What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-11 compared with 2022-11-10 · 97 added, 442 removed, 245 unchanged (69% of the section changed)

1 unchanged sentence

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Balance Sheets

September 30,

Cash and cash equivalents

6 unchanged sentences

Stockholders’ Equity:

Common Stock, par value $ 0.0001 , 250,000,000 shares authorized and 12,102,214 shares issued and outstanding as of September 30, 2022;

Common Stock, par value $ 0.0001 , 250,000,000 shares authorized, and 2,388,157 shares issued and outstanding as of March 31, 2023;

and 250,000,000 shares authorized, and 770,115 shares issued and outstanding as of December 31, 2022, respectively.

7 unchanged sentences

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Statements of Operations

For the three months ended

September 30,

For the nine months ended

September 30,

Operating expenses:

5 unchanged sentences

( 2,786,152 )

( 7,962,797 )

( 5,304,008 )

Other income and expenses:

Interest (income) expense, net

$ ( 2,424,586 )

$ ( 1,712,920 )

$ ( 7,941,311 )

$ ( 5,349,621 )

Deemed dividend upon the redemption of 5,221,156 shares of Series 1c preferred stock (see Note 6)

Deemed dividend upon the amendment of terms of the Series 1d convertible preferred stock (see Note 6)

Net loss attributable to common stockholders

$ ( 2,424,586 )

$ ( 4,275,157 )

Interest income, net

$ ( 2,240,142 )

1 unchanged sentence

Net loss per share of common stock, basic and diluted

Weighted-average basic and diluted common units/shares

Weighted-average basic and diluted common shares

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

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Statements of Stockholder’s Equity

3 unchanged sentences

Stock-based compensation

( 2,786,151 )

Balance at March 31, 2022

$ ( 38,768,426 )

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

Stock-based compensation

( 2,730,573 )

Balance at June 30, 2022

$ ( 41,498,999 )

Issuance of common stock upon exercise of pre-funded warrants

Issuance of restricted stock unit awards

Stock-based compensation

( 2,424,586 )

Balance at September 30, 2022

$ ( 43,923,585 )

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

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Statements of Stockholder’s Equity (Deficit)

Class A Common

Class B Common

Series 1 Preferred

Series 1a Preferred

Series 1a Warrants

Series 1b Preferred

Balance at December 31, 2020

Series 1d Preferred Units issued

Class B Common Units forfeited

Conversion of Common Units to Common Stock

( 1,744,983 )

$ ( 2,342,853 )

Conversion of Preferred Units to Preferred Stock

( 6,906,244 )

$ ( 6,833,877 )

( 5,018,750 )

$ ( 4,380,081 )

( 6,500,000 )

$ ( 4,119,595 )

Conversion of Warrant Units to Preferred Stock Warrants

Settlement of fractional shares paid in cash

( 2,240,142 )

Stock-based compensation

Balance at March 31, 2023

Stock-based compensation

Balance at June 30, 2021

Redemption of Series 1c preferred shares

Conversion of Preferred Stock to Common Stock

Conversion of Preferred Stock Warrants to Common Stock Warrants

Conversion of Convertible Debt to Common Stock

Issuance of Common Stock and warrants, net issuance costs

Stock-based compensation

Balance at September 30, 2021

$ ( 47,833,330 )

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

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

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

Series 1c Preferred

Series 1d Preferred

Preferred Stock

Preferred Stock Warrants

Statements of Stockholder’s Equity

Stockholders’

Balance at December 31, 2021

$ ( 35,982,275 )

$ ( 3,177,939 )

Series 1d Preferred Units issued

Class B Common Units forfeited

Conversion of Common Units to Common Stock

Conversion of Preferred Units to Preferred Stock

( 46,553,188 )

$ ( 6,491,592 )

( 6,065,989 )

$ ( 5,034,801 )

Conversion of Warrant Units to Preferred Stock Warrants

Stock-based compensation

3 unchanged sentences

$ ( 38,768,427 )

Stock-based compensation

$ ( 1,331,792 )

Balance at June 30, 2021

$ ( 31,716,498 )

$ ( 505,802 )

Redemption of Series 1c preferred shares

( 5,221,156 )

$ ( 1,000,000 )

Conversion of Preferred Stock to Common Stock

( 65,823,015 )

Conversion of Preferred Stock Warrants to Common Stock Warrants

( 1,419,228 )

Conversion of Convertible Debt to Common Stock

Issuance of Common Stock and warrants, net issuance costs

Stock-based compensation

$ ( 1,712,920 )

Balance at September 30, 2021

$ ( 33,429,418 )

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

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Statements of Cash Flows

For the nine months ended

September 30,

For the three months ended

Cash flows from operating activities:

3 unchanged sentences

Stock-based compensation

Amortization of debt discount costs

Increase (decrease) in cash resulting from changes in:

Prepaid expenses and other current assets

( 1,007,393 )

Accounts payable

Accrued and other current liabilities

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

Net cash used in operating activities

2 unchanged sentences

Cash flows from financing activities:

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

( 1,000,000 )

Payments on debt

Net proceeds from issuance of convertible subordinated promissory notes

Proceeds from issuance of Series 1d preferred units

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

Proceeds from exercise of pre-funded warrants

Payment for fractional shares in reverse stock split

Net cash provided by financing activities

3 unchanged sentences

Cash and cash equivalents at end of period

Supplemental disclosures:

Cash paid for interest

Cash paid for taxes

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 of the Series 1d convertible preferred stock

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

Conversion of preferred stock to common stock at IPO

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

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Notes to Financial Statements

5 unchanged sentences

Initial Public Offering

On August 17, 2021, the Company completed its initial public offering (“IPO”), in which it sold 2,571,428 shares of its common stock together with 2,571,428 warrants to purchase one share of common stock with an exercise price of $ 7.00 per share, at a combined offering price of $ 7.00 .

Additionally, the underwriters exercised their option to purchase an additional 385,714 warrants to purchase common stock with an exercise price of $ 7.00 per share.

On August 17, 2021, the Company completed its initial public offering (“IPO”), in which it sold 160,714 shares of its common stock, par value $ 0.0001 per share (“Common Stock”), together with 160,714 warrants to purchase one share of Common Stock with an exercise price of $ 112.00 per share, at a combined offering price of $ 112.00 .

Additionally, the underwriters exercised their option to purchase an additional 24,106 warrants to purchase Common Stock with an exercise price of $ 112.00 per share, resulting in total IPO warrants issued of 184,820 at an exercise price of $ 112.00 .

The Company received net cash proceeds of approximately $ 15.4 million from the IPO after deducting underwriters’ discounts and offering expenses of approximately $ 2.6 million.

Each of the following occurred in connection with the completion of the IPO in August 2021:

The sale of 2,571,428 shares of common stock along with 2,957,142 warrants to purchase common stock.

The conversion of 65,823,015 shares of convertible preferred stock into an aggregate of 3,813,973 shares of common stock.

The conversion of $ 175,000 principal amount of outstanding convertible promissory notes and accrued interest of $ 5,434 into 32,219 shares of common stock.

The conversion of 1,419,228 Series 1a preferred warrants into 69,212 warrants exercisable into common stock.

Each purchaser in the IPO received one share of common stock and one warrant to purchase one share of common stock at a combined offering price of $ 7.00 .

Each warrant to purchase common stock entitles the holder to purchase one share of common stock, are immediately exercisable, and expire five years from the date of issuance.

The Company evaluated the terms of the warrants issued and determined that they should be classified as equity instruments.

The Company’s shares of Common Stock and warrants are listed on the Nasdaq Stock Market LLC under the symbols “DRMA,” and “DRMAW,” respectively, and both began trading in August 2021.

After the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.

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.

Reverse Stock Split

On July 1, 2021, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-20.5 pursuant to an amendment to the Company’s certificate of incorporation approved by the Company’s board of directors and stockholders.

On March 13, 2023, the Company effected a reverse split of shares of the Company’s Common Stock at a ratio of 1-for-16 pursuant to an amendment to the Company’s certificate of incorporation approved by the Company’s board of directors and stockholders.

The par value was not adjusted as a result of the reverse split.

All issued and outstanding common stock shares and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented, and the conversion ratios for the Company’s outstanding preferred stock was adjusted accordingly.

See Note 6 – Equity Securities for additional information.

All issued and outstanding Common Stock shares and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Liquidity and Going Concern Uncertainty

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 September 30, 2022, cash and cash equivalents totaled $ 8.1 million and the Company had an accumulated deficit of $ 43.9 million.

For the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company used cash of $ 7.0 million and $ 5.7 million, respectively, in operations.

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

As of March 31, 2023, cash and cash equivalents totaled $ 8.8 million and the Company had an accumulated deficit of $ 47.8 million.

For the three months ended March 31, 2023, and the year ended December 31, 2022, the Company used cash of $ 1.6 million and $ 8.8 million, respectively, in operations.

During March 2023, the Company raised $ 5.0 million in gross proceeds from an at-the-market public offering of Common Stock and warrants.

The Company’s cash balances are expected to fund operations into the first quarter of 2024.

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

These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued.

Historically, the Company’s principal sources of cash have included proceeds from the issuance of common and preferred equity units and proceeds from the issuance of debt.

Historically, the Company’s principal sources of cash have included proceeds from the issuance of common and preferred equity securities and proceeds from the issuance of debt.

The Company’s principal uses of cash have included cash used in operations and payments for license rights.

7 unchanged sentences

Management can provide no assurance that any sources of a sufficient amount of financing or collaboration agreements will be available to the Company on favorable terms, if at all.

Additionally, the COVID-19 pandemic continues to evolve and has already disrupted global financial markets.

The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the pandemic.

If the disruption persists or deepens, the Company could experience an inability to access additional capital.

The Company has raised additional capital through the initial public offering of its common stock and warrants and through a private placement financing;

however, management’s current plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions, potential future global pandemics or health crises, and the recent disruptions to, and volatility in, the credit and financial markets in the United States.

The Company has raised additional capital through the initial public offering of its Common Stock and warrants, as well as a private placement financing in April 2022 and an at-the-market public offering in March 2023;

however, prior completed financings do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

Basis of Presentation

17 unchanged sentences

The Company operates in only one segment.

Deferred Financing Costs

The Company capitalizes certain legal, accounting, and other fees and costs that are directly attributable to in-process equity financings as deferred offering costs until such financings are completed.

Upon the completion of an equity financing, these costs are recorded as a reduction of additional paid-in capital of the related offering.

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 and as of September 30, 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, cash sweep, and money market accounts.

This cash is held in checking and cash sweep accounts.

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

1 unchanged sentence

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

3 unchanged sentences

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

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

Interest Income

29 unchanged sentences

Comprehensive loss includes net loss and other comprehensive income (loss) for the periods presented.

The Company did not have other comprehensive income (loss) items such as unrealized gains and losses and so for the three and nine months ended September 30, 2022, and September 30, 2021, comprehensive loss was equal to the net loss.

Net Loss Per Common Unit/Share

On March 24, 2021, the Company converted from an LLC to a C-corporation.

Upon the conversion, each outstanding common unit and preferred unit was converted into one share of common stock and preferred stock, respectively.

Common units had similar rights and characteristics of common stock issued upon the conversion.

In calculating net loss per share, the Company retrospectively applied the effects of the conversion to the number of common units outstanding prior to the conversion.

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

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.

As the Company has reported a net loss for the periods presented, diluted net loss per common unit or share is the same as the basic net loss per common unit or share for the periods presented.

Three Months Ended September 30,

Nine Months Ended September 30,

$ ( 2,424,586 )

$ ( 1,712,920 )

$ ( 7,941,311 )

$ ( 5,349,621 )

Deemed dividend upon redemption of 5,221,156 shares of Series 1c convertible preferred stock

Deemed dividend upon amendment of the terms to the

Series 1d convertible preferred stock

Net loss attributable to common stockholders

$ ( 2,424,586 )

$ ( 4,275,157 )

The Company did not have other comprehensive income (loss) items such as unrealized gains and losses and so for the three months ended March 31, 2023, and 2022, comprehensive loss was equal to the net loss.

Net Loss Per Common Share

Basic net loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of 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 share equivalents.

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

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

As the Company has reported a net loss for the periods presented, diluted net loss per common share is the same as the basic net loss per common share for the periods presented.

Three Months Ended

$ ( 2,240,142 )

$ ( 2,786,152 )

Basic and diluted net loss per common unit/share

Weighted-average basic and diluted common units/shares

The common unit or share equivalents that are not included in the calculation of diluted net loss per common unit or share but could potentially dilute basic earnings per share in the future are as follows:

As of September 30,

Basic and diluted net loss per common share

Weighted-average basic and diluted common shares

The common share equivalents that are not included in the calculation of diluted net loss per common share but could potentially dilute basic earnings per share in the future are as follows:

As of March 31,

Common stock options

2 unchanged sentences

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard-setting bodies that are adopted by the Company as of the specified effective date.

Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

For the three months ended March 31, 2023, 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

The following provides certain balance sheet details:

September 30,

Prepaid expenses and other current assets:

3 unchanged sentences

Interest receivable

Deferred offering costs

Total prepaid expenses and other current assets

3 unchanged sentences

Accrued legal fees

Accrued board compensation

Accrued other

Total accrued and other current liabilities

Subordinated Convertible Promissory Notes

In July and October 2020, the Company issued an aggregate of $ 3,000,000 of subordinated convertible promissory notes (the “Notes”).

Notes in the amount of $ 1,145,000 were issued to existing investors who are also related parties (See Note 11 - Related Parties), $ 1,730,000 were issued to existing investors who are not related parties and notes in the amount of $ 125,000 were issued to new investors.

The Notes bore interest at 4 % per annum and were to mature on July 17, 2021 .

The Notes were subordinated to the Company’s long-term debt and were convertible into a qualified Series A financing of at least $ 10 million at a 20 % discount to the lowest price per unit paid by investors for that financing.

Under authoritative accounting guidance, this contingent beneficial conversion feature was to be measured and recognized when the contingency is resolved.

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

The Company recognized $ 14,126 of amortized debt discount costs during the nine months ended September 30, 2021.

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 .

In connection with this amendment, Notes in the amount of $ 1,255,000 were issued to existing investors who are also related parties (See Note 11 - Related Parties) and $ 311,000 were issued to existing investors who are not related parties.

In March 2021, the Company further amended the terms of the Notes to allow for the conversion of the Notes into Series 1d Preferred Units at the same price as purchasers of Series 1d Preferred Units.

As of March 15, 2021, $ 4,391,000 of the Notes, along with related interest of $ 73,801 , were converted to 5,379,247 Series 1d Preferred Units.

Since the Notes did not convert at a discount, there was no beneficial conversion feature.

The Company considers the above modification of the Notes in March 2021 to be a substantial modification requiring extinguishment accounting under Accounting Standards Codification (“ASC”) 470-50-40-10.

Based upon an independent valuation of the reacquisition price of the Notes, the difference between the reacquisition price and the net carrying amount of the Notes immediately prior to the modification is not material to the financial statements.

In connection with the Company’s IPO in August 2021, the outstanding principal of the Notes and accrued interest totaling $ 180,434 converted into 32,219 shares of common stock.

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, and September 30, 2022, the Company had no promissory notes outstanding.

Long-Term Debt

In February 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) whereas SVB agreed to provide term loans to the Company in two tranches.

The first tranche of $ 2,500,000 was drawn in February 2017 and bore interest at a rate of 1.5 % above the prime rate, which was 3.25 % as of December 31, 2020, with principal and interest payable monthly through February 9, 2021.

The second tranche was not utilized.

In connection with the Loan and Security Agreement, SVB also received warrant units to purchase, at any time after February 9, 2017 and prior to February 9, 2027, 187,978 Series 1a Preferred Units or the equivalent Series A Preferred Units had they purchased Series 1a Preferred Units, if Series A Preferred Units are issued, at a price of $ 1.00 per unit.

The estimated fair value of these warrant units of $ 104,630 (See Note 6 – Equity Securities), as well as costs associated with the term loan, including provision for a final payment of $ 225,000 , were recorded as a discount to outstanding debt and amortized to interest expense utilizing the effective interest method over the underlying term of the loan.

In June 2019, the Company and SVB entered into a First Amendment to the Loan and Security Agreement whereby if the Company did not achieve certain capital milestones by December 1, 2019, term loan principal payments would be deferred from December 21, 2019 through May 1, 2020 with the deferred principal payments being payable in equal monthly installments, in addition to those principal payments already scheduled to be paid, starting on June 1, 2020 and extending through the February 9, 2021 maturity date of the term loan.

In addition, if those principal payments were deferred for that six-month period, a non-refundable amendment fee of $ 100,000 would be due and payable on the earliest to occur of the maturity date, the prepayment of the term loan or the occurrence of an event of default.

The capital milestones were not achieved by December 1, 2019 and, therefore, the defined principal repayments were deferred.

The non-refundable amendment fee of $ 100,000 , as well as $ 12,280 of costs associated with the amendment, were recorded as a discount to outstanding debt and were amortized to interest expense utilizing the effective interest method over the remaining underlying term of the loan.

In January and February 2021, the Company paid the final principal payments of $ 231,482 under the SVB Loan and Security Agreement.

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

For the nine months ended September 30, 2021, the Company paid a total of $ 556,482 to SVB as final payments for its long-term debt.

As of December 31, 2021, and September 30, 2022, the Company had no long-term debt outstanding.

Equity Securities

Common Stock and Preferred Stock

On March 24, 2021, the Company entered into a Plan of Conversion (“Conversion”) whereby the Company converted from an LLC under the laws of the State of Delaware to a Delaware C-corporation with the name Dermata Therapeutics, Inc.

In connection with the Conversion, each fully paid preferred and common unit in the LLC was converted into a like number of shares of preferred and common stock of the Company with a par value of $ 0.0001 per share.

The Shares issued had the same rights, preferences and privileges that had accrued to the pre-converted Units.

Any references in these Notes to Financial Statements to equity securities as “units” refer to pre-conversion equity securities and any references to “shares” or “stock” in these Notes to Financial Statements refer to post-conversion equity securities.

The par value was not adjusted as a result of the reverse split.

All issued and outstanding common stock share and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse split for all periods presented.

On August 17, 2021, the Company completed its IPO, in which it sold 2,571,428 shares of its common stock together with 2,571,428 warrants to purchase one share of common stock with an exercise price of $ 7.00 per share at a combined offering price of $ 7.00 .

Additionally, the underwriters exercised their option to purchase an additional 385,714 warrants with an exercise price of $ 7.00 per warrant.

The Company received net cash proceeds of approximately $ 15.4 million from the IPO after deducting underwriters’ discounts and offering expenses of approximately $ 2.6 million.

Each of the following occurred in connection with the completion of the IPO in August 2021:

The sale of 2,571,428 shares of common stock along with 2,957,142 warrants to purchase common stock.

The conversion of 65,823,015 shares of convertible preferred stock into an aggregate of 3,813,973 shares of common stock.

The conversion of $ 175,000 principal amount of outstanding convertible promissory notes and accrued interest of $ 5,434 into 32,219 shares of common stock.

The conversion of 1,419,228 Series 1a preferred warrants into 69,212 warrant shares exercisable into common stock.

After the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.

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.

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 .

On March 20, 2023, the Company closed a public offering (the “2023 Offering”) priced at the market under Nasdaq rules, in which it sold an aggregate of (i) 85,000 shares of Common Stock, (ii) pre-funded warrants (the “2023 Pre-Funded Warrants”) to purchase up to an aggregate of 1,533,123 shares of Common Stock with an exercise price of $ 0.0001 per share, (iii) Series A warrants (the “Series A Common Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock, and (iv) Series B warrants (the “Series B Common Warrants” and collectively with the Series A Warrants, the “2023 Offering Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock.

The 2023 Offering Warrants have an exercise price of $ 2.82 per share.

The 2023 Pre-Funded Warrants were fully exercised by March 31, 2023, adding 1,533,123 common shares.

No 2023 Pre-Funded Warrants were outstanding as of March 31, 2023.

On April 25, 2022, the Company closed a private placement (“PIPE”), in which it sold 56,161 shares of its Common Stock together with 179,687 pre-funded warrants to purchase up to an aggregate of 179,687 shares of Common Stock with an exercise price of $ 0.0001 per share (“Pre-funded Warrant”), and 235,849 warrants to purchase up to an aggregate of 235,849 shares of Common Stock with an exercise price of $ 21.20 per share (“PIPE Common Warrant”) at a combined offering price of $ 21.20 .

The PIPE Common Warrants related to the private placement were to expire on May 12, 2027.

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 September 30, 2022.

The Company’s total common stock issued and outstanding was 12,102,214 and 8,328,629 shares as of September 30, 2022, and December 31, 2021, respectively.

Series 1 Preferred Units

From the Company’s formation on December 8, 2014 through 2016, the Company issued 6,906,244 Series 1 Preferred Units for net consideration of $ 6,833,877 .

The Company’s Series 1 Preferred Units were converted to preferred stock during the first quarter of 2021.

Additionally, in August 2021, the Company converted all preferred stock into common stock.

No Series 1 Preferred Units were outstanding as of December 31, 2021 and September 30, 2022.

Series 1a Preferred Units

In 2016, the Company issued 5,000,000 Series 1a Preferred Units in exchange for cash of $ 5,000,000 and net of issuance costs of $ 19,868 .

Purchasers of the Series 1a Preferred Units also received 1,250,000 Warrant Units to purchase an additional amount of Series 1a Preferred Units.

The estimated fair value of the warrant units was recorded as a separate component of members’ equity (deficit) in the accompanying balance sheet as of December 31, 2020 with an offset to the Series 1a proceeds.

In June 2020, 18,750 of the warrants were exercised for consideration of $ 18,750 , which consideration was received in July 2020.

The Company’s Series 1a Preferred Units were converted to preferred stock during the first quarter of 2021.

Additionally, in August 2021, the Company converted all preferred stock into common stock.

No Series 1a Preferred Units were outstanding as of December 31, 2021 and September 30, 2022.

Series 1b Preferred Units

In 2018, the Company issued 6,500,000 Series 1b Preferred Units in exchange for cash of $ 6,500,000 and net of issuance costs of $ 40,405 .

Purchasers of the Series 1b Preferred Units also received 1,268,279 Class B Common Units.

The estimated fair value of the Class B Common units has been recorded as a component of members’ equity (deficit) in the accompanying balance sheet as of December 31, 2020 with an offset to the Series 1b proceeds.

The Company’s Series 1b Preferred Units were converted to preferred stock during the first quarter of 2021.

Additionally, in August 2021, the Company converted all preferred stock into common stock.

No Series 1b Preferred Units were outstanding as of December 31, 2021 and September 30, 2022.

Series 1c Preferred Units

On June 14, 2019, the Company closed participation in a $ 5,785,000 Series 1c financing from current and new investors.

As of December 31, 2019, cash of $ 5,535,000 , including $ 150,000 from the conversion of a convertible note issued to a Managing Member of the Company for a loan made to the Company, net of issuance costs of $ 25,857 , had been received.

The accrued interest on the convertible note in the amount of $ 1,487 was also converted into Series 1c Preferred Units.

The remaining balance of $ 250,000 committed to the financing was paid in the amounts of $ 125,000 in May 2020 and $ 125,000 in June 2020.

In June 2019, 5,221,156 Series 1c Preferred Units were issued in connection with the settlement and license agreement, and in July 2021, the Company redeemed these units/shares in connection with an amendment to the settlement and license agreement.

See Note 9 – License Agreements for more information.

The Company’s Series 1c Preferred Units were converted to preferred stock during the first quarter of 2021.

Additionally, in August 2021, the Company converted all preferred stock into common stock.

No Series 1c Preferred Units were outstanding as of December 31, 2021 and September 30, 2022.

Series 1d Preferred Units

In March 2021, the Company issued 686,742 Series 1d Preferred Units at a cost of $ 0.83 per unit for total proceeds of $ 570,000 .

In addition, as described in Note 4 – Subordinated Convertible Promissory Notes, as of March 15, 2021, $ 4,391,000 of convertible promissory notes, along with related interest of $ 73,801 , were converted into 5,379,247 Series 1d Preferred Units.

The outstanding Series 1d Preferred Units were converted to preferred stock during the first quarter of 2021.

Additionally, in August 2021, the Company converted all preferred stock into common stock.

No Series 1d Preferred Units were outstanding as of December 31, 2021 and September 30, 2022.

Class A Common Units

During 2014 and 2015, the Company issued 508,777 Class A Common Units in exchange for consideration of $ 10,430 .

The Class A Common Units outstanding converted to common stock during the first quarter of 2021.

No Class A Common Units were outstanding as of December 31, 2021 and September 30, 2022.

Class B Common Units

The Company had 1,767,477 Class B Common Units outstanding as of December 31, 2020.

This includes 133,953 Class B Common Units issued for consideration of $ 2,853 and 1,268,279 Class B Common Units issued in connection with the issuance of the Series 1b Preferred Units, which were assigned an estimated fair value of $ 2,340,000 .

The remaining 365,245 Class B Common Units were issued as a profits interest as that term is defined by Revenue Procedure 93-27, 1993-2 C.B.

343, as clarified by Revenue Procedure 2001-43, 2001-2 C.B.

191, with participation thresholds from $ 0.001 to $ 0.36 .

During the first quarter 2020, the Company issued 2,439 Class B Common Units, all of which represented a profits interest.

During the first quarter of 2021, 22,494 Class B Common Units were forfeited as a result of employee resignations.

The remaining Class B Common Units outstanding converted to common stock during the first quarter of 2021.

No Class B Common Units were outstanding as of December 31, 2021 and September 30, 2022.

Liquidation Preference

Prior to the Company’s IPO in August 2021, the Company’s preferred units were subject to liquidation preferences contained herein.

So long as there were no Series A Preferred Units outstanding at the time of a liquidity event, any liquidity event proceeds would have been distributed as follows:

First, the Series 1d Preferred Units had a two times preference in liquidation over the Series 1c Preferred Units and then participated with the Series 1c, 1b and 1a Preferred Units once the Series 1c Preferred Unit preferences had been satisfied.

Second, proceeds to Series 1c Preferred Unit holders sufficient to cover two times their Series 1c investment;

third, proceeds to Series 1, Series 1a, Series 1b, Series 1c, and Series 1d Preferred Unit holders sufficient to cover interest at the rate of 8 % per annum on the Series 1 Preferred Units, the Series 1a Preferred Units, the Series 1b Preferred Units, the Series 1c Preferred Units, and Series 1d Preferred Units;

fourth, proceeds to the Series 1, Series 1a, Series 1b and Series 1c Preferred Unit holders sufficient to cover the unit value of Series 1 Preferred Units, Series 1a Preferred Units, Series 1b Preferred Units, Series 1c Preferred Units, and Series 1d Preferred Units;

fifth, to Class A and Class B Common holders proceeds sufficient to cover their pro-rata portion of distributions made to Series 1, Series 1a, Series 1b, Series 1c, and Series 1d Preferred Unit holders, provided that no Class B Common Units would share in any distribution until after the point at which the amount per Class A Common Unit exceeds the amount of such Class B Common Unit’s Participation Threshold;

and sixth, a pro-rata distribution of the remaining proceeds to all equity holders.

Upon the issuance of Series A Preferred Units, each Series 1 Preferred Unit, each Series 1a Preferred Unit, each Series 1b Preferred Unit, each Series 1c Preferred Unit and each Series 1d Preferred Unit would have automatically converted into the number of Series A Preferred Units equal to the sum of the unit value of the Series 1, Series 1a, Series 1b, Series 1c or Series 1d Preferred Units plus all accumulated preferred return as of the conversion date that would have been due with respect to such Series 1, Series 1a, Series 1b, Series 1c or Series 1d Preferred Units in the case of a liquidity event.

As of December 31, 2021 and September 30, 2022, no Series A Preferred Units had been issued, and no preferred stock remained outstanding.

Conversion Rights

Prior to the Company’s IPO in August 2021, the Company’s preferred units were subject to conversion rights contained herein.

Upon the first issuance by the Company of any Series A Preferred Units, each Series 1 Preferred Unit and each Series 1a Preferred Unit and each Series 1b Preferred Unit and each Series 1c Preferred Unit and each Series 1d Preferred Unit would have automatically been converted into the number of Series A Preferred Units equal to the sum of the Unit Value with respect to such Series 1 Preferred Unit or Series 1a Preferred Unit or Series 1b Preferred Unit or Series 1c Preferred Unit or Series 1d Preferred Unit as of the conversion date divided by the product of 0.80 multiplied by the Unit Value of the Series 1 Preferred Units or Series 1a Preferred Units or Series 1b Preferred Units or Series 1c Preferred Units or Series 1d Preferred Unit issued on the conversion date.

The Series A Preferred Units issued to the Series 1 Preferred Members and Series 1a Preferred Members and Series 1b Preferred Members and Series 1c Preferred Members and Series 1d Preferred Members upon conversion of such Series 1 Preferred Units and Series 1a Preferred Units and such Series 1b Preferred Units and Series 1c Preferred Units and Series 1d Preferred Units would have had the same rights, privileges and preferences as the other Series A Preferred Units issued by the Company on the conversion date.

The Company considered the classification of the Preferred Units and concluded that they were appropriately included as a component of equity since each class of Preferred Units participates in the same form of consideration received upon a change in control.

As of December 31, 2021 and September 30, 2022, no preferred units or stock remained outstanding.

The PIPE Pre-funded Warrants were exercised fully during 2022, and no Pre-Funded Warrants were outstanding as of December 31, 2022, or March 31, 2023, related to the 2022 PIPE.

In connection with the March 2023 Offering, the Company agreed to amend the terms of the PIPE Common Warrants, which are held by the purchaser in the 2023 Offering.

The exercise price of the PIPE Common Warrant was reduced from $21.20 to $2.82 per share upon closing of the 2023 Offering.

The original expiration date of the PIPE Common Warrant was May 12, 2027, which was extended to five years after the closing of the 2023 Offering, or March 20, 2028.

The modification of the PIPE Common Warrants resulted in an increase in additional paid-in capital since the warrants are equity classified before and after the modification in connection with the March 2023 Offering.

Stockholders’ Agreements

On March 24, 2021, in connection with the conversion of Dermata Therapeutics, LLC into a Delaware corporation, the Company entered into a Stockholders’ Agreement (as amended, the Stockholders’ Agreement) with all of its 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 the Company’s shares of capital stock, set forth agreements and understandings with respect to how shares of its capital stock held by the stockholders party thereto will have been 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.

In addition, pursuant to the Stockholders’ Agreement, holders of the Company’s Series 1a Preferred Stock were entitled to purchase, at any time prior to March 14, 2026, such number of shares of the Company’s Series 1a Preferred Stock as such Series 1a Stockholder shall request, up to an aggregate number of shares of Series 1a Preferred Stock not to exceed the product of 25% and the aggregate number of shares Series 1a Preferred Stock then held by such Series 1a Stockholder (or the Series 1a Preferred Warrant Rights).

The shares of Series 1a Preferred Stock purchased pursuant to any Series 1a Preferred Warrant Right had a per share purchase price of $ 20.50 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization).

Upon the consummation of the Company’s IPO of common stock, each Series 1a Preferred Stock Warrant became exercisable for the same number of shares of Common Stock with the same per share exercise price of $ 20.50 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization).

The Stockholders’ Agreement would have automatically terminated upon the earliest of (a) immediately prior to the consummation of the Company’s initial public offering of common stock, and (b) the consummation of a sale of the Company, subject to certain conditions.

The Company completed the IPO of common stock in August 2021, thereby terminating the Stockholders’ Agreement.

On June 29, 2021, with effectiveness on July 1, 2021, the Company’s board of directors amended its Certificate of Incorporation to adjust the conversion price and certain conversion mechanics of the Company’s issued and outstanding Series 1d Preferred Stock, whereby each share of Series 1d Preferred stock would convert into such number of Common Stock as determined by dividing (i) the product of (a) the Original Issue Price for the Series 1d Preferred Stock, multiplied by (b) 1.2, rounded to the nearest whole cent, by (ii) the 80 % of the initial public per share offering price in the IPO.

The Series 1d conversion shall not be subject to further adjustment for any stock split.

On June 29, 2021, with effectiveness on July 1, 2021, the Company’s board of directors approved an amendment to the 2021 Plan to increase the number of shares of Common Stock available for issuances from 593,340 to 1,648,213 shares.

Effective January 1, 2022, an evergreen provision contained in the Company's 2021 Omnibus Equity Incentive Plan, or the 2021 Plan, added one percent of common shares outstanding as of December 31, 2021 to the 2021 Plan.

This evergreen provision resulted in an increase of 83,286 shares to the 2021 Plan, increasing shares authorized for issuance under the 2021 Plan to 1,731,499 as of January 1, 2022.

On June 29, 2021, the Company’s board of directors approved a 1-for-20.5 reverse split of all outstanding shares of common stock, effected on July 1, 2021 (no fractional shares were issued).

Except as otherwise noted, all references to share and per share amounts related to common stock and common units have been restated to reflect the reverse stock split.

On July 12, 2021, the Company’s board of directors amended its Certificate of Incorporation to further adjust the conversion price and certain conversion mechanics of the Company’s issued and outstanding Series 1d Preferred Stock.

The two amendments to the Series 1d Preferred Stock conversion terms were combined for purposes of accounting for the amendments.

In order to determine if these amendments resulted in a modification or extinguishment of the Series 1d Preferred Stock, pursuant to the related authoritative guidance, the Company engaged an independent third-party valuation firm to assist with determining the fair value of the Series 1d Preferred Stock immediately before the change in conversion terms, as well as immediately after the change in conversion terms.

This resulted in a substantive increase in fair value, and as such, the Company determined the amendments resulted in extinguishment accounting.

Accordingly, the Company applied ASC 260, Earnings per Share, and ASC 470, Debt, by analogy to determine the appropriate measurement and presentation.

The Company compared the fair value of the Series 1d Preferred Stock, as amended, to its carrying value and recorded the resulting difference of approximately $2.3 million as a deemed dividend for the Series 1d preferred shareholders.

The Company recorded the deemed dividend to additional paid-in capital during the quarter ended September 30, 2021.

Because the Company is in an accumulated deficit position, the deemed dividend increased the net loss attributable to the common shareholders for the three and nine months ended September 30, 2021.

On July 30, 2021, the Company entered into a Second Amendment to the License and Settlement Agreement (or, the Second License Amendment), whereby, for the settlement of certain disputes arising under the License Agreement, the Company agreed to exchange the shares of Series 1c Preferred Stock owned by Villani, Inc.

(“Villani”) for an increase of milestone payments and royalty rates due to Villani under the License Agreement.

On July 30, 2021, Villani surrendered 5,221,156 shares of Series 1c Preferred Stock to the Company and on August 17, 2021, the Company paid to Villani $ 1.0 million upon the close of the Company’s initial public offering for the redemption of the Series 1c shares.

The Company determined that the deemed dividend to Villani for the Series 1c preferred share redemption was the difference between the $1.0 million paid for the shares and the carrying value of the shares of $ 730,962 , resulting in a deemed dividend of $ 269,038 .

This deemed dividend of $ 269,038 was recorded to additional paid-in capital during the quarter ended September 30, 2021.

Because the Company is in an accumulated deficit position, the deemed dividend increased the net loss attributable to common shareholders for the three and nine months ended September 30, 2021.

On August 14, 2021, the Company’s board of directors approved an amendment to the Company’s Certificate of Incorporation to increase the number of shares of Common Stock authorized to 90,000,000 .

On July 11, 2022, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of State of the State of Delaware to increase the number of authorized shares of the Company’s Common Stock from 90,000,000 shares to 250,000,000 shares.

The increase in the number of authorized shares was approved by the holders of a majority of the outstanding shares of Common Stock of the Company at its annual meeting on July 11, 2022.

Warrants issued at IPO

The underwriters exercised their option to purchase an additional 385,714 warrants with an exercise price of $ 7.00 , increasing the number of warrants issued at IPO to 2,957,142 .

Each warrant is immediately exercisable at the option of the holder and expires five years from the date of issuance.

The Company evaluated the terms of the warrants issued at the IPO and determined that they should be classified as equity instruments based upon accounting guidance provided in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging.

Since the Company determined that the warrants were equity classified, the Company recorded the proceeds from the IPO, net of issuance costs, within common stock at par value and the balance of proceeds to additional paid in capital.

The fair value of each warrant on August 17, 2021 was $ 0.9995 based on the closing trading price on that day.

As of September 30, 2022, the Company had 2,957,142 warrants outstanding resulting from the IPO with an exercise price of $ 7.00 and which expire August 17, 2026 .

As of September 30, 2022, the outstanding warrants are exercisable into 2,957,142 shares of common stock whose fair value was $ 0.52 per share, based on the closing trading price on that day.

Underwriter IPO Warrants

Upon the closing of the Company's IPO in August 2021, the Company issued to the underwriters warrants to purchase 128,571 of shares of common stock at an exercise price equal to 115 % of the public offering price, or $ 8.05 per share, exercisable for a period of five years, or until August 2026.

As of September 30, 2022, the Company had 128,571 warrants outstanding resulting from the underwriter IPO warrants with an exercise price of $ 8.05 and which expire August 17, 2026 .

As of September 30, 2022, the outstanding warrants are exercisable for 128,571 shares of common stock whose fair value was $ 0.52 per share, based on the closing trading price on that day.

Warrants issued with Class B Common Units

In March 2021, the Company granted Class B Common Units Profits interests to certain former employees and consultants.

In connection with the conversion from an LLC to a C-Corporation, the Company converted 65,303 of vested Units to fully vested Common Stock Warrants with an exercise price of $ 5.74 .

These Common Stock Warrants issuances were considered a modification under ASC 718, Stock Compensation, in which the fair value of the Class B Common Units profits interests were measured at the modification date and compared to the fair value of the common stock warrants, with the difference of $ 279,812 recorded as stock-based compensation expense in the first quarter of 2021.

As of September 30, 2022, the Company had 65,303 common warrants outstanding related to the prior Class B Common Units with an exercise price of $ 5.74 and which expire December 31, 2024.

As of September 30, 2022, the outstanding warrants are exercisable into 65,303 shares of common stock whose fair value was $ 0.52 per share, based on the closing trading price on that day.

Warrants issued with Series 1a Preferred Units

In connection with the issuance of 5,000,000 Series 1a Preferred Units in November 2016, each Series 1a Preferred Member received Warrant Units to purchase from the Company, at any time after November 15, 2016 and on or prior to November 15, 2021, such number of Series 1a Preferred Units as such Series 1a Preferred Member shall request, up to an aggregate number of Series 1a Preferred Units not to exceed the product of 25% and the aggregate number of Series 1a Preferred Units then held by such Series 1a Preferred Member, which was 1,231,250 units at December 31, 2020.

The exercise price for each Warrant Unit was $1.00, subject to adjustment for unit splits and combinations.

The warrants had a 5-year term.

The Company received total proceeds of $ 5,000,000 for the Series 1a Preferred Units and warrants which were allocated on a relative fair value basis to the Units and warrants resulting in a relative fair value of $ 4,381,199 and $ 618,801 , respectively.

The estimated fair value of the Series 1a Warrant Units was recorded as a separate component of members’ equity (deficit) in the accompanying financial statements as of December 31, 2020.

In June 2020, 18,750 of the warrants were exercised for consideration of $ 18,750 , which consideration was received in July 2020.

In connection with the Loan and Security Agreement, SVB also received Warrant Units to purchase, at any time after February 9, 2017 and prior to February 9, 2027, 187,978 Series 1a Preferred Units or the equivalent Series A Preferred Units had they purchased Series 1a Preferred Units, if Series A Preferred Units are issued, at an exercise price of $ 1.00 per unit.

On March 24, 2021, in connection with the conversion from an LLC to a C-Corporation, each warrant to purchase Series 1a Preferred Units in the LLC was automatically converted into a warrant to purchase, upon the same terms and conditions, shares of Series 1a Preferred Stock of the Company.

In July 2021, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-20.5, and the conversion ratio of the preferred stock was adjusted accordingly.

In August 2021, in connection with the Company’s IPO, the outstanding Series 1a preferred warrants were converted into 69,212 common warrants.

As of September 30, 2022, the Company had 69,212 common warrants outstanding related to the prior Series 1a preferred warrants with an exercise price of $ 20.50 and which expire November 15, 2026.

As of September 30, 2022, the outstanding warrants are exercisable into 69,212 shares of common stock whose fair value was $ 0.52 per share, based on the closing trading price on that day.

Common and Pre-Funded Warrants issued with PIPE

In April 2022, the Company completed the 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, and 3,773,585 PIPE Common Warrants to purchase one share of common stock with an exercise price of $ 1.325 per share, at a combined offering price of $ 1.325 .

Each PIPE Common Warrant is immediately exercisable at the option of the holder and expires May 13, 2027.

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

During the quarter ended September 30, 2022, the remaining 2,000,000 Pre-funded Warrants were exercised.

No additional Pre-funded Warrants are outstanding as of September 30, 2022.

As of September 30, 2022, the Company had 3,773,585 PIPE Common Warrants outstanding with an exercise price of $ 1.325 and which expire May 13, 2027.

As of September 30, 2022, the outstanding PIPE Common Warrants are exercisable into 3,773,585 shares of common stock whose fair value was $ 0.52 per share, based on the closing trading price on that day.

On March 13, 2023, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware on March 14, 2023, a 1-for-16 reverse stock split of the Company’s issued and outstanding shares of Common Stock.

Preferred Stock

While the Company has 10,000,000 shares of preferred stock authorized with a par value of $ 0.0001 , no shares of preferred stock are outstanding as of March 31, 2023, or December 31, 2022.

The Company performs 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 Accounting Standards Codification, or ASC, 480 Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging.

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, including whether the warrants are indexed in the Company's own common stock and whether the warrant holders could potentially require cash settlement of the warrants.

Additional accounting guidance regarding modifications is provided in Accounting Standards Update, or ASU, 2021-04 Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force), effective as of January 1, 2022.

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.

The Company has performed an assessment of all warrants issued and modified and determined that the Company’s warrants are equity classified.

Common and Pre-Funded Warrants issued with Public Offering

In March 2023, the Company completed the 2023 Public Offering, in which it sold 85,000 shares of its Common Stock together with 1,533,123 2023 Pre-funded Warrants to purchase up to an aggregate of 1,533,123 shares of Common Stock with an exercise price of $0.0001 per share, and 1,618,123 Series A Common Warrants to purchase up to an aggregate of 1,618,123 shares of Common Stock with an exercise price of $ 2.82 per share, and 1,618,123 Series B Common Warrants to purchase up to an aggregate of 1,618,123 shares of Common Stock with an exercise price of $ 2.82 per share, at a combined offering price of $ 3.09 .

Each Series A Common Warrant is immediately exercisable at the option of the holder and expires March 20, 2028.

Each Series B Common Warrant is immediately exercisable at the option of the holder and expires July 20, 2025 .

In connection with the 2023 Offering, the Company issued Placement Agent Warrants to purchase up to 113,269 shares of Common Stock at an exercise price equal to $ 3.8625 per share.

The Placement Agent Warrants are exercisable immediately upon issuance and expire on March 16, 2028.

During the quarter ended March 31, 2023, 1,533,123 of the 2023 Pre-funded Warrants were exercised.

No additional 2023 Pre-funded Warrants are outstanding as of March 31, 2023.

Summary of Warrants Outstanding

The table below lists outstanding warrants for the dates presented.

The fair value of the Company’s warrants is $ 1.29 per warrant share, the Company’s closing stock price as of March 31, 2023.

Since the exercise price of the warrants listed are greater than the fair value as of March 31, 2023, the intrinsic value of the warrants is zero.

Quantity of Warrants Outstanding as of

March 31, 2023

December 31, 2022

Series 1a Warrants

Class B Common Unit Warrants

IPO Underwriter Warrants

PIPE Common Warrants

Series A Common Warrants

Series B Common Warrants

Placement Agent Warrants

Total warrants outstanding

Equity Incentive Plan

1 unchanged sentence

Effective January 1, 2022, an evergreen provision contained in the Company’s 2021 Plan increased the total number of shares of common shares issuable under the 2021 Plan in an amount equal to one percent of the Company’s common shares outstanding as of December 31, 2021.

This evergreen provision resulted in an additional 83,286 common shares issuable pursuant to the 2021 Plan, increasing the total authorized shares available for issuance under the 2021 Plan to 1,731,499 as of January 1, 2022.

This evergreen provision resulted in an additional 5,205 common shares issuable pursuant to the 2021 Plan as of January 1, 2022.

This evergreen provision resulted in an additional 7,701 common shares issuable pursuant to the 2021 as of January 1, 2023, increasing the total authorized shares available for issuance under the 2021 Plan to 115,919 as of January 1, 2023.

Stock awards may be granted at an exercise price per share of not less than 100% of the fair market value at the date of grant.

Stock awards granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years for employees and one year for directors of the Company’s board and consultants .

As of September 30, 2022, there remain an additional 547,447 shares reserved for issuance under the 2021 Plan.

As of March 31, 2023, there remain an additional 127 shares reserved for issuance under the 2021 Plan.

Fair Value Measurement

21 unchanged sentences

The following table presents the weighted-average assumptions used for the stock option grants:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended

Grant date fair value

Risk-free rate

Risk-free interest rate

Dividend yield

3 unchanged sentences

In general, stock-based compensation is allocated to research and development expense or general and administrative expense according to the classification of cash compensation paid to the employee, director, or consultant to whom the stock award was granted.

On March 24, 2021, in connection with the conversion from an LLC to a C-Corporation, the Company converted 277,448 of Class B Common Units profits interests, for which no consideration had been received, into 277,448 options to purchase common stock at an exercise price of $ 5.74 to $ 6.314 per share.

The fair value of common stock prior to IPO was determined in part based upon input from an independent third-party valuation firm.

The Company considered the conversion of these Class B Common Units profits interests as a modification under ASC 718, Stock Compensation, in which the fair value of the Class B Common Units profits interests was measured at the modification date and compared to the fair value of the common stock options, with the difference of $ 1,339,993 resulting in incremental stock-based compensation expense.

Related to the options, the Company recorded $ 849,564 of stock-based compensation expense recorded in the first quarter of 2021.

In December 2021, the Company’s board of directors authorized a stock option grant in lieu of a cash bonus for the Company’s Chairman and Chief Executive Officer.

The stock-based compensation expense of $ 0.4 million related to the stock option grant was booked to the fiscal year ended December 31, 2021;

however, the impact to additional paid-in capital was not booked until the first quarter of 2022, when the stock option award was granted.

The following table summarizes the total stock-based compensation expense related to stock options and RSUs included in the Company’s statements of operations:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended

Research and development

6 unchanged sentences

Options cancelled

Balance at September 30, 2022

Options exercisable at September 30, 2022

The aggregate intrinsic value of options exercisable as of September 30, 2022 is calculated as the difference between the exercise price of the underlying options and the closing market price of the Company’s common stock on that date, which was $ 0.52 per share.

The intrinsic value of options outstanding and exercisable as of September 30, 2022 was $ 385 .

As of September 30, 2022, total unrecognized compensation cost related to stock options was approximately $ 1.1 million and the weighted average period over which this cost is expected to be recognized is 2.5 years.

Restricted Stock Unit Award Activity

A summary of the Company’s Equity Plan restricted stock unit, or RSU, award activity is as follows:

RSU’s outstanding

Balance at December 31, 2021

RSUs cancelled

Balance at September 30, 2022

During the three and nine months ended September 30, 2022, the Company issued to certain of the Company’s directors 80,589 and 127,726 RSUs, respectively, as partial compensation for their services during 2022.

The Company recognized stock-based compensation expense of approximately $ 0.1 million during the three and nine months ended September 30, 2022 related to the restricted stock unit awards.

There were no RSUs outstanding during 2021 and there is no unrecognized compensation expense related to outstanding RSUs as of September 30, 2022.

The Company sponsors a 401(k) savings plan for all eligible employees.

The Company may make discretionary matching contributions to the plan to be allocated to employee accounts based upon employee deferrals and compensation.

To date, the Company has not made any matching contributions into the savings plan.

Balance at March 31, 2023

Options exercisable at March 31, 2023

The aggregate intrinsic value of options exercisable as of March 31, 2023, is calculated as the difference between the exercise price of the underlying options and the closing market price of the Company’s common stock on that date, which was $ 1.29 per share.

The intrinsic value of options outstanding and exercisable as of March 31, 2023, was zero.

As of March 31, 2023, total unrecognized compensation cost related to stock options was approximately $ 1.0 million and the weighted average period over which this cost is expected to be recognized is 2.3 years.

Commitments and Contingencies

License Agreements

2 unchanged sentences

The Company is responsible for the development (including manufacturing, packaging, non-clinical studies, clinical trials and obtaining regulatory approval and commercialization (including marketing, promotion, distribution, etc.)) for all Licensed Products.

In partial consideration of the License, the Company forgave its previous outstanding loan to Villani in the amount of $ 400,000 .

The original License Agreement was amended in 2019 and, in consideration of the receipt of certain know-how and patents, the Company issued to Villani 5,221,156 Series 1c Preferred Units equal to 5 % of the Company’s fully diluted capitalization, valued at $ 730,962 .

Pursuant to the amended License Agreement, the Company was required to make future milestone payments to Villani in an aggregate amount of up to $ 20.25 million upon the achievement of specified development and sales milestones, payable in cash or in equity, at the option of Villani, as well as single-digit royalty payments on net sales.

The original License Agreement was amended in 2019, and pursuant to the amended License Agreement, the Company was required to make future milestone payments to Villani in an aggregate amount of up to $20.25 million upon the achievement of specified development and sales milestones, payable in cash or in equity , at the option of Villani, as well as single-digit royalty payments on net sales.

On July 30, 2021, the Company further amended the License Agreement in the Second Amendment to the License and Settlement Agreement (the “Second Amendment”).

In consideration of the Second Amendment, Villani exchanged the 5,221,156 Series 1c Preferred Shares issued to Villani in 2019 for an increase in milestone payments and royalty rates payable pursuant to the License Agreement and the Company paid Villani $ 1 million after the close of the IPO.

Pursuant to the Second Amendment, the Company is required to make future milestone payments to Villani in an aggregate amount of up to $40.5 million upon the achievement of specified development and sales milestones, payable in cash or in equity , at the option of Villani, as well as single-digit royalty payments on net sales.

The Second Amendment includes customary terms relating to, among others, indemnification, intellectual property protection, confidentiality, remedies, and warranties.

See Note 6 – Equity Securities for additional information regarding the Company’s redemption of the Series 1c Preferred Shares from Villani.

Commitments and Contingencies

Clinical Trials

During 2021, the Company initiated a clinical trial which completed patient enrollment in June 2022;

however, the Company had not completed data analysis for the clinical trial by September 30, 2022.

Accordingly, the Company anticipates additional research and development expense of $ 0.1 to $ 0.2 million to be incurred during the fourth quarter of fiscal year 2022 related to this ongoing clinical trial.

Coronavirus Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) pandemic.

Significant uncertainties may arise with respect to potential shutdowns of operations or government orders to cease activities due to emergency declarations, inability to operate, employee shortages, or claims for business interruption insurance, etc.

Each of these matters may have a significant impact on the future results of the Company.

Supplier Agreement

3 unchanged sentences

The imposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities by the United States, the United Kingdom, and/or the European Union could prevent the Company from performing under this existing contract or any future contract it may enter or may prevent the Company from remitting payment for raw material purchased from the Company’s supplier.

The Company has received two shipments of raw material from its supplier during fiscal year 2022 containing additional quantities of Spongilla raw material which will provide the Company with sufficient quantities of Spongilla to initiate and complete two Phase 3 studies in moderate-to-severe acne and support filing a new drug application for DMT310 in acne upon the successful completion of two Phase 3 studies.

The Company received two shipments of raw material from its supplier during fiscal year 2022 containing additional quantities of Spongilla raw material which will provide the Company with sufficient quantities of Spongilla to initiate and complete two Phase 3 studies in moderate-to-severe acne and support filing a new drug application for DMT310 in acne upon the successful completion of two Phase 3 studies.

Depending on the extent and breadth of new sanctions or export controls that may be imposed against Russia, otherwise or as a result of the impact of the war in Ukraine, it is possible that the Company’s ability to obtain additional supply of the Spongilla raw material used in DMT310 and DMT410 could be negatively impacted, which could adversely affect its business, results of operations, and financial condition.

2 unchanged sentences

The Company is not a party to any legal proceedings or aware of any threatened legal proceedings which are expected to have a material adverse effect on its financial condition, results of operations or liquidity.

Related Parties

Prior to the Company converting from an LLC to a C-corporation in March 2021, the Company had two Managing Members.

One of the Managing Members remained the Company’s majority stockholder upon the close of the Company’s IPO and serves as the Company’s President, Chief Executive Officer, and Chairman of the Board of Directors.

The other Managing Member remained a beneficial owner upon the close of the Company’s IPO and serves as the Company’s Lead Director of the Board of Directors.

Hereinafter these two Managing Members, and their affiliates, are referred to collectively as the Principal Stockholders after the completion of the IPO.

During 2020, the Managing Members and other related parties loaned the Company $ 1,145,000 as subordinated convertible promissory notes.

Additionally, during the first quarter of 2021, the Managing Members and other related parties loaned the Company $ 1,255,000 as subordinated convertible promissory notes.

Refer to Note 4 – Subordinated Convertible Promissory Notes for further discussion.

During the third quarter of 2021, the Company amended the conversion terms of its Series 1d preferred stock, as described in Note 6 – Equity Securities.

As a result of the Series 1d preferred stock amendments, the Company presented a deemed dividend of approximately $ 2.3 million for the year ended December 31, 2021, approximately $ 1.2 million of which related to Series 1d preferred shares owned by the Company’s Principal Stockholders and their affiliates.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements