Dermata Therapeutics, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly those under “Risk Factors.” CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to: ● our lack of operating history; ● the expectation that we will incur significant operating losses for the foreseeable future and will need significant additional capital; ● the expectation that any planned OTC formulation, dosage, combination, or indications fall inside the scope of an applicable OTC monograph, will not require a new drug application, and are otherwise not challenged by FDA, state boards, or other regulators, any of which could delay or prevent launch or require reformulation, relabeling, additional testing, or other corrective actions; ● the possibility that positive clinical data generated in the Rx setting are not predictive of consumer experience or commercial performance in the OTC context, and the limits such data may impose on the scope of permissible OTC claims; ● our ability to timely secure and scale manufacturing, packaging, and quality systems suitable for OTC commercialization, including meeting lot release, stability, shelf life, and container-closure requirements, and to manage product returns, recalls, or withdrawals if quality issues arise; ● our ability to successfully execute our strategic pivot from Rx to OTC, including our capacity to design, formulate, manufacture, package and distribute products that comply with applicable federal, state and international OTC requirements and standards, including FDA OTC monographs, current good manufacturing practices applicable to OTC products, labeling and Drug Facts requirements, and other enforcement policies; ● our ability to establish and maintain distribution and sales channels, including direct-to-consumer e-commerce, professional/clinic channels, and any retail partners, and to manage channel economics, chargebacks, returns, and working capital needs; 22 ● our current and future capital requirements to support our development and commercialization efforts for our product candidates and our ability to satisfy our capital needs; ● our dependence on our product candidates, which are not yet available for commercial sale; ● our ability to acquire sufficient quantities of raw material needed to manufacture our product candidates; ● our, or that of our third-party manufacturers, ability to manufacture cGMP quantities of our product candidates as required for clinical trials and, subsequently, our ability to manufacture commercial quantities of our product candidates for commercial sale; ● our lack of a sales and marketing organization and our ability to effectively commercialize our product candidates, including in connection with our recent pivot to the OTC market; ● our dependence on third parties to manufacture our product candidates; ● our ability to maintain or protect the validity of our intellectual property; ● our ability to internally develop new inventions and intellectual property; ● interpretations of current laws and the passages of future laws; ● impacts of increased trade tariffs, import quotas or other trade restrictions or measures taken by the United States and other countries, including the recent and potential changes in U.S. trade policies that have been and may be made by the Trump presidential administration; ● acceptance of our business model by investors; ● the accuracy of our estimates regarding expenses and capital requirements; ● the accuracy of our estimate forecast for future commercial sales of our product candidates; ● our ability to adequately support organizational and business growth; and ● other factors discussed in our most recent Annual Report on Form 10-K. The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith, and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs, or projections will result or be achieved or accomplished. 23 Overview We are a scientific leader in dermatology dedicated to the development and commercialization of products that address common and underserved skin conditions. In March 2025, we announced that we achieved statistically significant results from our Phase 3 STAR-1 clinical trial of XYNGARI™, formerly our lead prescription (“Rx”) candidate incorporating our Spongilla technology for moderate-to-severe acne. XYNGARI™ demonstrated statistically significant results across all three co-primary endpoints at weeks 4, 8, and 12 when compared with placebo. Following the successful completion of the STAR-1 trial, we conducted a full assessment of the Rx landscape and the continued Rx development pathway for XYNGARI™. In September 2025, after an extensive review of current trends in dermatology, changing patient preferences, and go-to market costs, management, with support from the our board of directors, determined that a strategic shift to developing and distributing OTC pharmaceutical dermatology products that are backed by science would be a better path to commercialization with potentially greater financial upside. We believe we can leverage the data generated with our Spongilla technology to create OTC pharmaceutical products that are effective and that patients want to use. This repositioning should accelerate our path to commercialization, reduce our regulatory burden, and decrease company expenses, all while being able to address broader consumer segments in the dermatology space. We believe the dermatology market, from both an OTC and Rx perspective, has seen a substantial shift over the last few years, with an increasing trend of consumers first relying on OTC treatments for common dermatological diseases and conditions such as acne vulgaris (or “acne”), psoriasis vulgaris (or “psoriasis”), and acne rosacea (or “rosacea”), among others. Common dermatology issues, like acne with over 50 million patients in the U.S., are well known by patients with extensive publicly available information and thus patients are more willing to treat these diseases with OTC offerings prior to seeing a dermatologist. Over 70% of patients with acne first choose to try OTC products and wait at least one year before scheduling a visit with a dermatologist. Additionally, due to the lower price point for OTC products, a desire for self-administration, difficulty getting appointments with dermatologists, and enhanced convenience, many consumers are first relying on OTC products to fill their treatment needs. We believe that we can apply the clinical knowledge we’ve gained over the last ten years to design products that incorporate OTC pharmaceutical ingredients with our Spongilla technology to offer patients easy access to affordable and effective OTC treatments for acne, psoriasis, seborrheic dermatitis and other skin diseases and conditions. While this is a major shift in strategy for our company, we believe it is the best path forward to meet our mission of providing patients with efficacious and safe treatment options. We are currently working with a branding agency to build a new brand identity for our OTC treatments, that represents our core values of providing patients skin care products that are natural but scientifically proven to work. We believe this new brand identity will bridge the gap between Rx therapies and OTC pharmaceutical products, allowing patients to take control of their skin care needs and feel confident about the treatment outcomes of the products we plan to offer. As part of this new brand identity, we will be developing visual and verbal identities that bring to life the core essence of the new brand, which incorporates scientifically backed technology that targets the underlying causes of skin diseases with a consumer-friendly approach. We want customers to experience the efficacy and safety we saw in our previous clinical studies and to feel proud of their skin after using our products. We plan to develop and distribute a variety of OTC products that are backed by science but are easily accessible by patients who are more comfortable treating their skin problems independently with readily available OTC therapies. Our core values will remain unchanged during this strategic shift as we strive to provide patients with affordable, safe, and effective treatment options, but now they can directly order our products rather than having to see a physician to be prescribed treatment. We believe patients are seeking greater flexibility and freedom in treating their skin as a majority of patients first turn to OTC products before seeing a dermatologist. With the continued regulatory oversight of the OTC marketplace, patients should maintain confidence in the OTC therapies they can purchase without a prescription. We view this shift in consumer preferences as a significant benefit for the research we have completed to date. Over the past several years we have gained substantial knowledge of various dermatology diseases and what seems to work in treating these diseases. We plan to leverage this knowledge in creating a whole product line of skin care treatments that patients can access directly. We plan to launch our first product in the middle of 2026 which will consist of a once-weekly, topical acne kit that can be used by patients with mild, moderate, or severe acne. We have gained tremendous understanding of our Spongilla technology over the past 8 years and deeply understand the benefits of it being combined with OTC monograph active ingredients to topically treat a variety of dermatological conditions. Our Spongilla technology is derived from a naturally grown freshwater sponge, Spongilla lacustris or Spongilla , which is processed into a fine, purified powder and mixed with a fluidizing agent immediately prior to application by the patient. Spongilla is a unique freshwater sponge that only grows in commercial quantities in select regions of the world and under specific environmental conditions, all of which give our Spongilla technology its distinctive anti-microbial, anti-inflammatory, and mechanical properties. The combination of these environmental conditions, the proprietary harvesting protocols developed with our exclusive supplier, and our post-harvest processing procedures produce an ingredient that optimizes the mechanical components as well as the organic components, while eliminating any harmful bacteria that could be found in a freshwater sponge. We believe these unique components used in tandem with an OTC monograph active ingredient could produce a superior OTC product candidate unlike anything currently on the market. We plan for our product candidates to have multiple mechanisms of action for the treatment of skin diseases and conditions. 24 Prior to our strategic switch to develop and distribute OTC pharmaceutical products, our U.S. Food and Drug Administration (“FDA”) investigational new drug applicant, XYNGARI™, was intended to utilize our Spongilla technology as a stand-alone product for the once weekly treatment of a variety of skin diseases, with our initial focus being the treatment of moderate to severe acne. In March 2025, we announced that our XYNGARI™ Phase 3 S pongilla T reatment of A cne R esearch (“STAR-1”) trial topline data met all co-primary endpoints at week 12. XYNGARI™ demonstrated highly statistically significant difference compared with placebo for all primary endpoints after 12 weeks of once weekly treatments. XYNGARI™ patients saw a rapid and sustained therapeutics treatment effect in absolute reduction in inflammatory lesion counts with a -11.4 lesion reduction at week four, -14.7 lesion reduction at week 8, and -16.8 lesion reduction at week 12 compared to -8.6, -10.9, and -13.1 lesion reduction for placebo at weeks 4, 8, and 12, respectively. XYNGARI™ patients also saw a rapid and sustained therapeutics treatment effect in absolute reduction in noninflammatory lesion counts with a -12.4 lesion reduction at week four, -15 lesions reduction at week 8, and -17.3 lesion reduction at week 12 compared to -8.8, -10.4, and -12.4 lesion reduction for placebo at weeks 4, 8, and 12, respectively. Lastly, we observed a sustained therapeutics treatment effect as measured in the investigator’s global assessment (IGA) of acne scale. IGA is measured on a 5-point scale (0-4), with 4 being severe, 3 being moderate, 2 being mild, 1 being almost clear and 0 being clear. To be considered a responder, patients had to achieve a score of 0 (clear) or 1 (almost clear). There were 11.9% of XYNGARI™ patients that were considered a responder at week four, 21.6% of XYNGARI™ patients being considered a responder at week 8, and 29.4% of XYNGARI™ patients being considered a responder at week 12 compared to 6.2%, 8.0%, and 15.2% of placebo patients being considered a responder at weeks 4, 8, and 12, respectively. In fact, approximately 80% of the XYNGARI™ patients had at least a 1-grade change in their acne at the end of the study. The Phase 3 STAR-1 trial was double-blind, randomized, placebo controlled, and enrolled 520 patients with moderate-to-severe acne, age 9 years or older across sites in the United States and Latin America. The co-primary endpoints included absolute reduction in inflammatory and noninflammatory lesion counts and the improvement in investigators global assessment (“IGA”) of acne. Patients were treated once a week for 12 weeks with either XYNGARI™ or placebo and were evaluated monthly. While we saw positive results from the STAR-1 study, after evaluating the prescription dermatology market and regulatory hurdles for approval, we made the strategic decision to withdraw our investigational new drug application (“IND”) for XYNGARI™ for the treatment of acne. We believe this strategic decision will provide us greater flexibility to leverage the many novel features and benefits of our Spongilla technology in a variety of skin care products for the OTC marketplace. We are currently finalizing the components and container closure for our initial acne kit, as well as completing the brand identity, with an expected launch in the middle of 2026. The acne kit will be a topical product applied once weekly by patients at home or in a dermatology or esthetician’s office. The product will utilize one active ingredient from FDA’s OTC acne monograph, which consist of OTC drugs that are generally recognized by FDA as safe and effective, in predefined doses, for specific therapeutic categories. These OTC active ingredients can be used alone or in combination with other ingredients and marketed as a treatment for various skin diseases or conditions, like acne. For our initial acne kit we plan on incorporating salicylic acid as the active ingredient in combination with our unique Spongilla technology to distribute a novel acne treatment kit we believe is unlike anything currently on the market. Based on years of testing we have learned that our Spongilla technology has a unique combination of mechanical components and chemical components, that provide unique benefits against various skin conditions. The mechanical components of the Spongilla powder consist of many microscopic siliceous, needle-like spicules that, when massaged into the skin, penetrate the stratum corneum (the skin’s outermost protective layer) and create microchannels into the dermis where pro-inflammatory cytokines and bacteria reside. We believe that the penetration of the spicules also leads to the opening of microchannels, which allow oxygen to enter pilosebaceous glands, helping to kill C. acnes , which grow in an anaerobic (without oxygen) environment ( C. acnes are the bacteria that cause inflammatory lesions in acne patients). The spicules also cause turnover of the top layer of dead skin, thereby increasing collagen production resulting in skin rejuvenation. Additionally, we believe the newly created microchannels provide a conduit for Spongilla powder’s naturally occurring chemical compounds to be delivered to the dermis and pilosebaceous glands, helping to kill the C. acnes and reduce inflammation. In addition to anti-microbial compounds, the Spongilla powder also appears to have anti-inflammatory chemical compounds, as demonstrated during in vitro experiments, that inhibit inflammation through the reduction of C.acnes stimulated IL-8 production and by inhibiting IL-17A and IL-17F expression in human cell lines. Also, during in vitro studies of Spongilla powder’s organic compounds, we observed the inhibition of the lipogenesis of sebocytes, which may translate to a reduction in sebum (an oily and waxy substance produced by the human body’s sebaceous glands) production and the oiliness of the skin in patients. We believe the combination of an FDA approved OTC active ingredient with the multiple biological and mechanical effects of our Spongilla technology could be important factors in treating multiple inflammatory skin diseases. 25 On January 17, 2025, we entered into a Clinical Trial Collaboration Agreement (the “Collaboration Agreement”) with Revance Therapeutics, Inc. (“Revance”) where we intended to conduct a Phase 2a clinical trial to evaluate the topical application of XYNGARI™ followed by the topical application of DAXXIFY® for the treatment of primary axillary hyperhidrosis. In light of our recent strategic shift to develop and distribute OTC pharmaceutical products, we plan to continue to discuss future opportunities for this collaboration with Revance. At this time, the initiation of the Phase 2a clinical trial has been placed on hold. We still believe there is a potential to utilize our Spongilla technology for the topical delivery of botulinum toxin, but with our strategic decision to withdraw the XYNGARI™ IND, we are currently evaluating the regulatory and commercial opportunities for this program. While the initiation of the Phase 2a clinical study is on hold, we continue to evaluate alternative ways to leverage our Spongilla technology as a novel platform to enhance the topical delivery of large-molecules, like botulinum toxin, as a needle-free alternative to conventional intradermal injection of large molecules for medical and aesthetic skin conditions. Typically, for facial aesthetics, botulinum toxins are injected into facial muscles to reduce forehead, lateral canthal, and glabella deep lines. While currently only approved for the treatment of axillary hyperhidrosis, intradermal injections of botulinum toxin primarily affect neuromodulatory at the level of cutaneous nerves, sweat glands, and superficial muscle fibers, not via deep muscular paralysis as with intramuscular injections. However, there have been many studies conducted with intradermal injections of botulinum toxin for various aesthetic and medical skin conditions, showing its broad potential application. This is because the mechanism of action of botulinum toxin in the dermis acts to block acetylcholine release from the presynaptic nerve terminals. The primary effects are 1) reduced cholinergic activity (eccrine glands reduce sweating, sebaceous glands reduce sebum production, arrector pili and superficial muscle fibers reduce fine wrinkling resulting in smoother skin), 2) modulation of sensory nerves leading to a reduction in neurogenic inflammation, itching, and erythema (redness), and 3) indirect skin-tightening due to mild reduction of superficial muscle tone and possible microvascular effects. Intradermal injections of botulinum toxin have also shown cosmetic effects, including skin smoothing through reducing pore size, reducing fine lines, and a mild lifting effect from dermal tightening and reducing oil and sweat reduction. However, due to the difficulty, pain, and time-consuming nature of intradermal injections, there still remains few approved or widely practiced treatment options. We believe our Spongilla technology can increase the number of intradermal uses for botulinum toxin by leveraging the unique microstructure of our Spongilla technology, to create microchannels into the dermis, enabling improved dermal penetration of botulinum toxins (i.e. Botox ® ). Using our microstructures to create microchannels into the dermis avoids the need to give multiple intradermal injections, which can be painful for patients and very time consuming for the dermatologist or esthetician. Additionally, our technology can allow for broad coverage of larger surface areas of the skin, which we believe will provide a better field effect of the botulinum toxin We plan to leverage this platform for broad applicability across dermatologic and aesthetic skin conditions, potentially allowing dermatologists and estheticians to increase uses for the intradermal delivery of botulinum toxin. We believe this non-invasive approach could meaningfully expand the therapeutic and aesthetic utility of botulinum toxin for conditions such as axillary, palmar and plantar hyperhidrosis, acne, acne scars, rosacea, and improved skin aesthetics (including improvements in skin luminosity and brightness, reducing pore size and number of pores, reducing fine lines, and reducing skin oiliness by decreasing sebum production). Our initial clinical proof-of-concept studies using our Spongilla technology have demonstrated the ability to deliver botulinum toxin into the dermis for improvement in facial aesthetics and reduction in sweat production in patients with primary axillary hyperhidrosis. We plan to continue to explore additional uses for this platform and look forward to getting our technology in the hands of estheticians and dermatologists so they may better serve their patients. 26 We have a limited operating history. Since our inception, our operations have focused on developing XYNGARI™ and DMT410, our topical botulinum toxin program, organizing and staffing our company, raising capital, establishing our supply chain and manufacturing processes, further characterizing the multiple mechanisms of action of our Spongilla technology, building an intellectual property portfolio, and conducting non-clinical and clinical trials. We do not have any product candidates approved for marketing and have not generated any revenue from product sales. We have funded our operations primarily through the sale of our equity securities and debt securities. Since inception, we have raised an aggregate of approximately $77.5 million of gross proceeds from the sale of our debt and equity securities. We have not generated any revenue to date and have incurred significant operating losses. Our net losses were $5.7 million and $9.1 million for the nine months ended September 30, 2025, and 2024, respectively. As of September 30, 2025, we had an accumulated deficit of $71.4 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our future activities, as we: ● develop OTC pharmaceutical kits for the treatment of acne; ● prepare for commercial launch of OTC pharmaceutical kits for the treatment of acne, including hiring additional marketing personnel; ● continue development of DMT410 for the treatment of aesthetic and medical skin conditions, including proof of concept clinical trials; ● manufacture our product candidates for commercial sale; ● hire additional research and development and selling, general and administrative personnel; ● maintain, expand, and protect our intellectual property portfolio; and ● incur additional costs associated with operating as a public company. We will need additional financing to support our operations. We may seek to fund our operations through public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital when needed or on favorable terms would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so. OTC Pharmaceutical Requirements We plan to develop and distribute OTC pharmaceutical products, such as topical acne products, that are subject to FDA and foreign regulation. Under the U.S. OTC monograph system, OTC pharmaceutical products that meet established conditions are generally recognized as safe and effective and do not require the submission and approval of a new drug application. The FDA OTC monographs include well-known ingredients and specify requirements for permitted indications, required warnings and precautions, allowable combinations of ingredients and dosage levels. Pharmaceutical products marketed under the OTC monograph system must conform to specific quality, formula, and labeling requirements. Following the passage of the CARES Act, FDA is updating and working to finalize current monographs. All facilities where OTC pharmaceutical products are manufactured, tested, packaged, stored or distributed must comply with current Good Manufacturing Practices (“cGMP”) regulations and/or regulations promulgated by competent authorities in the countries where the facilities are located. All of our pharmaceutical products are manufactured, tested, packaged, stored and distributed according to cGMP regulations. The FDA performs periodic audits to ensure that our facilities remain in compliance with all appropriate regulations. The failure of a facility to be in compliance may lead to a breach of representations made to customers or to regulatory action against us related to the products made in that facility, such as seizure, injunction or recall. Serious product quality concerns could also result in governmental actions against us that, among other things, could result in the suspension of production or distribution of our products, product seizures, loss of certain licenses or other governmental penalties, and could have a material adverse effect on our financial condition or operating results. We are required to report serious adverse events associated with the use of our OTC pharmaceutical products marketed in the U.S. and other countries where such products are sold. We cannot predict whether new legislation regulating our activities will be enacted or what effect any legislation would have on our business. OTC Pharmaceutical Pre- and Post-market Regulation Before and after an OTC pharmaceutical product is commercialized, numerous regulatory requirements apply, including: ● international quality system regulations, including those of the FDA and other regulatory authorities, impose cGMP requirements governing the methods used in, and the facilities and controls used for, the design, manufacture, packaging, servicing, labeling, storage, installation, and distribution of all finished OTC pharmaceuticals intended for human use; 27 ● global standards and regulations affecting product design and development, including requirements to keep existing products current to the “state of the art,” and doing an ongoing assessment of the risk acceptability, adopting risk control measures where appropriate, and re-assessing the clinical benefit; ● labeling regulations, including a prohibition on product promotion for unapproved or “off label” uses; ● the drug reporting regulation requiring a manufacturer to report to the regulatory authorities if its drug may have caused or contributed to a death or serious injury in a way that would likely cause or contribute to a death or serious injury if it were to recur and ongoing post-market surveillance of the product and like-products to continuously evaluate the benefit/risk over the life of the product; and ● regulations on corrections and removals which require a manufacturer to report recalls and field actions to the regulatory authorities if initiated to reduce a risk to health posed by the device or to remedy a violation of the applicable laws. Recent Developments On July 15, 2025, we held our annual meeting of stockholders at which time our stockholders approved the adoption of an amendment to our Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of its issued and outstanding shares of Common Stock, at a specific ratio, ranging from one-for-two to one-for-thirty, with the exact ratio determined by our board of directors without further approval or authorization of its stockholders. On August 1, 2025, we effected the reverse split of our shares of Common Stock at a ratio of 1-for-10, as approved by our board of directors, with no adjustment to par value. All issued and outstanding shares of Common Stock and per share amounts contained in our financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented. On September 10, 2025, we announced a strategic pivot to shift our focus to developing and distributing OTC pharmaceutical products for the dermatology market. We plan to focus on developing and launching multiple products that can be sold directly to consumers to treat their various skin diseases and conditions. We believe this strategic shift, through leveraging the FDA’s OTC monograph pathway, could accelerate our ability to launch a commercial dermatology product, reduce our regulatory burden, and give us access to a broader consumer market. We are currently working with a branding agency to develop the commercial launch strategy while also beginning the manufacturing process for our initial product launch, which we expect to occur in the middle of 2026. 28 ATM Agreement In June 2024, we entered into the ATM Agreement with H.C. Wainwright & Co., LLC , as Sales Agent, pursuant to which we may offer and sell, from time to time through Sales Agent, shares of our Common Stock for aggregate proceeds of up to $1,662,761 (upon the terms and subject to the conditions and limitations set forth in the ATM Agreement). In 2024, we sold 55,001 shares of Common Stock under the ATM Agreement, for net proceeds of $1.4 million after deducting $0.2 million of compensation to Sales Agent and other administration fees. During the nine months ended September 30, 2025, we sold no shares of Common Stock under the ATM Agreement. On November 7, 2025, we filed a prospectus supplement, pursuant to which we may offer and sell, from time to time through Sales Agent, shares of our Common Stock for aggregate proceeds of an additional $1,792,315 (upon the terms and subject to the conditions and limitations set forth in the ATM Agreement). As of the date of this filing, we have not sold any additional shares under the ATM Agreement. Critical Accounting Policies and Use of Estimates We have based our management’s discussion and analysis of financial condition and results of operations on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully discussed in Note 2 - Summary of Significant Accounting Policies to our unaudited financial statements contained within this Form 10-Q, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. Research and Development Expenses To date, our research and development expenses have been related to the clinical development and manufacturing costs of our product candidates. Research and development expenses include salaries and related expenses for personnel, including stock-based compensation, as well as external party costs for clinical, nonclinical, and manufacturing of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development estimates will be subject to change as additional information becomes available. In March 2025, we announced topline results from our Phase 3 STAR-1 clinical trial and we completed the trial in the second quarter of 2025. We expect that research and development costs will decrease in fiscal year 2026 as we will no longer conduct FDA-regulated clinical trials under IND for NDA, and the cost of manufacturing OTC products is significantly less than manufacturing FDA-regulated products. Selling, General and Administrative Costs Selling, general and administrative expenses consist primarily of salaries, benefits, stock-based compensation for personnel in executive, finance, business development, marketing and other corporate administrative functions. Selling, general and administrative expenses also include pre-commercial launch activities prior to product launch, including marketing expenses, legal fees incurred relating to corporate and patent matters, professional fees incurred for accounting, auditing, tax and administrative consulting services, and insurance costs. We expect our selling, general and administrative expenses to increase in 2026. The increase in expenses is due to our planned launch of our first product candidate in mid-2026, including the development and commencement of our marketing campaigns and initiatives, the hiring of marketing personnel and engagement of consultants to support full commercialization activities, and the addition of programs to support commercialization activities. We expect to continue to incur audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, board of director fees, investor relations costs associated with operating as a public company, patent costs and defense, and general and administrative personnel. 29 Warrants We perform an assessment of warrants upon issuance to determine their proper classification in the financial statements based upon the warrant’s specific terms, in accordance with the authoritative guidance provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) , and ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”) . The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480 and whether the warrants meet all of the requirements for equity classification under ASC 815-40, including whether the warrants are indexed in our own Common Stock and whether the warrant holders could potentially require cash settlement of the warrants. For issued or modified warrants that meet all the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be liability-classified and recorded at their initial fair value on the date of issuance and remeasured at fair value at each balance sheet date thereafter. We have performed an assessment of all warrants issued and modified and determined that our warrants are equity classified. Fluctuations in Operating Results Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the progress and timing of expenditures related to the development and commercialization of our product candidates. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance. Results of Operations Three Months Ended September 30, 2025, and 2024 The following table summarizes our results of operations for the periods presented: Three Months Ended September 30, 2025 2024 Difference Operating expenses: Research and development $ 504,387 $ 2,401,359 $ (1,896,972 ) Selling, general and administrative 1,256,284 824,294 431,990 Total operating expenses 1,760,671 3,225,653 (1,464,982 ) Losses from operations (1,760,671 ) (3,225,653 ) 1,464,982 Other income and expenses: Interest income, net 68,682 52,497 16,185 Net loss $ (1,691,989 ) $ (3,173,156 ) $ 1,481,167 Research and Development Expenses Research and development expenses decreased by $1.9 million from $2.4 million for the three months ended September 30, 2024, to $0.5 million for the three months ended September 30, 2025. The decrease in research and development expenses resulted from $1.9 million of decreased clinical expenses from the XYNGARI™ STAR-1 acne study, which completed enrollment during the fourth quarter of 2024 and completed expenses during the second quarter of 2025. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $0.4 million from $0.8 million for the three months ended September 30, 2024, to $1.3 million for the three months ended September 30, 2025. The increase in selling, general and administrative expense was the result of $0.5 million of increased marketing expenses, as we are preparing for our first product launch in mid-2026, partially offset by $0.1 million of decreased audit fees. 30 Nine Months Ended September 30, 2025, and 2024 The following table summarizes our results of operations for the periods presented: Nine Months Ended September 30, 2025 2024 Difference Operating expenses: Research and development $ 2,403,363 $ 6,011,201 $ (3,607,838 ) Selling, general and administrative 3,469,842 3,301,753 168,089 Total operating expenses 5,873,205 9,312,954 (3,439,749 ) Loss from operations (5,873,205 ) (9,312,954 ) 3,439,749 Other income and expenses: Interest expense, net 176,536 176,431 105 Net loss $ (5,696,669 ) $ (9,136,523 ) $ 3,439,854 Research and Development Expenses Research and development expenses decreased by $3.6 million from $6.0 million for the nine months ended September 30, 2024, to $2.4 million for the nine months ended September 30, 2025. The decrease in research and development expenses resulted from approximately $3.6 million of decreased clinical expenses from the XYNGARI™ STAR-1 acne study, which completed enrollment during the fourth quarter of 2024. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $0.2 million from $3.3 million for the nine months ended September 30, 2024, to approximately $3.5 million for the nine months ended September 30, 2025. The increase in selling, general and administrative expense was the result of $0.5 million of increased marketing expenses partially offset by $0.3 million of decreased audit fees. We expect marketing expenses to increase as we are preparing for our first product launch in mid-2026. Cash Flows The following table summarizes our cash flows from operating and financing activities: Nine Months Ended September 30, 2025 2024 Statements of cash flows data: Total net cash provided by (used in): Operating activities $ (6,428,362 ) $ (8,249,334 ) Financing activities $ 7,930,919 $ 6,954,951 Increase (decrease) in cash and cash equivalents $ 1,502,557 $ (1,294,383 ) Operating activities Cash used in operations of $6.4 million for the nine months ended September 30, 2025, was the result of the net loss of $5.7 million and decreases in accounts payable and accrued expenses and other current liabilities of $0.8 million, partially offset by non-cash stock-based compensation of $0.1 million. Cash used in operations of $8.2 million for the nine months ended September 30, 2024, was the result of the net loss of $9.1 million, offset by increases in non-cash stock-based compensation of $0.6 million and increases in accrued expenses of $0.3 million. 31 Financing activities Cash provided by financing activities of $7.9 million for the nine months ended September 30, 2025, was primarily the result of the January 2025 PIPE financing which raised net proceeds of approximately $2.2 million, and the March 2025 Inducement financing which raised net proceeds of $5.7 million. Cash provided by financing activities of approximately $7.0 million for the nine months ended September 30, 2024, was the result of the September 2024 PIPE financing which raised net proceeds of $3.1 million, sales of the Company’s shares through the ATM Agreement which raised net proceeds of $1.4 million during the third quarter of 2024, and the May 2024 warrant inducement financing which raised net proceeds of $2.3 million. Liquidity and Capital Resources Since our inception, we have incurred net losses and have not generated any revenue. As of September 30, 2025, our cash and cash equivalents totaled $4.7 million, and we had an accumulated deficit of $71.4 million. For the nine months ended September 30, 2025, and the year ended December 31, 2024, we used cash of $6.4 million and approximately $11.1 million, respectively, in operations. We expect our cash resources to fund operations into the second quarter of 2026. We anticipate that we will continue to incur net losses for the foreseeable future, or until product candidate revenues exceed operating expenses, which timing is uncertain at this time. Historically, our principal sources of cash have included proceeds from the issuance of equity and proceeds from the issuance of debt. Our principal use of cash has been cash used in operations. Our projected principal uses of cash for the next 12 months are the following expected activities related to our OTC product launch, which is expected in mid-2026: ● product formulation optimization, bench testing, and small-scale manufacturing runs; ● packaging development, consumer product testing, brand development, and marketing activities in preparation for commercial launch; ● ongoing research and development related to additional OTC product launches; and ● general working capital requirements. We expect that selling, general and administrative expenses, including marketing, will continue to grow, and therefore, we will need to raise additional capital to sustain operations until we can generate operating income. Funding Requirements We are focused on preparing for the launch of our first commercial OTC product, a monthly kit containing four weekly acne treatments, which is planned for mid-2026, based on our current operating plan and anticipated expenditures associated with formulation and pre-commercial activities. We anticipate we will incur net losses for the next several years until we can generate sufficient operating income from our OTC products. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, marketing, external manufacturing, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the potential income generated from revenues related to our OTC product candidates. In addition, we may seek opportunities to identify, acquire or in license and develop additional drug candidates, potentially build commercial capabilities, and expand our corporate infrastructure. We believe that our existing cash and cash equivalents will be sufficient to fund our operating expenses into the second quarter of 2026. We have based this estimate of cash runway on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we expect. We anticipate that we will continue to incur net losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern for the one-year period following the date that these financial statements were issued. 32 Based on our recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and the need to raise additional capital to finance future operations, we are developing plans to mitigate this risk, which may consist of raising additional capital through some combination of equity or debt financings, and/or potentially new collaborations, business transactions, and reducing cash expenditures. If we are not able to secure adequate additional funding, we may be forced to make significant reductions in our operations and the pursuit of our growth strategy. In that event, we may have to delay, scale back, or eliminate some or all of our research and development programs and activities which could adversely affect our business prospects, or we may be unable to continue operations. We may raise additional capital through the sale of equity or convertible debt securities. In such an event, the terms of these securities may include liquidation or other preferences that adversely affect the rights of the holders of our Common Stock. Our future funding requirements will depend on many factors, including: ● the number and characteristics of the product candidates we pursue; ● the scope, progress, results, and costs of researching and developing our product candidates, and conducting any clinical trials; ● the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; ● the cost of manufacturing our product candidates and any candidates we successfully commercialize; ● our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements; ● the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims, including litigation costs and the outcome of such litigation; ● the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future drug candidates, if any; ● revenues derived from the sale of our OTC products, if any; ● pace and cost of product formulation and validation of our OTC acne product; ● timing and scale of commercial launch activities, including digital and retail distribution partnerships; ● cost of manufacturing scale-up and establishing compliant supply chains; and ● extent of marketing and consumer acquisition spending required to gain initial market traction. To continue to grow our business over the longer term, we plan to commit substantial resources to marketing our first OTC product. Additionally, we have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our plan to acquire or in license and develop additional products and product candidates to augment our internal development pipeline. Strategic transaction opportunities that we may pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue development, acquisition or in licensing of approved or development products in new or existing therapeutic areas or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations, or for general corporate purposes. Strategic transactions may require us to raise additional capital through one or more public or private debt or equity financings or could be structured as a collaboration or partnering arrangement. We have no arrangements, agreements, or understandings in place at the present time to enter into any acquisition, in licensing or similar strategic business transaction. 33 Contractual Obligations and Commitments We do not currently own or lease any office space. We enter into contracts in the normal course of business with contract research organizations for research studies and stability testing, contract manufacturing organizations for manufacturing and other services, agencies for branding, marketing, and product design for our first product launch, expected in mid-2026, and others for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material. JOBS Act Accounting Election We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Recent Accounting Pronouncements See Item 1 of Part I, “Notes to Financial Statements — Note 2 — Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.