What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-02-21 · 41 added, 72 removed, 216 unchanged (34% of the section changed)

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References in the following discussion to “we”, “our”, “us”, “Dermata”, or “the Company”, refer to Dermata Therapeutics, Inc.

formerly known as Dermata Therapeutics, LLC.

We are a clinical-stage medical dermatology company focused on identifying, developing, and commercializing innovative pharmaceutical product candidates for the treatment of medical and aesthetic skin conditions and diseases we believe represent significant market opportunities.

We are a late-stage medical dermatology company focused on identifying, developing, and commercializing innovative pharmaceutical product candidates for the treatment of medical and aesthetic skin conditions and diseases we believe represent significant market opportunities.

Dermatological diseases such as acne vulgaris (or acne), psoriasis vulgaris (or psoriasis), hyperhidrosis, and various aesthetic indications, affect millions of people worldwide each year which may negatively impact their quality of life and emotional well-being.

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market size of approximately 50 million patients.

We have shown DMT310’s ability to treat the multiple causes of acne in a Phase 2b study where we initially saw a 45% reduction in inflammatory lesions after four treatments, with statistically significant improvements at all time points for all three primary endpoints throughout the study (reduction in inflammatory lesions, reduction in non-inflammatory lesions, and improvement in Investigator Global Assessment).

Based on this Phase 2b data we are currently preparing for an end of phase 2 meeting with the FDA to finalize requirements prior to initiating a phase 3 program in the second half of 2023.

We have recently initiated a Phase 3 program of DMT310 in moderate-to-severe acne and began enrolling patients in the first of two identical studies in December of 2023.

Both studies will be double blind, randomized, placebo controlled, and enroll about 550 patients, age 9 years in older across sites in the United States and Latin America.

The primary endpoints include absolute reduction in inflammatory and noninflammatory lesions and the improvement in investigators global assessment (IGA) of acne, which are the same endpoints used in our Phase 2b study of DMT310 for moderate-to-severe acne.

Patients will be treated once a week for 12 weeks with either DMT310 or placebo and will be evaluated monthly.

We expect to have top-line results from the first Phase 3 study in the first quarter of 2025.

Previously DMT310 has shown its ability to treat the multiple causes of acne in a Phase 2b study where we initially saw a 45% reduction in inflammatory lesions after four treatments, with DMT310 achieving statistically significant improvements at all time points for all three primary endpoints throughout the study (reduction in inflammatory lesions, reduction in non-inflammatory lesions, and improvement in IGA).

In addition, based on the multiple mechanisms of action and anti-inflammatory effect seen with DMT310 acne trial, we completed a Phase 1b proof of concept, or POC, trial in psoriasis where we saw encouraging results warranting further investigation.

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We are currently in the process of discussing partnering opportunities with botulinum toxin companies to move the DMT410 program into Phase 2 studies.

The COVID-19 pandemic continues to have a major impact in the US and around the world.

The availability of vaccines holds promise for the future, though new variants of the virus and potential waning immunity from vaccines may result in continued impact from this pandemic in the future, which could adversely impact our operations.

To date, the Company has managed delays and disruptions without significant impact in planned and ongoing preclinical and clinical trials, manufacturing or shipping.

Potential impacts to our business include delays in planned and ongoing preclinical and clinical trials including enrollment of patients, disruptions in time and resources provided by independent clinical investigators, contract research organizations, and other third-party service providers, temporary closures of our facilities, disruptions or restrictions on our employees’ ability to travel, and delays in manufacturing and/or shipments to and from third-party suppliers and contract manufacturers for APIs and drug product.

We have a limited operating history.

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We have funded our operations primarily through the sale of our equity securities and debt securities.

Since inception, we have raised an aggregate of approximately $51.9 million of gross proceeds from the sale of our debt and equity securities, including the securities sold in our IPO.

Since inception, we have raised an aggregate of approximately $61.0 million of gross proceeds from the sale of our debt and equity securities, including the securities sold in our initial public offering.

We have not generated any revenue to date and have incurred significant operating losses.

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complete development of DMT310 for the treatment of acne, including non-clinical studies and Phase 3 clinical trials;

prepare and file for regulatory approval of DMT310 for the treatment of moderate-to-severe acne;

prepare and file for regulatory approval of DMT310 for the treatment of moderate-to-severe acne upon positive results from the Phase 3 clinical program;

continue development of DMT310 for the treatment of psoriasis, including a Phase 2 clinical trial and Phase 3 clinical trials, pending additional finances or strategic partner;

identify a botulinum toxin partner for DMT410 for the treatment of aesthetic and medical skin conditions;

sign a partnership agreement with a botulinum toxin partner for DMT410 for the treatment of aesthetic and medical skin conditions;

prepare for commercialization of DMT310, if approved, including the hiring of sales and marketing personnel;

begin to manufacture our product candidates for Phase 2 and Phase 3 trials and commercial sale;

manufacture our product candidates for Phase 2 and Phase 3 trials and commercial sale;

hire additional research and development and selling, general and administrative personnel;

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We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal and tax related services associated with maintaining compliance with stock exchange listing and SEC requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company.

Interest Expense

Interest expense has consisted primarily of interest expense on our previously outstanding convertible debt and loan with Silicon Valley Bank, amortization of debt discount costs, and interest on milestone payments under the License Amendment and Settlement Agreement.

Interest Income

Interest income consists of interest income earned on cash equivalents from interest bearing demand accounts.

From inception until March 24, 2021, we operated as a limited liability company taxed as a partnership.

Therefore, any income tax liability or benefit through that date accrued to our members.

Since March 24, 2021, we have operated as a C-Corporation and account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

If we determine that we would be able to realize our deferred tax assets in the future in excess of our recorded net amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We record uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

We recognize interest and penalties related to unrecognized tax benefits, if any, within income tax expense.

Any accrued interest and penalties are included within the related tax liability.

Critical Accounting Policies and Significant Judgments and Estimates

We have based our management’s discussion and analysis of financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods.

On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses and the fair value of units and common stock.

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued research and development expenses, stock-based compensation, and warrants.

We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances.

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While our significant accounting policies are more fully described in Note 2 to our audited financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Research and Development Expenses

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to record actual research and development expenses and to estimate accrued research and development expenses, current assets, and other current liabilities.

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We make estimates of our accrued research and development expenses, current assets, and other current liabilities as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

Example of estimated accrued research and development expenses, prepaid assets, and other current liabilities include fees paid to contract manufacturers made in connection with the manufacturing of clinical trials materials and contract research organizations made in connection the performance of clinical trials on our behalf.

Examples of estimated accrued research and development expenses, prepaid assets, and other current liabilities include fees paid to contract manufacturers made in connection with the manufacturing of clinical trials materials and contract research organizations made in connection the performance of clinical trials on our behalf.

We base our expenses related to clinical manufacturing and clinical trials on our estimates of the services performed pursuant to contracts with the entities performing those services on our behalf.

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Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed, or services are performed.

Fair Value of Common Stock and Stock-based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.

The company’s policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date.

Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the fair value of our common shares for awards prior to our IPO, and for options, the expected life of the option and expected share price volatility.

We use the Black-Scholes option pricing model to value our option awards.

The assumptions used in calculating the fair value of share-based awards represents our best estimates and involve inherent uncertainties and the application of judgment.

As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.

Prior to our initial public offering in August 2021, we were required to periodically estimate the fair value of our common stock when issuing stock options and computing their estimated stock-based compensation expense.

The fair value of common stock was determined by management on a periodic basis, with the assistance of an independent third-party valuation firm.

The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of significant levels of management judgment.

In order to determine the fair value, we considered, among other things, contemporaneous transactions involving the sale of our common stock to unrelated third parties, the lack of marketability of our common stock and the market performance of comparable publicly traded companies.

Fair Value of Common Units

In the absence of a public trading market for our common units prior to our IPO, on each grant date, we developed an estimate of the fair value of our common units underlying the unit grants.

We estimated the fair value of our common units by referencing arm’s length transactions with third parties, inclusive of the common units underlying which occurred on or near the valuation date(s).

During the year ended December 31, 2019, we issued 161,142 Class B Common Units to employees, officers, and directors.

During the year ended December 31, 2020, we issued 2,926 Class B Common Units to consultants and 2,643 Class B Common Units to an employee.

All of the Class B Common Units issued in 2019 and 2020 represent a profits interest, as that term is defined in Revenue Procedure 93-27, 1993-2 C.B.

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

For performance-based awards, if and when the achievement of the predetermined performance criteria become probable, expense will be recognized.

To date unit-based compensation expense has not been material.

The assumptions used in calculating the fair value of unit-based awards represents management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

As a result, if factors change and management uses different assumptions, unit-based compensation expense could be materially different for future awards.

All of such securities were exchanged for shares of our capital units in connection with our conversion from a limited liability company to a corporation in March 2021.

Dermata operates as a C-Corporation and account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

We recognize interest and penalties related to unrecognized tax benefits, if any, within income tax expense.

Any accrued interest and penalties are included within the related tax liability.

Comparison of the Years Ended December 31, 2023, and 2022

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Research and development

$ (1,581,275 )

General and administrative

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Other income and expenses:

Interest (income) expense, net

$ (9,610,913 )

Interest income, net

$ (7,794,690 )

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Research and Development Expenses

Research and development expenses increased by approximately $2.2 million from $3.5 million for the year ended December 31, 2021, to $5.7 million for the year ended December 31, 2022.

The increase in research and development expense was the result of $1.1 million of increased clinical trial expenses, $0.7 million of increased non-clinical expenses, $0.3 million in increased CMC expenses, as well as increased employee and personnel expenses of $0.2 million, offset by decreased stock-based compensation expense of $0.1 million.

Research and development expenses decreased by approximately $1.6 million from $5.7 million for the year ended December 31, 2022, to $4.1 million for the year ended December 31, 2023.

The decrease in research and development expense was the result of $1.8 million of decreased clinical trial expenses and $0.4 million of decreased non-clinical expenses, offset by $0.2 million in increased chemistry, manufacturing, and controls, or CMC, expenses in preparation for the DMT310 Phase 3 program, as well as increased employee and personnel expenses of $0.4 million.

General and Administrative Expenses

General and administrative expenses decreased by $0.4 million from $4.4 million for the year ended December 31, 2021, to $4.0 million for the year ended December 31, 2022.

The decrease in general and administrative expenses was the result of $0.8 million in decreased stock-based compensation expense, $0.2 million of decreased legal costs, and $0.1 million of decreased employee and personnel expenses, offset by increased insurance costs of $0.5 million and increased public company costs of $0.2 million.

Other income and expenses

Other income and expenses changed by $109,186 from $45,613 representing interest expense, net, for the year ended December 31, 2021, compared to interest income, net, of $63,573 for the year ended December 31, 2022.

The Company opened a cash sweep account during the third quarter of 2022 and has begun earning interest income via overnight deposits.

The prior year interest expense related to the amortization of debt discount and interest expense for previously outstanding debt.

As of December 31, 2021, and December 31, 2022, the Company no longer had any debt outstanding.

General and administrative expenses were approximately $4.0 million for the years ended December 31, 2022, and 2023.

Insurance costs decreased by $0.3 million from the year ended December 31, 2022, to December 31, 2023, which were offset by $0.3 million of increased public company costs, including the expenses related to audit fees and shareholder meetings.

Interest income

The Company earns interest income via overnight deposits on the Company’s cash and cash equivalents.

Interest income increased by approximately $0.2 million from $63,573 for the year ended December 31, 2022, to $247,216 for the year ended December 31, 2023, as result of the timing of when the sweep accounts were opened, which were opened during the third quarter of 2022.

The following table summarizes our cash flows from operating and financing activities:

Statements of cash flows data:

Total net cash provided by (used in):

Operating activities

Total cash used in operating activities

$ (6,408,931 )

$ (8,834,164 )

Financing activities

Total cash provided by financing activities

Increase (decrease) in cash and cash equivalents

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Operating activities

Cash used in operations of $6.4 million for the year ended December 31, 2023, was the result of the net loss of $7.8 million, offset by non-cash stock-based compensation of $0.5 million, an increase in accounts payable of $0.4 million and an increase in accrued and other current liabilities of $0.3 million, as well as a decrease in prepaid expenses and other current assets of $0.2 million.

Cash used in operations of $8.8 million for the year ended December 31, 2022, was the result of the net loss of $9.6 million and a decrease in accounts payable and accrued and other current liabilities of $0.3 million, offset by non-cash stock-based compensation of $0.9 million and a decrease in prepaid expenses and other current assets of $0.2 million.

Cash used in operations of $5.7 million for the year ended December 31, 2021, was the result of the net loss of $7.9 million and an increase in prepaid expenses and other current assets of $0.7 million, offset by non-cash stock-based compensation of $1.9 million and an increase in accounts payable and accrued and other current liabilities of $1.0 million.

Financing activities

Cash provided by financing activities of $7.6 million for the year ended December 31, 2023, was the result of $4.2 million of net proceeds received from the issuance of common stock and warrants issued in the March 2023 Offering, $1.5 million of net proceeds received from the issuance of common stock and warrants in the May 2023 Offering, as well as $2.0 million of net proceeds from the November 2023 Warrant Inducement.

Cash provided by financing activities of $4.3 million for the year ended December 31, 2022, was the result of the net proceeds received from the issuance of common stock and warrants issued in April 2022 from a private placement of the Company’s securities.

Cash provided by financing activities of $16.0 million for the year ended December 31, 2021, was the result of net proceeds of $15.4 million from our initial public offering, $1.6 million from the issuance of convertible subordinated promissory notes, proceeds of $0.6 million from the issuance of Series 1d Preferred Units, offset by $1.0 million payment for the redemption of 5,221,156 shares of Series 1c preferred stock and $0.6 million of principal and final payments on debt.

Liquidity and Capital Resources

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For the year ended December 31, 2023, and 2022, we used cash of $6.4 million and $8.8 million, respectively, in operations.

Historically, our principal sources of cash have included proceeds from the issuance of common and preferred equity and proceeds from the issuance of debt.

Historically, our principal sources of cash have included proceeds from the issuance of equity and debt.

Our principal uses of cash have included cash used in operations (including clinical development of our product candidates and general and administrative expenses) and payments for license rights.

We expect that the principal uses of cash in the future will be for continuing operations, funding of research and development, and general working capital requirements.

We expect that as research and development expenses continue to grow, we will need to raise additional capital to sustain operations and research and development activities.

We expect that as research and development expenses continue to grow for our Phase 3 development program, we will need to raise additional capital to sustain operations and fund research and development activities, including our ongoing Phase 3 STAR-1 clinical study.

Future Capital Requirements

We plan to focus in the near term on the development, regulatory approval, and potential commercialization of DMT310 for the treatment of acne and psoriasis.

We anticipate we will incur net losses for the next several years as we complete clinical development of DMT310 for the treatment of acne and psoriasis and continue research and development of DMT410 for the treatment of aesthetic and medical skin conditions.

We anticipate we will continue to incur net losses for the next several years as we complete clinical development of DMT310 for the treatment of acne and psoriasis and continue research and development of DMT410 for the treatment of aesthetic and medical skin conditions.

In addition, we plan to seek opportunities to identify, acquire or in license and develop additional drug candidates, potentially build commercial capabilities, and expand our corporate infrastructure.

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The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the company to continue as a going concern, which contemplates the continuation of operations, realization of assets and liquidation of liabilities in the ordinary course of business.

We incurred net losses of $9.6 million and $7.9 million for the years ended December 31, 2022, and 2021, respectively, and had an accumulated deficit of $45.6 million at December 31, 2022.

We incurred a net loss of $7.8 million for the year ended December 31, 2023, and had an accumulated deficit of $53.4 million as of December 31, 2023.

We anticipate incurring additional losses until such time, if ever, that we can generate significant revenue from our product candidates currently in development.

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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-K

Item 7. Management’s Discussion and Analysis