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; ● 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 still in preclinical or early stages of clinical development; ● our, or that of our third-party manufacturers, ability to manufacture cGMP quantities of our product candidates as required for pre-clinical and clinical trials and, subsequently, our ability to manufacture commercial quantities of our product candidates; ● our ability to complete required clinical trials for our product candidates and obtain approval from the FDA or other regulatory agencies in different jurisdictions; ● our lack of a sales and marketing organization and our ability to commercialize our product candidates if we obtain regulatory approval; ● our dependence on third-parties to manufacture our product candidates; ● our reliance on third-party CROs to conduct our clinical trials; ● our ability to maintain or protect the validity of our intellectual property; ● our ability to internally develop new inventions and intellectual property; 24 Table of Contents ● interpretations of current laws and the passages of future laws; ● acceptance of our business model by investors; ● the accuracy of our estimates regarding expenses and capital requirements; ● our ability to adequately support organizational and business growth; and ● the continued spread of COVID-19 and the resulting global pandemic and its impact on our preclinical studies and clinical studies. 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 anticipate 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. Overview We are a clinical-stage medical dermatology company focused on identifying, developing and commercializing innovative pharmaceutical product candidates for the treatment of medical and aesthetic skin diseases and conditions we believe have significant unmet needs. Dermatological diseases such as acne vulgaris (or acne), psoriasis vulgaris (or psoriasis), papulopustular rosacea (or rosacea), hyperhidrosis and various aesthetic indications affect millions of people worldwide each year, and may negatively impact their quality of life and emotional well-being. While there are multiple current treatment options for these indications on the market, we believe that most have significant drawbacks, including cumbersome application regimens and varying negative side effects. While a majority of these indications are first treated with topical products, many patients frequently switch treatments or discontinue treatment altogether due to patient dissatisfaction with slow and modest response rates, early onset of negative side effects, onerous application schedules and typically long duration of therapy. A small percentage of patients may be candidates for biologic or systemic therapies, but these patients are typically required to try topical or oral treatment options prior to qualifying for these expensive systemic therapies. Given the limitation with current topical therapies and the restricted usability of systemic therapies, we believe there is a significant opportunity to address the needs of frustrated patients searching for effective topical products that satisfy their dermatological and lifestyle needs. Our lead product candidate, DMT310, incorporates our proprietary, multifaceted, Spongilla technology to topically treat a variety of dermatological conditions with an expected once-weekly treatment application regimen. DMT310 is a multifactorial, naturally-derived product that is applied once-weekly to treat acne. The product consists of two grams of powder processed from a wholly naturally grown freshwater sponge, Spongilla lacustris or Spongilla , which powder is then mixed with a fluidizing agent immediately prior to application by the patient to form an easily applicable paste. 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 it its distinctive anti-microbial, anti-inflammatory and mechanical properties. The combination of these ideal environmental conditions, the proprietary harvesting protocols developed with our supplier, and our post-harvest processing procedures produce a pharmaceutical product candidate that optimizes the mechanical component as well as the chemical components of the sponge for a product candidate with multiple mechanisms of action for the treatment of inflammatory skin conditions, such as acne. 25 Table of Contents We believe our Spongilla technology platform will enable us to develop and formulate singular and combination products that target topical delivery of chemical compounds into the dermis for maximum treatment effect for a variety of indications. One mechanism of our technology is its mechanical ability to allow for the intradermal delivery of a variety of large and small molecules to a targeted treatment site, through topical application. In addition to this mechanical component, the technology also utilizes multiple naturally occurring chemical compounds which we believe have demonstrated in-vitro anti-microbial, and anti-inflammatory properties. We believe the combination of these mechanical and chemical components can make our platform extremely versatile for the treatment of a wide variety of medical and aesthetic skin conditions and diseases, including psoriasis. 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 accounting principles generally accepted in the United States. 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 the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses and stock-based compensation. 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 3 - 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 We rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to these costs. Fair Value of Common Stock and Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company’s policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date rather than on an accelerated attribution basis over the vesting period. Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the fair value of the Company’s common shares, and for options, the expected life of the option and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its option awards. The assumptions used in calculating the fair value of share-based awards represents management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. 26 Table of Contents Results of Operations Three Months Ended June 30, 2021 and 2020 The following table summarizes our results of operations for the three months ended June 30, 2021 and 2020: Three Months Ended June 30, 2021 June 30, 2020 Difference Costs and expenses: Research and development expenses $ 867,197 $ 411,949 $ 455,248 General and administrative expenses 462,772 380,837 81,935 Total operating expenses 1,329,969 792,786 537,183 Losses from operations (1,329,969 ) (792,786 ) (537,183 ) Other income and expenses: Interest expense, net 1,823 28,863 (27,040 ) Net loss $ (1,331,792 ) (821,649 ) $ (510,143 ) Research and Development Expenses Research and development expenses increased $455,248 from $411,949 for the three months ended June 30, 2020 to $867,197 for the three month ended June 30, 2021. The increase was the result of increased clinical trial expenses of $42,347, increased non-clinical trial expenses of $129,406, increased manufacturing expenses of $145,249 and increased salaries and stock-based compensation of $138,246. General and Administrative Expenses General and administrative expenses increased $81,935 from $380,837 for the three months ended June 30, 2020 to $462,772 for the three months ended June 30, 2021. The increase was the result of increased stock-based compensation of $84,343, net of other decreases of $2,309. Other Income and Expenses Other income and expenses decreased $27,040 from $28,863 for the three months ended June 30, 2020 to $1,823 for the three months ended June 30, 2021. The decrease was the result of decreased debt discount amortization of $15,099 and decreased interest expense, net, of $11,941. Six Months Ended June 30, 2021 and 2020 The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020: Six Months Ended June 30, 2021 June 30, 2020 Difference Costs and expenses: Research and development expenses $ 1,547,785 $ 1,373,053 $ 174,732 General and administrative expenses 2,043,957 768,310 1,275,647 Total operating expenses 3,591,742 2,141,363 1,450,379 Loss from operations (3,591,742 ) (2,141,363 ) (1,450,379 ) Other income and expenses: Interest expense, net 44,958 101,459 (56,501 ) Net loss $ (3,636,700 ) $ (2,242,822 ) $ (1,393,878 ) 27 Table of Contents Research and Development Expenses Research and development expenses increased $174,732 from $1,373,053 for the six months ended June 30, 2020 to $1,547,785 for the six months ended June 30, 2021. The increase resulted from decreased Phase 2b clinical trial expenses of $1,274,085, offset by increases in other clinical trial expenses, net, of $571,143, increases in manufacturing expenses of $175,251, increases in salaries and stock-based compensation of $519,639 and increases in other non-clinical trial expenses of $182,784. General and Administrative Expenses General and administrative expenses increased $1,275,647 from $768,310 for the six months ended June 30, 2020 to $2,043,957 for the six months ended June 30, 2021. The increase resulted from increased professional fees of $214,223 related to the conversion from a limited liability company to a C-Corp., increased patent costs of $101,248, increased salary and stock-based compensation expense of $788,882 and increases in other general and administrative expenses, net, of $171,294. Other income and expenses Other income and expenses decreased $56,501 from $101,459 for the six months ended June 30, 2020 to $44,958 for the six months ended June 30, 2021. The decrease was the result of decreased debt discount amortization of $58,190, offset by decreased interest expense, net, of $1,689. Cash Flows The following table summarizes our cash flows from operating and financing activities: Six Months Ended June 30, 2021 2020 Statements of cash flows data: Total net cash provided by (used in): Operating activities $ (1,679,433 ) $ (2,122,956 ) Financing activities $ 1,576,235 $ 867,851 Decrease in cash $ (103,198 ) $ (1,255,105 ) Operating activities Cash used in operations of $2,122,956 for the six months ended June 30, 2020 was the result of the net loss of $2,242,822 and a decrease in accounts payable and accrued and other current liabilities of $12,283, offset by depreciation and amortization of $72,481 and a decrease in prepaid expenses and other current assets of $59,668. Cash used in operations of $1,679,433 for the six months ended June 30, 2021 was the result of the net loss of $3,636,700 and an increase in prepaid expenses and other current assets of $634,609, offset by non-cash amortization of $13,970, stock-based compensation of $1,274,036 and an increase in accounts payable and accrued and other current liabilities of $1,303,870. Financing activities Cash provided by financing activities of $867,851 for the six months ended June 30, 2020 was the result of proceeds of $600,000 from the issuance of convertible subordinated promissory notes, proceeds of $250,000 from the issuance of Series 1c Preferred Units, and proceeds of $133,592 from the Payroll Protection Plan loan, offset by $115,741 of principal payments on debt. Cash provided by financing activities of $1,576,235 for the six months ended June 30, 2021 was the result of proceeds of $1,562,717 from the issuance of convertible subordinated promissory notes, proceeds of $570,000 from the issuance of Series 1d Preferred Units, offset by $556,482 of principal and final payments on debt. 28 Table of Contents Liquidity and Capital Resources Since our inception, we have not generated any revenue or commercialized any products. As of June 30, 2021, our cash totaled $427,202, and we had an accumulated deficit of $31,716,498. For the year ended December 31, 2020 and the six months ended June 30, 2021, we used cash of $4,028,541 and $1,679,433, respectively, in operations. As a result of our initial public offering of common stock and warrants to purchase common stock in August 2021 for proceeds of $18 million, before deducting expenses, (see Note 14 – Subsequent Events), our cash balances are expected to fund operations into October 2022. We anticipate that we will continue to incur net losses for the foreseeable future. Historically, our principal sources of cash have included proceeds from the issuance of common and preferred equity and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations (including clinical development of our product candidates) and payments for license rights. We expect that the principal uses of cash in the future will be for continuing operations, funding of research and development and general working capital requirements. We expect that as research and development expenses continue to grow, we will need to raise additional capital to sustain operations and research and development activities. Funding Requirements We plan to focus in the near term on the development, regulatory approval and potential commercialization of DMT310 for the treatment of acne, psoriasis and rosacea. We anticipate we will incur net losses for the next several years as we complete clinical development of DMT310 for the treatment of acne, psoriasis and rosacea and continue research and development of DMT410 for the treatment of aesthetic conditions. In addition, we plan to identify, acquire or in-license and develop additional drug candidates, potentially build commercial capabilities and expand our corporate infrastructure. We may not be able to complete the development and initiate commercialization of these programs if, among other things, our clinical trials are not successful or if the FDA does not approve our drug candidate arising out of our current clinical trials when we expect, or at all. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support development of our drug candidates. As a publicly traded company, we will incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and The NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that were not applicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We believe that the net proceeds from our initial public offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months, including the completion of our ongoing Phase 2 clinical trials for DMT310 for the treatment of psoriasis, the initiation of our Phase 2 clinical trial for DMT310 for the treatment of rosacea and the completion of our planned non-clinical and pharmacokinetic studies for DMT310 for the treatment of acne. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect that we will require additional capital to conduct Phase 3 studies for DMT310 for the treatment of acne, and to pursue in-licenses or acquisitions of other drug candidates. Additional funds may not be available on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy. If we are unable to raise sufficient additional capital, we may need to substantially curtail our planned operations and the pursuit of our growth strategy. 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 a holder of our common stock. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including: · the number and characteristics of the drug candidates we pursue; · the scope, progress, results and costs of researching and developing our drug candidates, and conducting preclinical studies and clinical trials; · the timing of, and the costs involved in, obtaining regulatory approvals for our drug candidates; · the cost of manufacturing our drug candidates and any drugs 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; and · the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future drug candidates, if any. 29 Table of Contents Contractual Obligations and Commitments We do not currently lease any office space. We enter into contracts in the normal course of business with contract research organizations for clinical trials, preclinical research studies and testing, manufacturing and other services and products 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. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. 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. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 30 Table of Contents