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Item 9A. Controls and Procedures

2023-02-21 compared with 2022-03-28 · 233 added, 263 removed, 1229 unchanged (29% of the section changed)

30 unchanged sentences

Christopher J.

Nardo, M.P.H., Ph.D.

Senior Vice President, Development

Maria Bedoya Toro Munera, Ph.D., M.B.A.

Senior Vice President, Chief Development Officer

Maria Bedoya Toro Munera, Ph.D.

Senior Vice President, Regulatory Affairs & Quality Assurance

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Proehl was selected as an officer and director due to his leadership experience at other companies and his history of founding and operating specialty pharmaceutical companies.

Kyri Van Hoose became our Senior Vice President and Chief Financial Officer in September 2021.

Van Hoose became our Senior Vice President and Chief Financial Officer in September 2021.

Van Hoose is a seasoned and collaborative finance and accounting professional with over 20 years of experience, including more than 15 years of accounting and finance experience in the life science industry.

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Van Hoose held leadership positions of increasing responsibilities at Acadia Pharmaceuticals, Inc., including Senior Director of Finance and Corporate Controller.

Van Hoose began her career at Deloitte and is a licensed Certified Public Accountant (California active).

Van Hoose began her career at Deloitte and is a licensed Certified Public Accountant (California inactive).

Van Hoose earned her B.S.

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Christopher J.

Nardo, M.P.H., Ph.D.

became our Senior Vice President of Development in June 2015.

became our Senior Vice President and Chief Development Officer in July 2022.

Nardo has more than 15 years of experience in the pharmaceutical industry.

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in Biology at Loyola Marymount University.

Maria Bedoya Toro Munera, Ph.D., M.B.A.

Maria Bedoya Toro Munera, Ph.D.

became our Senior Vice President of Regulatory Affairs and Quality Assurance in January 2016.

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prior to its sale to Precision Medicine Inc.

Hale currently sits on the board of directors of two public companies, including Oncternal Therapeutics, Inc.

ONCT), since 2019, and BIOCEPT, Inc.

BIOC), since 2011.

Hale is a co-founder and Chairman of Adigica Health, Inc., Zerigo Health, Inc., Oncternal Therapeutics, Inc., Neurana Pharmaceuticals, Inc.

He is also co-founder and Director of Neurelis Pharmaceuticals, Inc.

and Recros Medica, Inc., a co-founder of Cadence Inc., Evoke Pharma Inc., Elevation Pharmaceutical Inc.

and Zogenix Inc.

Hale is a co-founder and currently serves as Chairman of Oncternal Therapeutics, Inc.

ONCT), since 2013.

Hale is also a co-founder and currently serves as a director of Neurelis, Inc., a private company, and is a co-founder of Zerigo Health, Inc., Cadence, Inc., Evoke Pharma, Inc., Elevation Pharma, Inc., and Zogenix, Inc.

Hale is a co-founder and serves on the Board of Directors of BIOCOM and CONNECT and is a former member of the Board of the Biotechnology Industry Organization (BIO), and the Biotechnology Institute.

He has served on the Board of Rady Children’s Hospital since 1986, including Chairman of the Board from 2011 to 2015, and is founder and Chairman of the Rady Children’s Institute of Genomic Medicine.

He is a member of the UCSD Rady School of Management Dean’s Advisory Council and a Director of the San Diego Economic Development Corporation .

He is a member of the UCSD Rady School of Management Dean’s Advisory Council, a member of the board of the University of San Diego, and is a former Director of the San Diego Economic Development Corporation .

Hale was selected as a director due to his industry and executive business experience.

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Kathleen Scott became a director upon the effectiveness of our initial public offering in August 2021.

Scott is currently the Chief Financial Officer of ARS Pharmaceuticals, Inc., a privately held biotech company.

Prior to ARS Pharma, Ms.

Scott is currently the Chief Financial Officer of ARS Pharmaceuticals, Inc., a publicly traded biotech company (Nasdaq:

Prior to ARS Pharmaceuticals, Ms.

Scott was the Chief Financial Officer of Neurana Pharmaceuticals from January 2017 to March 2022, Recros Medica from August 2014 to April 2021, Adigica Health from February 2016 to March 2021, Clarify Medical from August 2014 to December 2016, Oncternal Therapeutics from March 2016 to May 2016, MDRejuvena from August 2014 to August 2016, and BioSurplus from March 2010 to November 2014.

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Scott started her career as an auditor in Arthur Andersen’s San Diego office, focusing on both public and private clients.

Scott is the immediate past board chair of the YMCA of San Diego County and is a CPA and CFA charter holder.

Scott is the past board chair and current director of the YMCA of San Diego County and is a CPA and CFA charter holder.

Scott graduated magna cum laude from UCLA with a B.S.

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Brittany Bradrick became a director in January 2022.

Bradrick has served as the Chief Financial Officer of Neurelis, Inc.

since October 2021.

Bradrick has served as the Chief Operating Officer and Chief Financial Officer of Neurelis, Inc.

since September 2022 and the Chief Financial Officer since October 2021.

Prior to joining Neurelis, Ms.

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We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and our directors, on our website identified above or in filings with the SEC.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our directors, officers and person who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC.

On July 7, 2022, Christopher Nardo filed a Form 4 reporting receipt of an equity grant one day late.

Based solely upon review of Forms 3, 4 and 5 (and amendments thereto) filed electronically with the SEC by our executive officers and directors owning mor than 10% of our common stock and upon any written representations received from the executive officers and directors, other than as described above, to our knowledge we believe that all other Section 16(a) filing requirements were met timely in fiscal year 2022.

EXECUTIVE COMPENSATION

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Proehl, President and Chief Executive Officer;

Kyri Van Hoose, our Senior Vice President and Chief Financial Officer;

Van Hoose, our Senior Vice President and Chief Financial Officer;

Christopher J.

Nardo, Ph.D., Senior Vice President, Development

Nardo, Ph.D., our Senior Vice President and Chief Development Officer.

Summary Compensation Table

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Christopher J.

Senior Vice President, Development

Senior Vice President, Chief Development Officer

Proehl’s bonus for 2021 was remunerated in fully vested stock options.

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On August 17, 2021, we entered into an employment agreement with Dr.

Nardo, which was subsequently amended on December 6, 2021 and January 1, 2022 (as amended, the Nardo Agreement).

Under the terms of the Nardo Agreement, he holds the position of Senior Vice President, Development and receives a base salary of $280,000 annually.

Nardo, which was subsequently amended on December 6, 2021, January 1, 2022, and July 1, 2022 (as amended, the Nardo Agreement).

Nardo holds the position of Senior Vice President, Chief Development Officer and receives a base salary of $320,000 annually.

In addition, Dr.

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The stock option vested in 48 equal monthly installments commencing September 1, 2017.

This stock option award was granted January 3, 2022 and was fully vested at issuance.

This stock option award was granted January 3, 2022.

The stock option vests 40% at the first anniversary date of the stock option grant with the remaining 60% vesting over the remaining 36 months for a total vest period of 48 months.

This stock option award was granted July 1, 2022.

The stock option vests 25% at the first anniversary date of the stock option grant with the remaining vesting in 36 equal monthly installments commencing July 1, 2022.

We did not engage in any repricings or other modifications or cancellations to any of our named executive officers’ outstanding option awards during the year ended December 31, 2022.

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The following table shows for the fiscal year ended December 31, 2022, certain information with respect to the compensation of all non-employee directors of the Company:

Fees Earned or Paid in Cash (1)

Fees Earned Paid in Cash (1)

Stock Awards (2)

Stock Option Awards

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____________________________

Board of Director fees earned or paid in cash were for calendar year 2021, representing fees earned by our Directors since our IPO in August 2021.

Board of Director fees earned or paid in cash were for calendar year 2022, representing fees earned by our Directors.

Amounts in this column reflect the grant date fair value of RSUs granted to our non-employee directors.

These amounts have been computed in accordance with FASB ASC Topic 718.

For a discussion of valuation assumptions used to determine the grant date fair value of the foregoing RSU awards, see Note 1 to our audited consolidated financial statements for the year ended December 31, 2022, included in this Annual Report on Form 10-K.

In accordance with SEC rules, this column reflects the aggregate grant date fair value of the stock option awards granted during 2022.

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This amount does not reflect the actual economic value that will be realized by the Directors upon the vesting of the stock options, the exercise of the stock options, or the sale of the common stock underlying such stock options.

Wierenga served as Directors prior to our IPO in August 2021.

As part of their compensation for prior Board service, Mr.

Wierenga received stock option grants on March 31, 2021.

These stock option awards were granted on August 17, 2021 with a vesting schedule of 1/12 th vesting monthly.

These stock option awards were granted on January 12, 2022, with a vesting schedule of 1/12 th vesting monthly.

We have adopted a compensation policy pursuant to which our board members receive $40,000 per year ($60,000 for Lead Director), each member of the Audit Committee receives $7,500 per year ($15,000 for the Chair), each member of the Compensation Committee receives $5,000 per year ($10,000 for the Chair), and each member of the Nominating and Corporate Governance Committee receives $4,000 per year ($8,000 for the Chair).

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As part of this non-employee director compensation policy, our directors may elect to receive their annual compensation (i) 100% in restricted stock units, (ii) 50% in cash and 50% in restricted stock units, or (iii) 100% in cash.

To the extent any of our directors elect to receive any of their compensation in restricted stock units, such restricted stock units will vest monthly in 12 equal installments.

This policy is applicable for fiscal years commencing on January 1, 2022.

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of March 25, 2022 by:

The following table sets forth information regarding beneficial ownership of our common stock as of February 14, 2023, by:

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;

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Under these rules, beneficial ownership includes any shares of common stock as to which the individual or entity has sole or shared voting power or investment power.

Applicable percentage ownership is based on 8,328,629 shares of common stock outstanding as of March 25, 2022.

In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options held by such person that are currently exercisable or will become exercisable within 60 days of March 25, 2022 are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.

Applicable percentage ownership is based on 12,321,848 shares of common stock outstanding as of February 14, 2023.

In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options held by such person that are currently exercisable or will become exercisable within 60 days of February 14, 2023, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.

Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.

Name of Beneficial Owner (1)

Name and Address of Beneficial Owner (1)

Number of Shares

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Proehl Investment Ventures LLC

2,933,531 (3)(4)

Hale BioPharma Ventures LLC

535,973 (8)(9)

Named Executive Officers and Directors Other Than 5% or Greater Stockholders

3,655,109 (3)(4)(5)

Named Executive Officers and Directors

Christopher J.

641,992 (8)(9)(10)

Wendell Wierenga Ph.D.

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Brittany Bradrick

All Directors, Director Nominees and Officers as a Group (10 persons)

All Executive Officers and Directors as a group (11 persons)

Less than 1%.

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We have determined beneficial ownership in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, which is generally determined by voting power and/or dispositive power with respect to securities.

Unless otherwise noted, the shares of common stock listed above are owned as of the date of this report and are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them.

Unless otherwise noted, the shares of common stock listed above are owned as of February 14, 2023, and are owned of record by each individual named as beneficial owner and such individual has sole voting and dispositive power with respect to the shares of common stock owned by each of them.

Proehl, our Chairman and Chief Executive Officer is the Chairman and Chief Executive Officer of Proehl Investment Ventures LLC.

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Proehl may be deemed to beneficially own the shares of our common stock held by Proehl Investment Ventures LLC.

Includes (i) 2,905,544 shares of common stock held by Proehl Investment Ventures LLC, (ii) 27,987 shares of common stock issuable upon exercise of warrants held by Proehl Investment Ventures LLC that are exercisable within 60 days of March 25, 2022.

Includes (i) 59,512 shares of common stock held by Mr.

Proehl, (ii) 383,510 shares of common stock issuable upon exercise of stock options held by Mr.

Proehl exercisable within 60 days of the date of this report, (iii) 8,928 shares of common stock held by Mr.

Proehl exercisable within 60 days of February 14, 2023, (iii) 8,928 shares of common stock held by Mr.

Proehl as Trustee of the Megan Proehl Wilder 2020 Irrevocable Trust, (iv) 17,857 shares of common stock held by Mr.

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Does not include 85,150 shares of common stock issuable upon exercise of stock options held by Mr.

Proehl that are not exercisable within 60 days of March 25, 2022.

Proehl that are not exercisable within 60 days of February 14, 2023.

Includes (i) 25,121 shares of common stock held by Dr.

Nardo, (ii) 63,762 shares of common stock issuable upon exercise of stock options held by Dr.

Nardo exercisable within 60 days of the date of this report, and (iii) 2,439 shares of common stock held by Dr.

Nardo exercisable within 60 days of February 14, 2023, and (iii) 2,439 shares of common stock held by Dr.

Nardo as Co-Trustee of the Nardo Family Trust Dated October 3, 2001.

Does not include 161,236 shares of common stock issuable upon exercise of stock options held by Dr.

Nardo that are not exercisable within 60 days of the date of this report.

Nardo that are not exercisable within 60 days of February 14, 2023.

Includes 43,187 shares of common stock issuable upon exercise of stock options held by Ms.

Van Hoose exercisable within 60 days of the date of this report.

Van Hoose exercisable within 60 days of February 14, 2023.

Does not include 161,813 shares of common stock issuable upon exercise of stock options held by Ms.

Van Hoose that are not exercisable within 60 days of March 25, 2022.

Van Hoose that are not exercisable within 60 days of February 14, 2023.

David Hale, our Lead Director, is the Chairman and Chief Executive Officer of Hale BioPharma Ventures LLC.

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Hale may be deemed to beneficially own the shares of our common stock held by Hale BioPharma Ventures LLC.

Includes (i) 532,925 shares of common stock held by Hale BioPharma Ventures LLC, and (ii) 3,048 shares of common stock held by Hale BioPharma Ventures LLC issuable upon exercise of warrants exercisable within 60 days of March 25, 2022.

Includes (i) 75,720 shares of common stock held by Mr.

Hale, (ii) 22,072 shares of common stock issuable upon exercise of stock options held by Mr.

Hale exercisable within 60 days of the date of this report, (iii) 12,195 shares of common stock held by a limited partnership of which Mr.

Hale exercisable within 60 days of February 14, 2023, (iii) 12,195 shares of common stock held by a limited partnership of which Mr.

Hale serves as the General Partner and as such, has voting and dispositive control over the shares of common stock, and (iv) 35,714 shares of common stock and warrants to purchase up to 35,714 shares of Common Stock held by Mr.

Hale as Trustee of the Hale Family Trust.

Does not include 3,334 shares of common stock issuable upon exercise of stock options held by Mr.

Hale that are not exercisable within 60 days of March 25, 2022.

Includes (i) 62,398 shares of common stock held by Dr.

Wierenga and (ii) 22,072 shares of common stock issuable upon exercise of stock options held by Dr.

Wierenga exercisable within 60 days of this report.

Does not include 3,334 shares of common stock issuable upon exercise of stock options that are not exercisable within 60 days of March 25, 2022.

Wierenga exercisable within 60 days of February 14, 2023.

Includes (i) 2,439 shares of common stock held by Ms.

Scott as Trustee of the Scott 2008 Trust dated 3/28/08, and (ii) 9,166 shares of common stock issuable upon exercise of stock options held by Ms.

Scott exercisable within 60 days of this report.

Does not include 5,834 shares of common stock issuable upon exercise of stock options that are not exercisable within 60 days of March 25, 2022.

Includes 9,166 shares of common stock issuable upon exercise of stock options held by Dr.

Mento exercisable within 60 days of the date of this report.

Does not include 5,834 shares of common stock issuable upon exercise of stock options held by Dr.

Mento that are not exercisable within 60 days of March 25, 2022.

Includes 9,166 shares of common stock issuable upon exercise of stock options held by Ms.

Fisher exercisable within 60 days of the date of this report.

Does not include5,834 shares of common stock issuable upon exercise of stock options held by Ms.

Fisher that are not exercisable within 60 days of March 25, 2022.

Scott as Trustee of the Scott 2008 Trust dated 3/28/08, (ii) 27,145 shares of common stock held by Ms.

Scott, and (iii) 15,000 shares of common stock issuable upon exercise of stock options held by Ms.

Scott exercisable within 60 days of February 14, 2023.

Includes 15,000 shares of common stock issuable upon exercise of stock options held by Dr.

Sandler exercisable within 60 days of the date of this report.

Does not include 5,834 shares of common stock issuable upon exercise of stock options held by Dr.

Sandler that are not exercisable within 60 days of March 25, 2022.

Includes 3,333 shares of common stock issuable upon exercise of stock options held by Ms.

Bradrick exercisable within 60 days of the date of this report.

Does not include 6,667 shares of common stock issuable upon exercise of stock options held by Ms.

Bradrick that are not exercisable within 60 days of March 25, 2022.

Mento exercisable within 60 days of February 14, 2023.

Includes (i) 23,443 shares of common stock held by Ms.

Fisher and (ii) 15,000 shares of common stock issuable upon exercise of stock options held by Ms.

Fisher exercisable within 60 days of February 14, 2023.

Includes (i) 24,184 shares of common stock held by Dr.

Sandler and (ii) 15,000 shares of common stock issuable upon exercise of stock options held by Dr.

Sandler exercisable within 60 days of February 14, 2023.

Includes (i) 23,443 shares of common stock held by Ms.

Bradrick and (ii) 15,000 shares of common stock issuable upon exercise of stock options held by Ms.

Bradrick exercisable within 60 days of February 14, 2023.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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Sean Proehl is eligible to receive, from time to time, equity awards under our existing equity incentive plan, or any other equity incentive plan we may adopt in the future, and the terms and conditions of such awards, if any, will be determined by our board of directors or Compensation Committee, in their discretion.

Sales of Preferred Units

In March 2021, we issued an aggregate of 686,742 Series 1d Preferred Units at $0.83 per unit for gross proceeds of approximately $570,000.

Proehl Investment Ventures, LLC, Allison Taylor Proehl 2020 Irrevocable Trust, Meghan Proehl Wilder 2020 Irrevocable Trust and Sean Michael Proehl Irrevocable Trusts Dated December 18, 2020 purchased 307,228, 120,481, 60,240 and 120,481 Series 1d Preferred Units, respectively.

Proehl, our President and Chief Executive Officer and the Chairman of the board of directors, is the managing member of Proehl Investment Ventures, LLC and the trustee of Allison Taylor Proehl 2020 Irrevocable Trust, Meghan Proehl Wilder 2020 Irrevocable Trust and Sean Michael Proehl Irrevocable Trusts Dated December 18, 2020.

The shares of Series 1d Preferred Stock held by Mr.

Proehl (in the aggregate), automatically converted into 90,203 shares of common stock upon the completion of our initial public offering, at a conversion price equal to $5.60 (80% of the initial offering price).

LLC Conversion

In March 2021, in connection with the conversion of Dermata Therapeutics, LLC into a Delaware corporation, Proehl Investment Ventures, LLC received an aggregate of 35,791,829 shares of our preferred stock, warrants exercisable for 573,750 shares of our preferred stock with an exercise price of $1.00 per share, 917,317 shares of our common stock, and Hale BioPharma Ventures, LLC received an aggregate of 5,089,162 shares of our then-outstanding preferred stock, warrants exercisable for 62,500 shares of our then-outstanding preferred stock with an exercise price of $1.00 per share and 254,634 shares of our common stock.

Hale, a member of the board of directors, is the managing member of Hale BioPharma Ventures, LLC.

Stockholders’ Agreement

On March 24, 2021, in connection with the conversion of Dermata Therapeutics, LLC into a Delaware corporation, we entered into a Stockholders’ Agreement (as amended, the Stockholders’ Agreement) with all of our then-existing stockholders, including Proehl Investment Ventures, LLC and Hale BioPharma Ventures, LLC.

The Stockholders’ Agreement among other things, provided for certain restrictions on transfer of our shares of capital stock, set forth agreements and understandings with respect to how shares of our capital stock held by the stockholders party thereto would be voted on, or tendered in connection with, an acquisition of the Company and provided for certain voting rights with respect to the election of directors.

The Stockholders’ Agreement automatically terminated upon the completion of our initial public offering.

Convertible Note Financing

In July 2020, we held the first closing of the sale of certain subordinated convertible promissory notes (or, the Notes) for an aggregate principal amount of $2,330,000, including $500,000 from Proehl Investment Ventures, LLC.

In October 2020, we held the second closing of the Notes for an aggregate principal amount of $670,000, including $420,000 from Proehl Investment Ventures, LLC.

In February 2021, we held the third closing of the Notes for an aggregate principal amount of $1,556,000, including $825,000 from Proehl Investment Ventures, LLC, $100,000 from the Proehl Family Trust and $250,000 Hale BioPharma Ventures, LLC.

On March 15, 2021, we completed the conversion of $4,391,000 of principal amount of the Notes into 5,379,247 Series 1d Preferred Units.

At that time Proehl Investment Ventures, LLC, Sean Michael Proehl Irrevocable Trusts Dated December 18, 2020 and Hale BioPharma Ventures, LLC held an aggregate principal amount of $1,745,000, $100,000 and $250,000 of Notes, respectively.

Proehl, our President and Chief Executive Officer and a member of the board of directors, is the managing member of Proehl Investment Ventures, LLC and the trustee of Sean Michael Proehl Irrevocable Trusts Dated December 18, 2020.

Hale, a member of the board of directors, is the managing member of Hale BioPharma Ventures, LLC.

In addition, Wendell Wierenga, a member of our board of directors, held $45,000 principal amount of the Notes.

Each of Messrs.

Proehl, Hale and Wierenga converted their aggregate principal amounts of Notes into Series 1d Preferred Units on March 15, 2021, which units were subsequently converted into shares of our Series 1d Preferred Stock in connection with our conversion to a Delaware corporation.

The shares of Series 1d Preferred Stock that were converted from the Notes held by Messrs.

Proehl, Hale and Wierenga were automatically converted into 333,494, 44,777 and 8,136 shares of common stock, respectively, upon the completion of our initial public offering, at a conversion price equal to $5.60 (80% of the initial offering price in our initial public offering).

The Notes had an interest rate of 4.0% per annum, were unsecured, had a maturity date of December 31, 2021 and provided for conversion into our common stock upon the earlier of (i) qualified Series A Financing (as defined in the Notes) which resulted in aggregate gross proceeds to the Company of at least ten million dollars ($10,000,000), or (ii) the closing of our initial public offering.

Upon the completion of our initial public offering, the aggregate principal amount and all accrued but unpaid interest on the Notes automatically converted into an aggregate of 32,219 shares of our common stock at a conversion price of $5.60 per share (which was 80% of the initial offering price).

Policies and Procedures for Related Party Transactions

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This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, where the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets as of December 31, 2022, and 2021, and a related person had, has or will have a direct or indirect material interest, including without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person.

In reviewing and approving any such transactions, our audit committee is tasked with considering all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction.

All of the transactions described in this section occurred prior to the adoption of this policy.

In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to:

(i) whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction with an unrelated party;

(ii) the extent of the related person’s interest in the transaction;

(iii) the benefits to the Company;

(iv) the impact on a director’s independence in the event the related person is a director, an immediately family member of a director or an entity in which a director is a partner, stockholder or executive officer;

(v) the availability of other sources for comparable products or services;

(vi) the terms of the transaction;

and (vii) the terms available to unrelated third parties.

All related-party transactions may only be consummated if our audit committee has approved or ratified such transaction in accordance with the guidelines set forth in the policy.

Any member of the audit committee who is a related person with respect to a transaction under review will not be permitted to participate in the deliberations or vote respecting approval or ratification of the transaction.

However, such director may be counted in determining the presence of a quorum at a meeting of the audit committee that considers the transaction.

Director Independence

Upon the completion of our initial public offering, our common stock was listed on the Nasdaq Capital Market (or Nasdaq).

Under the listing requirements and rules of Nasdaq, independent directors must constitute a majority of a listed company’s board of directors within 12 months after its initial public offering.

Under the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

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(incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Amendment No.

1 of the Amended and Restated Certificate of Incorporation of Dermata Therapeutics, Inc., filed with the Secretary of State of the State of Delaware on July 11, 2022 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 11, 2022).

Amended and Restated Bylaws of Dermata Therapeutics, Inc.

(incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Amendment No.

1 to the Amended and Restated Bylaws of Dermata Therapeutics, Inc.

(incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2022).

Specimen Certificate representing shares of common stock of Dermata Therapeutics, Inc.

(incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Form of Outstanding Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Form of Common Stock Purchase Warrant issued in the Company’s Initial Public Offering (incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

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and Direct Transfer, LLC entered into in connection with the Company’s Initial Public Offering (incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).

Form of Common Stock Warrant issued in Registered Direct Offering (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022).

Form of Pre-Funded Warrant issued in Registered Direct Offering (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022).

Description of Securities.*

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and Christopher J.

Nardo (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022).†

Amendment No.

3 dated July 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc.

and Christopher Nardo (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 15, 2022).

Employment Agreement dated December 6, 2021 by and between Dermata Therapeutics, Inc.

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and Maria Bedoya Toro Munera, Ph.D.

(incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022)*†

Employment Agreement dated December 6, 2021 by and between Dermata Therapeutics, Inc.

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1 dated January 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc.

Van Hoose (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022).

Supply Agreement between Dermata Therapeutics LLC and Reka-Farm LLC, dated as of February 27, 2020 (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).#

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and Villani, Inc., dated July 30, 2021 (incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).#

Form of Securities Purchase Agreement Dated April 20, 2022 between Dermata Therapeutics, Inc.

and the Purchaser (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022).

Form of Registration Rights Agreement dated April 20, 2022 between Dermata Therapeutics, Inc.

and the Purchaser (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022).

Form of Placement Agent Agreement dated April 20, 2022 between the Registrant and Maxim Group LLC (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022).

Consent of Mayer Hoffman McCann, P.C.*

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Financial Statements:

Balance Sheets as of December 31, 2021 and 2020

Statements of Operations for the Years ended December 31, 2021 and 2020

Statements of Stockholders’ and Members’ Equity (Deficit) for the Years ended December 31, 2021 and 2020

Statements of Cash Flows for the Years ended December 31, 2021 and 2020

Balance Sheets

Statements of Operations

Statements of Stockholders’ Equity (Deficit)

Statements of Cash Flows

Notes to Financial Statements

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We have audited the accompanying balance sheets of Dermata Therapeutics, Inc.

(formerly Dermata Therapeutics, LLC) (“Company”) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ and members’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

(formerly Dermata Therapeutics, LLC) (“Company”) as of December 31, 2022, and 2021, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

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San Diego, California

March 28, 2022

February 21, 2023

DERMATA THERAPEUTICS, INC.

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Balance Sheets

Current assets:

Cash and cash equivalents

Prepaid expenses and other current assets

Liabilities and Stockholders’ and Members’ Equity (Deficit):

Current liabilities:

Liabilities and Stockholders’ Equity:

Accounts payable

Accrued and other current liabilities

Convertible subordinated promissory notes, net of discount

Related party convertible subordinated promissory notes,

net of discount

Current portion of long-term debt, net of debt discount

Total current liabilities

Total liabilities

Commitments and Contingencies (see Note 10)

Stockholders’ and Members’ Equity (Deficit):

Series 1 Preferred Units, 6,906,244 units authorized,

issued and outstanding at December 31, 2020

Series 1a Preferred Units, 5,018,750

units authorized, issued and outstanding at December 31, 2020

Series 1a Preferred Warrant Units, 1,419,228 units issued and

outstanding at December 31, 2020

Series 1b Preferred Units, 6,500,000 units authorized,

issued and outstanding at December 31, 2020

Series 1c Preferred Units, 46,553,188 units

authorized, issued and outstanding at December 31, 2020

Class A Common Units, 508,777 units authorized,

issued and outstanding at December 31, 2020

Class B Common Units, 1,767,477 units

authorized, issued and outstanding at December 31, 2020

Common Stock, par value $ 0.0001 , 90,000,000 shares authorized,

8,328,629 shares issued and outstanding at December 31, 2021

Stockholders’ Equity:

Common Stock, par value $ 0.0001 , 250,000,000 shares authorized, and 12,321,848 shares issued and outstanding as of December 31, 2022;

and 90,000,000 shares authorized and 8,328,629 shares issued and outstanding as of December 31, 2021, respectively

Additional paid-in capital

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( 35,982,275 )

Total stockholders’ and members’ equity (deficit)

( 3,177,939 )

Total liabilities and stockholders’ and members’ equity (deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these financial statements.

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Other income and expenses:

Gain from forgiveness of Paycheck Protection Plan loan

Interest expense, net

Interest (income) expense, net

$ ( 9,610,913 )

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(FORMERLY DERMATA THERAPEUTICS, LLC)

Statements of Stockholder’s and Member’s Equity (Deficit)

Statements of Stockholder’s Equity (Deficit)

Class A Common

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Preferred Stock Warrants

Paid-in Capital

Balance at December 31, 2020

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$ ( 3,177,939 )

Class B Common Units issued

Series 1c Preferred Units issued

Exercise of Series 1a Preferred Warrant Units

$ ( 3,236,530 )

Balance at December 31, 2020

$ ( 28,079,798 )

$ ( 3,177,939 )

Series 1d Preferred Units issued

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$ ( 35,982,275 )

Issuance of common stock and warrants, net of issuance costs

Issuance of common stock upon exercise of pre-funded warrants

Issuance of restricted stock unit awards

Issuance of common stock upon conversion of restricted stock units

Stock-based compensation

$ ( 9,610,913 )

( 9,610,913 )

Balance at December 31, 2022

$ ( 45,593,188 )

The accompanying notes are an integral part of these financial statements.

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Amortization of debt discount costs

Depreciation of fixed assets

Gain from forgiveness of Paycheck Protection Plan loan

Increase/(decrease) in cash resulting from changes in:

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Accrued and other current liabilities

License and settlement agreement

Total adjustments to reconcile net loss to net cash used in operations

Net cash used in operating activities:

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Proceeds from issuance of common stock and warrants, net of issuance costs

Proceeds from issuances of common stock upon exercises of pre-funded warrants

Redemption of Series 1c preferred stock

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Payments on debt

Proceeds from Paycheck Protection Plan loan

Net proceeds from issuance of convertible subordinated promissory notes

Proceeds from issuance of Series 1d preferred units

Proceeds from issuance of Series 1c preferred units

Proceeds from exercise of Series 1a preferred warrant units

Net cash provided by financing activities:

Net increase (decrease) in cash

Net increase (decrease) in cash and cash equivalents

( 4,557,512 )

Cash at beginning of period

Cash at end of period

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures:

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Cash paid for taxes

Non-cash operating and financing activities:

Non-cash financing activities:

Conversion of common and preferred units and warrants to common and preferred stock and warrants

Conversion of convertible subordinated promissory notes to Series 1d preferred units

Deemed dividend upon amendment to the terms to the Series 1d convertible preferred stock

Deemed dividend upon amendment to the terms of the Series 1d convertible preferred stock

Conversion of convertible subordinated promissory notes and accrued interest to common shares at IPO

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Prior to the IPO, the Company had 1,911,009 shares of common stock outstanding after giving effect for the Company’s reverse stock split in July 2021.

The Company’s total common stock issued and outstanding was 8,328,629 as of December 31, 2021.

Reverse Stock Split

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Since its inception, the Company has devoted substantially all of its resources to research and development activities and has not generated any revenue or commercialized any product candidates.

As of December 31, 2021, cash totaled $10.8 million and the Company had an accumulated deficit of $ 36 million.

As of December 31, 2022, cash and cash equivalents totaled $ 6.2 million, and the Company had an accumulated deficit of $ 45.6 million.

For the years ended December 31, 2022, and 2021, the Company used cash of $ 8.8 million and $ 5.7 million, respectively, in operations.

The Company’s cash balances are expected to fund operations into the fourth quarter of 2022.

The Company’s cash balances are expected to fund operations into the third quarter of 2023.

The Company anticipates that it will continue to incur net losses for the foreseeable future.

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Upon the completion of the IPO in August 2021, approximately $ 2.6 million of offering costs related to the IPO were reclassified to additional paid-in capital.

As of December 31, 2021, the Company had deferred financing costs of $ 0.06 million included in other current assets.

As of December 31, 2021, the Company had deferred financing costs of $ 0.06 million and as of December 31, 2022, the Company had no deferred financing costs.

Cash and Cash Equivalents

The Company deposits its cash with reputable financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”).

This cash is held in checking and savings accounts.

This cash is held in checking, cash sweep, and money market accounts.

At times, deposits held may exceed the amount of insurance provided by the FDIC.

The Company has not experienced any losses in its cash and believes they are not exposed to any significant credit risk.

The Company maintains an insured cash sweep account in which cash from its main operating checking account is invested overnight in highly liquid, short-term investments.

The Company considers all highly liquid investments with a maturity date of 90 days or less at the date of purchase to be cash equivalents.

The Company has not experienced any losses in its cash and cash equivalents and believes they are not exposed to significant credit risk.

Fair Value Measurement

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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 Company believes the carrying amount of cash, accounts payable, accrued expenses and debt approximate their estimated fair values due to the short-term maturities of these financial instruments.

Fixed assets consist of furniture and fixtures and computer equipment.

Fixed assets are stated at cost less accumulated depreciation and amortization.

Additions, improvements, and major renewals are capitalized.

Maintenance, repairs, and minor renewals are expensed as incurred.

Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which is primarily three years.

Depreciation and amortization expense for the years ended December 31, 2021 and 2020 were $ 0 and $ 322 , respectively.

The Company’s cash sweep account is considered tier Level 1 since quoted prices are available in active and observable markets.

The Company believes the carrying amount of cash and cash equivalents, accounts payable, and accrued expenses approximate their estimated fair values due to the short-term maturities of these financial instruments.

Patent costs related to obtaining and maintaining patent protection in both the United States and other countries are expensed as incurred.

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Forfeitures are accounted for in the period they occur.

Restricted stock units (“RSUs”) granted under the 2021 Plan are measured at the grant date fair value of the common stock, with corresponding compensation expense recognized ratably over the requisite service period.

Refer to Note 7- Equity Incentive Plan for further discussion.

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Net loss per share for periods prior to the conversion to a C-corporation refers to net loss per common unit.

Diluted net loss per unit or share is calculated by adjusting weighted-average shares outstanding for the dilutive effect of common unit or share equivalents outstanding for the period.

Basic net loss per unit/share is calculated by dividing net loss attributable to common unitholders or shareholders by the weighted-average number of units or shares outstanding during the period, contingently issuable restricted stock units for which no future service is required as a condition to the delivery of the underlying common stock, and pre-funded warrants because their exercise requires only nominal consideration for the delivery of shares (collectively, “basic shares”), without consideration of common unit or share equivalents.

Diluted net loss per unit or share is calculated by adjusting basic shares outstanding for the dilutive effect of common unit or share equivalents outstanding for the period.

For purposes of the diluted net loss per unit or share calculation, preferred units or shares, profit interests, and warrants to purchase preferred units or shares are considered to be common unit or share equivalents but are excluded from the calculation of diluted net loss per common unit or share if their effect would be anti-dilutive.

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As of December 31,

Series 1 Preferred Units/Shares

Series 1a Preferred Units/Shares

Series 1a Preferred Warrant

Series 1b Preferred Units/Shares

Series 1c Preferred Units/Shares

Series 1d Preferred Units/Shares

Class B Common Units Profits Interests

Common Stock Options

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Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Account Standards Update (“ASU”) No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

ASU 2019-12 also improves the consistent application, and the simplification, of other areas of Topic 740 by clarifying and amending existing guidance.

ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted.

Adoption of this new guidance on January 1, 2021 did not have an impact on the Company’s financial position and results of operations.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”).

ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments.

It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions.

In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation.

The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the U.S.

Securities and Exchange Commission (“SEC”) for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020.

Adoption of this new guidance on January 1, 2021 did not have an impact on the Company’s financial position and results of operations.

For the year ended December 31, 2022, the Company has reviewed recent accounting standards and does not expect the future adoption of recently issued accounting pronouncements to have a material impact on the Company's financial position and results of operations.

Balance Sheet Details

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Prepaid research and development costs

Prepaid other

Interest receivable

Deferred offering costs

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Accrued and other current liabilities

Accrued interest payable

Accrued research and development costs

Accrued compensation and benefits

Accrued other

Total accrued and other current liabilities

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The Notes were recorded upon issuance net of debt discount costs of $ 28,301 .

The Company recognized $ 16,888 and $ 14,126 of amortized debt discount costs during the years ended December 31, 2021 and 2020, respectively, related to the Notes.

The Company recognized $ 16,888 of amortized debt discount costs during the year ended December 31, 2021, related to the Notes.

On January 27, 2021, the Company amended the terms of the Notes to increase the maximum amount of convertible promissory notes to be issued from $ 3,000,000 to $ 5,000,000 , to allow for the conversion of the convertible promissory notes into shares of common stock upon a Qualified Initial Public Offering with aggregate gross proceeds to the Company of at least $ 10,000,000 at a 20% discount to the lowest price per share paid by investors for that financing and to extend the maturity date to December 31, 2021.

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Upon this conversion, since the conversion contained a 20% discount, the Company measured the beneficial conversion feature and determined that it was not material to the financial statements.

As of December 31, 2021, the Company had no promissory notes outstanding.

As of December 31, 2022, and 2021, the Company had no promissory notes outstanding.

Long-Term Debt

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The Company also paid the final payment fee of $ 225,000 in February 2021 and the amendment fee of $ 100,000 in March 2021.

As of December 31, 2021, the Company had no long-term debt outstanding.

Paycheck Protection Program

On April 22, 2020, the Company received proceeds of a $ 133,592 loan from SVB under provisions of the Small Business Administration Paycheck Protection Program (“PPP”).

This loan was forgiven in December 2020 under provisions of the PPP.

For the year ended December 31, 2021, the Company paid a total of $ 556,482 to SVB as final payments for its long-term debt.

As of December 31, 2022, and 2021, the Company had no long-term debt outstanding.

Equity Securities

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Prior to the IPO, the Company had 1,911,009 shares of common stock outstanding after giving effect for the Company’s reverse stock split in July 2021.

The Company’s total common stock issued and outstanding was 8,328,629 shares as of December 31, 2021.

On April 25, 2022, the Company closed a private placement (“PIPE”), in which it sold 898,585 shares of its common stock together with 2,875,000 pre-funded warrants to purchase one share of common stock with an exercise price of $ 0.0001 per share (“Pre-funded Warrant”), and 3,773,585 warrants to purchase one share of common stock with an exercise price of $ 1.325 per share (“PIPE Common Warrant”) at a combined offering price of $ 1.325 .

The Company received net cash proceeds of approximately $ 4.3 million from the PIPE after deducting underwriters’ discounts and offering expenses of approximately $ 0.7 million.

The PIPE Common Warrant related to this private placement will expire on May 12, 2027.

During the quarter ended June 30, 2022, 875,000 of the Pre-funded Warrants were exercised.

Further, during the quarter ended September 30, 2022, 2,000,000 of the Pre-funded Warrants were exercised.

No Pre-Funded Warrants were outstanding as of December 31, 2022.

The Company’s total common stock issued and outstanding was 12,321,848 and 8,328,629 shares as of December 31, 2022, and 2021, respectively.

Series 1 Preferred Units

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