one federally insured financial institution. Approximately $14.7 million was held in excess of the Federal Deposit Insurance Corporation insured limit as of March 31, 2022. The Company has not experienced any losses in such accounts.

(h)

Revenue Recognition

The Company’s revenue is generated from two revenue streams: contract revenue and assay revenue. The Company accounts for revenue in accordance with Accounting Standards 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 assay 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 Assay Revenue and then for Contract Revenue.

Assay Revenue

The Company generates revenues from its Pigmented Lesion Assay (“PLA”) and PLAplus (now referred to as the DermTech Melanoma Test) or “DMT” which may consist at the option of the ordering clinician of either (i) the PLA or (ii) the PLA and PLAplus) it provides to healthcare clinicians throughout the United States to assist in a clinician’s diagnosis of melanoma. 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 collection on 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. The DermTech Connect app and telemedicine service were initially beta tested in Florida and is currently available in a limited number of states where permitted by law and applicable standards of practice guidelines.

8


 

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, a final report is drafted and provided to the clinician detailing the test results for the pigmented skin lesion indicating whether the sample collected is indicative of melanoma or not.

Contract Revenue

Contract revenue is generated from the sale of laboratory services and Smart Stickers to third-party companies through contract research agreements. Revenues are generated from providing gene expression tests to facilitate the development of drugs designed to treat dermatologic conditions. The provision of gene expression services may include sample collection using the Company’s Smart Sticker, assay development for research partners, RNA extraction, isolation, expression, amplification and detection, including data analysis and reporting.

 

(a) Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by revenue source during the three months ended March 31, 2022 and 2021, respectively (in thousands):

 

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Assay Revenue

 

 

 

 

 

 

 

 

DermTech Melanoma Test

 

$

3,518

 

 

$

2,190

 

Contract Revenue

 

 

 

 

 

 

 

 

Adhesive patch kits

 

 

66

 

 

 

189

 

RNA extractions

 

 

110

 

 

 

104

 

Project management fees

 

 

24

 

 

 

41

 

   Total revenues

 

$

3,718

 

 

$

2,524

 

 

The following table sets forth the percentages of total revenue or accounts receivable for the Company’s third-party payors and pharmaceutical customers that represent 10% or more of the respective amounts for the periods shown:

 

 

 

Revenue

 

 

Accounts Receivable

 

 

 

Three Months Ended March 31,

 

 

As of March 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Assay Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payor A

 

 

32

%

 

 

32

%

 

 

13

%

 

 

26

%

Payor B

 

*

 

 

 

10

%

 

 

15

%

 

*

 

* Less than 10%

There were no other payors or customers that individually accounted for more than 10% of the total revenue or accounts receivable for the periods shown in the table above.

 

(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 agreements that produce contract revenue, the Company receives a substantial up-front payment and additional payments upon the achievement of various milestones over the life of the agreement. This results in deferred revenue and is relieved upon delivery of the applicable 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 was $1.4 million as of March 31, 2022 and December 31, 2021. 

9


 

Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing agreements. For agreements that have an original duration of one year or less, the Company has elected the practical expedient applicable to such agreements and does not disclose the remaining performance obligations at the end of each reporting period. As of March 31, 2022, 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 approximately $0.1 million. The Company expects to recognize revenue on the majority of these remaining performance obligations over the next two to three years.

(i)

Accounts Receivable

Assay Accounts Receivable

Due to the nature of the Company’s assay revenue, it can take a significant amount of time to collect upon billed 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 $4.7 million and $3.6 million of gross assay accounts receivable as of March 31, 2022 and December 31, 2021, respectively.

Contract Accounts Receivable

Contract accounts receivable are recorded at the net invoice value and are not interest bearing. The Company reserves specific receivables if collectability is no longer reasonably assured, and as of March 31, 2022, 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 $0.3 million and $0.2 million of contract accounts receivable as of March 31, 2022 and December 31, 2021, respectively.

(j)

Net Loss Per Share

Basic and diluted net loss per share 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 three months ended March 31, 2022 and 2021, the outstanding common stock warrants, stock options, 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. Diluted net loss per share of common stock for the three months ended March 31, 2022 excludes the effect of anti-dilutive equity instruments including 723,480 shares of common stock issuable upon the exercise of outstanding common stock warrants and 3,986,965 shares of common stock issuable upon the exercise stock options and release of RSUs. Diluted net loss per share of common stock for the three months ended March 31, 2021 excludes the effect of anti-dilutive equity instruments including 749,770 shares of common stock then issuable upon the exercise of outstanding warrants and 2,495,765 shares of common stock then issuable upon the exercise of stock options and release of RSUs. The Company did not consider a two-class method of loss per share given that the Company’s convertible participating securities do not participate in losses.

10


 

(k)

Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following table provides a summary of the assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

March 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

30,226

 

 

$

 

 

$

 

 

$

30,226

 

Restricted cash

 

 

3,025

 

 

 

 

 

 

 

 

 

3,025

 

Marketable securities, available for sale: