Dermata Therapeutics, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 102 Table of Contents Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: ● Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; ● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorizations of management and our Board; and ● provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework provided in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting were effective as of December 31, 2023. Changes in Internal Control Over Financial Reporting There were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our chief executive officer and chief financial officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION (a) None (b) During the fiscal quarter ended December 31, 2023, no director or “officer” (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(c) of Regulation S-K. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. 103 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by this item is incorporated by reference to our Proxy Statement for the 2024 Annual Meeting of Stockholders. 104 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements The financial statements and related notes, together with the report of Moss Adams LLP and Mayer Hoffman McCann P.C. appear at pages F-1 through F-22 following the Exhibit List as required by “Part II—Item 8—Financial Statements and Supplementary Data” of the Form 10-K. (a)(2) Financial Statement Schedules All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (a)(3) Exhibits The following exhibits are filed as part of, or incorporated by reference into, this Amendment. Exhibit No. Description of Document 3.1 Amended and Restated Certificate of Incorporation of Dermata Therapeutics, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 3.2 Amendment No. 1 of the Amended and Restated Certificate of Incorporation of Dermata Therapeutics, Inc., filed with the Secretary of State of the State of Delaware on July 11, 2022 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 11, 2022). 3.3 Amendment No. 2 to the Amended and Restated Certificate of Incorporation of Dermata Therapeutics, Inc., dated March 13, 2023. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report file on Form 8-K filed on March 13, 2023). 3.4 Amended and Restated Bylaws of Dermata Therapeutics, Inc. (incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 3.5 Amendment No. 1 to the Amended and Restated Bylaws of Dermata Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 23, 2022). 4.1 Specimen Certificate representing shares of common stock of Dermata Therapeutics, Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 4.2 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 4.3 Form of Common Stock Purchase Warrant issued in the Company’s Initial Public Offering (incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 4.4 Form of Underwriter Warrant issued in the Company’s Initial Public Offering (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 105 Table of Contents 4.5 Form of Warrant Agency Agreement between Dermata Therapeutics, Inc. and Direct Transfer, LLC entered into in connection with the Company’s Initial Public Offering (incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 4.6 Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement on Form S-1/A (File No. 333-270195) filed on March 13, 2023). 4.7 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 24, 2023). 4.8 Form of Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on May 24, 2023). 4.9 Form of Placement Agent Warrant (incorporated by reference to Exhibit 4. to the Company’s Current Report on Form 8-K filed on May 24, 2023). 4.10 Form of New Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 17, 2023). 4.11 Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 17, 2023). 4.12 Description of Securities.* 10.1 Form of Indemnification Agreement entered into by Dermata Therapeutics, Inc. and its Officers and Directors (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 10.2 Dermata Therapeutics, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).† 10.3 Amendment No. 1 to the Dermata Therapeutics, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.15 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).† 10.4 Amendment No. 2 to the Dermata Therapeutics, Inc. 2021 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2023).† 10. 5 Form of Nonqualified Stock Option Award under 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).† 106 Table of Contents 10.6 Form of Incentive Stock Option Award under 2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).† 10.7 Employment Agreement dated December 6, 2021 by and between Dermata Therapeutics, Inc. and Gerald T. Proehl (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2021).† 10.8 Form of Employment Agreement dated August 17, 2021 by and between Dermata Therapeutics, Inc. and Christopher J. Nardo, M.P.H., Ph.D. (incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).† 10.9 Amendment No. 1 dated December 6, 2021 to the Employment Agreement by and between Dermata Therapeutics, Inc. and Christopher J. Nardo (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2021). † 10.10 Amendment No. 2 dated January 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc. and Christopher J. Nardo (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022).† 10.11 Amendment No. 3 dated July 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc. and Christopher Nardo (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 15, 2022).† 10.12 Employment Agreement dated December 6, 2021 by and between Dermata Therapeutics, Inc. and Maria Bedoya Toro Munera, Ph.D., M.B.A. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2021).† 10.13 Amendment No. 1 dated January 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc. and Maria Bedoya Toro Munera, Ph.D. (incorporated by reference to Exhibit 10.11 of the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2022).† 10.14 Employment Agreement dated December 6, 2021 by and between Dermata Therapeutics, Inc. and Kyri K. Van Hoose (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2021).† 10.15 Amendment No. 1 dated January 1, 2022 to the Employment Agreement by and between Dermata Therapeutics, Inc. and Kyri K. Van Hoose. (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-270195) filed March 16, 2023).† 10.16 Supply Agreement between Dermata Therapeutics LLC and Reka-Farm LLC, dated as of February 27, 2020 (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).# 10.17 License Agreement between Dermata Therapeutics LLC and Villani, Inc. dated as of March 31, 2017 (incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).# 10.18 Amended and Restated Annex A to the License Agreement between Dermata Therapeutics LLC and Villani, Inc. dated as of March 31, 2017 (incorporated by reference to Exhibit 10.10 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021). 10.19 License Amendment and Settlement Agreement between Dermata Therapeutics LLC and Villani, Inc. dated as of June 4, 2019 (incorporated by reference to Exhibit 10.11 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).# 10.20 Amendment to the License Amendment and Settlement Agreement between Dermata Therapeutics, Inc. and Villani, Inc., dated July 30, 2021 (incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-1 filed with the SEC on August 6, 2021).# 10.21 Form of Securities Purchase Agreement Dated April 20, 2022 between Dermata Therapeutics, Inc. and the Purchaser (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022). 10.22 Form of Registration Rights Agreement dated April 20, 2022 between Dermata Therapeutics, Inc. and the Purchaser (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022). 10.23 Form of Placement Agent Agreement dated April 20, 2022 between the Registrant and Maxim Group LLC (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2022). 107 Table of Contents 10.24 Form of Purchase Agreement (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1/A (File No. 333-270195) filed on March 16, 2023). 10.25 Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 24, 2023). 10.26 Form of Inducement Letter (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 17, 2023). 16.1 Letter of Mayer Hoffman McCann P.C. to the Securities and Exchange Commission, dated August 3, 2023 (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on August 3, 2023). 23.1 Consent of Moss Adams LLP.* 23.2 Consent of Mayer Hoffman McCann P.C.* 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).* 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).* 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).** 97.1 Clawback Policy of Dermata Therapeutics, Inc.* 101.INS* XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101) # Portions of this exhibit (indicated by asterisks) are omitted in accordance with the rules of the SEC. * Filed herewith. ** Furnished, not filed. † Indicates a management contract or compensation plan, contract or arrangement. ITEM 16. FORM 10-K SUMMARY None. 108 Table of Contents DERMATA THERAPEUTICS, INC. INDEX TO FINANCIAL STATEMENTS As of December 31, 2023, and 2022, and the Years Ended December 31, 2023, and 2022 Report of Independent Registered Public Accounting Firm (PCAOB ID 659 ) F-2 Report of Independent Registered Public Accounting Firm (PCAOB ID 199) F-3 Financial Statements: Balance Sheets F-4 Statements of Operations F-5 Statements of Stockholders’ Equity (Deficit) F-6 Statements of Cash Flows F-7 Notes to Financial Statements F-8 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Dermata Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheet of Dermata Therapeutics, Inc. (the “Company”) as of December 31, 2023, the related statement of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. We also have audited the adjustments to the 2022 financial statements to retrospectively reflect the impact of the reverse stock split, described in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply procedures to the 2022 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2022 financial statements taken as a whole. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Moss Adams LLP San Diego, California March 21, 2024 We have served as the Company’s auditor since 2023. F-2 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Dermata Therapeutics, Inc. Opinion on the Financial Statements We have audited, before the effects of the adjustments to retrospectively apply the reverse stock split described in Note 1, the accompanying balance sheet of Dermata Therapeutics, Inc. (“Company”) as of December 31, 2022, and the related statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). The 2022 financial statements before the effects of the adjustments discussed in Note 1 are not presented herein. In our opinion, the financial statements, before the effects of the adjustments to retrospectively apply the reverse stock split described in Note 1, present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the reverse stock split described in Note 1 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Moss Adams LLP. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses and negative cash flows from operations and is dependent on additional financing to fund operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. We served as the Company's auditor from 2016 to 2023. /s/ Mayer Hoffman McCann P.C. San Diego, California February 21, 2023 F-3 Table of Contents DERMATA THERAPEUTICS, INC. Balance Sheets December 31, 2023 2022 Assets: Cash and cash equivalents $ 7,438,135 $ 6,241,294 Prepaid expenses and other current assets 540,499 703,194 Total assets $ 7,978,634 $ 6,944,488 Liabilities and Stockholders’ Equity: Liabilities: Accounts payable $ 866,028 $ 496,702 Accrued and other current liabilities 757,588 425,932 Total liabilities 1,623,616 922,634 Commitments and Contingencies (see Note 7) Stockholders’ Equity: Common Stock, par value $ 0.0001 , 250,000,000 shares authorized as of December 31, 2023, and 2022; 3,930,840 and 770,115 shares issued and outstanding as of December 31, 2023, and 2022, respectively. 393 77 Additional paid-in capital 59,742,503 51,614,965 Accumulated deficit ( 53,387,878 ) ( 45,593,188 ) Total stockholders’ equity 6,355,018 6,021,854 Total liabilities and stockholders’ equity $ 7,978,634 $ 6,944,488 The accompanying notes are an integral part of these financial statements. F-4 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Operations For the year ended December 31, 2023 2022 Operating expenses: Research and development $ 4,069,766 $ 5,651,041 General and administrative 3,972,140 4,023,445 Total operating expenses 8,041,906 9,674,486 Loss from operations ( 8,041,906 ) ( 9,674,486 ) Other income and expenses: Interest income, net ( 247,216 ) ( 63,573 ) Net loss $ ( 7,794,690 ) $ ( 9,610,913 ) Net loss per share of common stock, basic and diluted $ ( 2.67 ) $ ( 13.92 ) Weighted-average basic and diluted common shares 2,924,398 690,666 The accompanying notes are an integral part of these financial statements. F-5 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Stockholder’s Equity (Deficit) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Par Value Capital Deficit Equity Balance at December 31, 2021 520,540 $ 52 $ 46,089,327 $ ( 35,982,275 ) $ 10,107,104 Issuance of Common Stock and warrants, net of issuance costs 56,162 6 4,276,359 - 4,276,365 Issuance of Common Stock upon exercise of pre-funded warrants 179,688 18 269 - 287 Issuance of restricted stock unit awards - - 166,875 - 166,875 Issuance of Common Stock upon conversion of restricted stock units 13,725 1 ( 1 ) - - Stock-based compensation - - 1,082,136 - 1,082,136 Net loss - - - ( 9,610,913 ) ( 9,610,913 ) Balance at December 31, 2022 770,115 $ 77 $ 51,614,965 $ ( 45,593,188 ) $ 6,021,854 Issuance of Common Stock and warrants, net of issuance costs 543,555 55 5,651,613 - 5,651,668 Issuance of Common Stock upon exercise of pre-funded warrants 1,875,445 187 - - 187 Issuance of Common Stock upon exercise of warrants, net of issuance costs 742,095 74 1,953,883 - 1,953,957 Settlement of fractional shares paid in cash ( 370 ) ( 40 ) - ( 40 ) Stock-based compensation - - 522,082 - 522,082 Net loss - - - ( 7,794,690 ) ( 7,794,690 ) Balance at December 31, 2023 3,930,840 $ 393 $ 59,742,503 $ ( 53,387,878 ) $ 6,355,018 The accompanying notes are an integral part of these financial statements. F-6 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Cash Flows For the year ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 7,794,690 ) $ ( 9,610,913 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 522,082 930,325 Increase (decrease) in cash resulting from changes in: Prepaid expenses and other current assets 162,695 121,940 Accounts payable 369,326 ( 18,543 ) Accrued and other current liabilities 331,656 ( 256,973 ) Total adjustments to reconcile net loss to cash used in operations 1,385,759 776,749 Net cash used in operating activities ( 6,408,931 ) ( 8,834,164 ) Cash flows from financing activities: Proceeds from issuance of Common Stock and warrants, net of issuance costs 7,605,625 4,276,365 Proceeds from exercise of pre-funded warrants 187 287 Payment for fractional shares in reverse stock split ( 40 ) - Net cash provided by financing activities 7,605,772 4,276,652 Net increase (decrease) in cash and cash equivalents 1,196,841 ( 4,557,512 ) Cash and cash equivalents at beginning of period 6,241,294 10,798,806 Cash and cash equivalents at end of period $ 7,438,135 $ 6,241,294 Supplemental disclosure: Cash paid for taxes $ 950 $ 950 Non-cash financing activities: Incremental fair value of March 2023 warrant modification $ 144,765 $ - Incremental fair value of November 2023 warrant inducement $ 2,995,343 $ - The accompanying notes are an integral part of these financial statements. F-7 Table of Contents DERMATA THERAPEUTICS, INC. Notes to Financial Statements 1. Organization and Basis of Presentation Dermata Therapeutics, Inc., (the “Company”), was formed in December 2014 as a Delaware limited liability company (“LLC”) under the name Dermata Therapeutics, LLC. On March 24, 2021, the Company converted from an LLC to a Delaware C-corporation and changed its name to Dermata Therapeutics, Inc. The Company is a clinical-stage biotechnology company focused on the treatment of medical and aesthetic skin conditions and diseases. Initial Public Offering 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. The Company’s shares of Common Stock and warrants are listed on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “DRMA,” and “DRMAW,” respectively, and both began trading in August 2021. Reverse Stock Split On March 13, 2023, the Company effected a reverse stock 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 (the “Board”), and stockholders. The par value and authorized shares were not adjusted as a result of the reverse split. All issued and outstanding shares of Common Stock 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 December 31, 2023, cash and cash equivalents totaled $ 7.4 million and the Company had an accumulated deficit of $ 53.4 million. For the year ended December 31, 2023, the Company used cash of $ 6.4 million in operations. The Company’s cash and cash equivalents are expected to fund operations into the third 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 equity securities and debt. The Company’s principal uses of cash have included cash used in operations and payments for license rights. The Company expects that the principal uses of cash in the future will be for continuing operations, funding of research and development, conducting preclinical studies and clinical trials, and general working capital requirements. The Company expects that as research and development expenses continue to grow, it will need to raise additional capital to sustain operations and research and development. F-8 Table of Contents Management’s Plan to Continue as a Going Concern To continue as a going concern, the Company will need, among other things, to raise additional capital resources. Until the Company can generate significant cash from operations, management’s plans to obtain such resources for the Company include proceeds from offerings of the Company’s equity securities or debt, or transactions involving product development, technology licensing or collaboration. 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. 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. Because of historical and expected operating losses and net operating cash flow deficits, there is substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements, which is not alleviated by management’s plans. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. 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. Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ materially from those estimates. 2. Summary of Significant Accounting Policies Use of Estimates The Company’s financial statements are prepared in accordance with GAAP. The preparation of the Company’s financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates and judgments, including those related to accrued research and development expenses, stock-based compensation, and the estimated fair values of equity instruments. Management evaluates its estimates on an ongoing basis. The Company bases its estimates on various assumptions that it believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceuticals. Cash and Cash Equivalents The Company deposits its cash and cash equivalents with accredited financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”), which are held in checking and cash sweep accounts. At times, deposits held may exceed the amount of insurance provided by the FDIC. The Company maintains an insured cash sweep account in which cash from its main operating checking account is invested overnight in highly liquid, short-term investments. The Company considers all highly liquid investments with a maturity date of 90 days or less at the date of purchase to be cash equivalents. Concentrations of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. The Company is exposed to credit risk in the event of a default by the financial institutions holding the Company’s cash and cash equivalents to the extent of the amounts held in excess of FDIC limits. The Company limits its credit risk by placing its cash and cash equivalents with financial institutions it believes are of high quality. To date, the Company has not experienced any losses on its deposits of cash and cash equivalents. F-9 Table of Contents Fair Value Measurement The Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; 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 and accrued expenses approximate their estimated fair values due to the short-term nature of these assets and liabilities. Interest Income Interest income consists of interest income earned on cash and cash equivalents from interest bearing demand accounts. Patent Costs Patent costs related to obtaining and maintaining patent protection in both the United States and other countries are expensed as incurred. Patents costs are classified as general and administrative expenses. Research and Development Research and development costs consist of expenses incurred in connection with the development of the Company’s product candidates. Such expenses include expenses incurred under agreements with contract research organizations, manufacturing and supply scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial supply, outsourced laboratory services, including materials and supplies used to support the Company’s research and development activities, and payments made for license fees and milestones that have not been demonstrated to have commercial value. Such costs are expensed in the periods in which they are incurred. Upfront payments and milestone payments for licensed technology are expensed as research and development as incurred or when the milestone is achieved or is determined to be probable of being achieved. Advanced payments for goods or services to be received in the future for research and development activities are recorded as prepaid expenses and expensed as the related goods are received or services are performed. Income Taxes The Company has operated as a C-Corporation since March 2021 and accounts 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 on the basis of 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. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers 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 management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. F-10 Table of Contents The Company records 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 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. Stock-Based Compensation In March 2021, the Company’s board of directors and shareholders approved the Dermata Therapeutics, Inc. 2021 Omnibus Equity Incentive Plan (the “2021 Plan”). For stock options granted under the 2021 Plan, the Company measures and recognizes compensation expense for all stock-based awards made to employees, directors, and non-employees, based on estimated fair values recognized using the straight-line method over the requisite service period. The fair value of options to purchase Common Stock granted to employees is estimated on the grant date using the Black-Scholes valuation model. The calculation of stock-based compensation expense requires that the Company make certain assumptions and judgments about variables used in the Black-Scholes model, including the expected term of the stock-based award, expected volatility of the underlying Common Stock, dividend yield, and the risk-free interest rate. Forfeitures are accounted for in the period they occur. Restricted stock units (“RSUs”) granted under the 2021 Plan are measured at the grant date fair value of the Common Stock, with corresponding compensation expense recognized ratably over the requisite service period. Warrants 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 (“FASB”), Accounting Standards Codification (“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. The Company accounts for modifications and exchanges of warrants in accordance with 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) (“ASU 2021-04”) . 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. Comprehensive Loss 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 years ended December 31, 2023, and 2022, comprehensive loss was equal to the net loss. Net Loss Per Share of Common Stock 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. The weighted-average number of shares of common stock outstanding includes (i) contingently issuable restricted stock units for which no future service is required as a condition to the delivery of the underlying Common Stock, (ii) pre-funded warrants because their exercise requires only nominal consideration for the delivery of shares, and (iii) shares held in abeyance because there is no consideration required for delivery of the 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, stock options and warrants 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. F-11 Table of Contents 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. Year Ended December 31, 2023 2022 Net loss $ ( 7,794,690 ) $ ( 9,610,913 ) Basic and diluted net loss per common share $ ( 2.67 ) $ ( 13.92 ) Weighted-average basic and diluted common shares 2,924,398 690,666 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 December 31, 2023 2022 Common Stock Options 102,074 65,983 Common Stock Warrants 8,358,697 437,102 Total potentially dilutive securities 8,460,771 503,085 Recent Accounting Pronouncements For the year ended December 31, 2023, the Company has reviewed recent accounting standards and identified the following as relevant to the Company. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for public entities with annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements and income tax footnote. F-12 Table of Contents 3. Balance Sheet Details The following provides certain balance sheet details: As of December 31, 2023 2022 Prepaid expenses and other current assets Prepaid insurance $ 426,413 $ 586,407 Prepaid research and development costs 91,232 92,581 Prepaid other 14,498 11,604 Interest receivable 8,356 12,602 Total prepaid expenses and other current assets $ 540,499 $ 703,194 Accrued and other current liabilities Accrued research and development costs $ 40,596 $ 254,787 Accrued compensation and benefits 716,490 170,389 Accrued other 502 756 Total accrued and other current liabilities $ 757,588 $ 425,932 4. Equity Securities On July 11, 2022, the Company filed a Certificate of Amendment to the Company’s Amended and Restated 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. A summary of the Company’s equity securities as of December 31, 2023, is as follows: Description Authorized Issued Held in Abeyance Reserved Outstanding Common Stock, par value $0.001 250,000,000 3,930,840 2,730,000 - 3,930,840 Preferred Stock 10,000,000 - - - - Warrants - 8,358,697 - - 8,358,697 2021 Omnibus Equity Incentive Plan 629,069 115,792 - 513,277 102,074 Total equity securities 260,629,069 12,405,329 2,730,000 513,277 12,391,611 Common Stock On November 20, 2023, the Company closed on an inducement agreement (the “Inducement”) with a holder (the “Holder”) of certain of its existing warrants to purchase up to 3,472,095 shares of the Company’s common stock, issued to the Holder on (i) April 25, 2022 (as amended on March 20, 2023, the “April 2022 Warrants”) and (ii) March 20, 2023 (the “March 2023 Warrants” together with the April 2022 Warrants, the “Existing Warrants”). The Existing Warrants had an exercise price of $ 2.82 . Pursuant to the Inducement, the Holder agreed to exercise for cash its Existing Warrants at a reduced exercise price of $ 0.6511 per share in consideration for the Company’s agreement to issue in a private placement (i) new series A Common Stock purchase warrants (the “November 2023 Series A Common Warrants”) to purchase 3,707,944 shares of Common Stock and (ii) new series B Common Stock purchase warrants (the “November 2023 Series B Common Warrants” and together with the November 2023 Series A Common Warrants, the “New Warrants”) to purchase 3,236,246 shares of Common Stock . The New Warrants are exercisable subject to stockholder approval, which the Company received at a stockholder meeting on January 12, 2024. The Company received net cash proceeds of approximately $ 2.0 million from the Inducement after deducting underwriters’ discounts and offering expenses of approximately $ 0.3 million. F-13 Table of Contents On May 26, 2023, the Company closed a private placement (the “2023 PIPE”) priced at the market under Nasdaq rules, in which it sold 458,555 shares of its Common Stock together with 342,322 pre-funded warrants to purchase up to an aggregate of 342,322 shares of Common Stock with an exercise price of $ 0.0001 per share (the “May 2023 Pre-Funded Warrants”), and 800,877 warrants to purchase up to an aggregate of 800,877 shares of Common Stock with an exercise price of $ 2.16 per share (the “May 2023 PIPE Common Warrants”) at a combined offering price of $ 2.285 . The Company received net cash proceeds of approximately $ 1.5 million from the 2023 PIPE after deducting underwriters’ discounts and offering expenses of approximately $ 0.3 million. The May 2023 Pre-Funded Warrants were exercised fully during the second quarter of 2023. On March 20, 2023, the Company closed a public offering (the “March 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 “March 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 “March 2023 Series A Common Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock, and (iv) Series B warrants (the “March 2023 Series B Common Warrants” and collectively with the March 2023 Series A Common Warrants, the “March 2023 Offering Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock. The March 2023 Offering Warrants had an exercise price of $ 2.82 per share. The Company received net cash proceeds of approximately $ 4.2 million after deducting the underwriter’s discounts and offering expenses of approximately $ 0.8 million. The March 2023 Pre-Funded Warrants were fully exercised during the first quarter of 2023, and the March 2023 Offering Warrants were exercised as part of the Inducement in November 2023. On April 25, 2022, the Company closed a private placement (the “April 2022 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 (the “April 2022 PIPE Pre-Funded Warrants”), 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 (the “April 2022 PIPE Common Warrants”) at a combined offering price of $21.20. The Company received net cash proceeds of approximately $ 4.3 million from the April 2022 PIPE after deducting underwriters’ discounts and offering expenses of approximately $ 0.7 million. The April 2022 PIPE Pre-Funded Warrants were fully exercised during 2022, and the April 2022 PIPE Common Warrants were exercised as part of the Inducement in November 2023. 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 December 31, 2023, or 2022, respectively. Abeyance Shares Related to the November 2023 Inducement, the Holder left 2,730,000 shares in abeyance at the Company’s transfer agent to be delivered to the Holder at their request. The 2,730,000 shares held in abeyance were delivered to the Holder on January 8, 2024. Accordingly, as of December 31, 2023, 2,730,000 shares were held in abeyance, have not been issued and are not outstanding . F-14 Table of Contents Warrants Summary of Warrants Outstanding The table below lists outstanding warrants for the dates presented. The warrants outstanding at December 31, 2023 are exercisable into 8,358,697 shares of common stock which had a fair value of $ 0.61 per share, based on the closing trading price on that day. The aggregate intrinsic value of warrants outstanding as of December 31, 2023, is calculated as the difference between the exercise price of the warrants and the closing market price of the Company’s Common Stock on that date. The intrinsic value of warrants outstanding as of December 31, 2023, was zero due to the warrants’ exercise prices above market value. Quantity of Warrants Outstanding as of December 31, Exercise Expiration Description 2023 2022 Price Date Pre-IPO Series 1a Warrants 4,321 4,321 $ 328.00 11/15/2026 Pre-IPO Class B Common Warrants 4,077 4,077 91.84 12/31/2024 IPO Warrants 184,820 184,820 112.00 8/17/2026 IPO Underwriter Warrants 8,035 8,035 128.80 8/17/2026 April 2022 PIPE Common Warrants - 235,849 2.82 3/20/2028 March 2023 Series A Common Warrants - - 2.82 3/20/2028 March 2023 Series B Common Warrants - - 2.82 7/20/2025 March 2023 Offering Placement Agent Warrants 113,269 - 3.8625 3/16/2028 May 2023 PIPE Common Warrants 800,877 - 2.16 11/27/2028 May 2023 PIPE Placement Agent Warrants 56,061 - 2.8563 5/23/2028 November 2023 Series A Common Warrants 3,707,944 - 0.6511 11/20/2028 November 2023 Series B Common Warrants 3,236,246 - 0.6511 3/20/2026 November 2023 Offering Placement Agent Warrants 243,047 - 0.8139 11/20/2028 Total warrants outstanding 8,358,697 437,102 Warrant Inducement In November 2023, the Company completed the Inducement, in which a Holder agreed to exercise 3,472,095 common warrants to purchase Common Stock at a reduced exercise price of $ 0.6511 per share in exchange for the 3,707,944 November 2023 Series A Common Warrants and 3,236,246 November 2023 Series B Common Warrants with an exercise price of $ 0.6511 per share. The New Warrants are exercisable subject to stockholder approval, which the Company received at a stockholder meeting on January 12, 2024. The Inducement, which resulted in the lowering of the exercise price of the Existing Warrants and the issuance of the New Warrants, is considered a modification of the Existing Warrants under the guidance of ASU 2021-04. The modification is consistent with the equity issuance classification under that guidance as the reason for the modification was to induce the holders of the Existing Warrants to cash exercise their warrants, which raised equity capital and generated net proceeds for the Company of approximately $ 2.0 million. As the Existing Warrants and the New Warrants were classified as equity instruments before and after the exchange, and as the exchange is directly attributable to an equity offering, the Company recognized the effect of the modification of approximately $ 3.0 million as an equity issuance cost. F-15 Table of Contents Warrant Modification In connection with the March 2023 Offering, the Company agreed to amend the terms of the April 2022 PIPE Common Warrants, which were held by the purchaser in the March 2023 Offering. The exercise price of the April 2022 PIPE Common Warrants was reduced from $21.20 to $2.82 per share upon closing of the March 2023 Offering . The original expiration date of the April 2022 PIPE Common Warrants was May 12, 2027, which was extended to five years after the closing of the March 2023 Offering, or March 20, 2028. The modification of the April 2022 PIPE Common Warrants was accounted for as a modification of equity-linked instruments. In accordance with ASU 2021-04, as the warrants were classified as equity instruments before and after the modification, and as the modification was directly attributable to an equity offering, the Company recognized the effect of the modification of approximately $ 0.1 million as an equity issuance cost. 5. Equity Incentive Plan Under the Company’s 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), as amended, the Company may grant options to purchase shares of Common Stock, restricted stock awards, performance stock awards, incentive bonus awards, other cash-based awards or directly issue shares of Common Stock to employees, directors, and consultants of the Company. 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 7,701 and 5,205 shares of Common Stock issuable pursuant to the 2021 Plan as of January 1, 2023, and 2022, respectively. At the Company’s 2023 Annual Meeting of Stockholders held on August 3, 2023, the Company’s stockholders approved an amendment to the Company’s 2021 Plan to increase the number of shares of common stock authorized for issuance thereunder by 513,150 shares to 629,069 shares. 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 December 31, 2023, there remain 513,277 shares reserved for issuance under the 2021 Plan, as amended. See Note 9 for a discussion of cancellation of stock options during the first quarter of 2024. F-16 Table of Contents Fair Value Measurement The Company uses the Black-Scholes option valuation model, which requires the use of highly subjective assumptions, to determine the fair value of stock-based awards. The fair value of each employee stock option is estimated on the grant date under the fair value method using the Black-Scholes model. The estimated fair value of each stock option is then expensed over the requisite service period, which is generally the vesting period. The assumptions and estimates that the Company uses in the Black-Scholes model are as follows: · Fair Value of Common Stock. The estimated fair value of the Common Stock underlying the Company’s stock option plan was determined by management by considering various factors as discussed below. All options to purchase shares of the Company’s Common Stock are intended to be exercisable at a price per share not less than the per-share fair value of the Company’s Common Stock underlying those options on the date of grant. The fair value of Common Stock is measured as the Company’s closing price of Common Stock on the date of grant. · Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to that of the expected term of the options. · Expected Term. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding, which is calculated using the simplified method, as the Company has insufficient historical information to provide a basis for an estimate. The simplified method calculates the expected term as the average of the vesting term plus the contractual life of the options. · Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it has limited trading history for its Common Stock price. Industry peers consist of several public companies in the biotechnology industry with comparable characteristics, including clinical trials progress and therapeutic indications. · Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy. To date, the Company has not declared any dividends to common shareholders and, therefore, the Company has used an expected dividend yield of zero. The following table presents the weighted-average assumptions used for stock options granted during the following periods: Year Ended December 31, 2023 2022 Grant date fair value $ 4.23 $ 23.36 Risk-free interest rate 3.9 % 1.5 % Dividend yield 0.00 % 0.00 % Expected life in years 6.1 5.4 Expected volatility 112 % 123 % F-17 Table of Contents Stock-based Compensation Expense 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. In December 2021, the Board 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: Year Ended December 31, 2023 2022 Research and development $ 193,700 $ 218,324 General and administrative 328,382 712,001 $ 522,082 $ 930,325 Stock Option Award Activity A summary of the Company’s 2021 Plan stock option activity is as follows: Number of Options Outstanding Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (in Years) Balance at December 31, 2022 65,983 $ 60.32 8.2 Options granted 36,091 4.96 9.0 Options exercised - - - Options cancelled - - - Balance at December 31, 2023 102,074 $ 40.77 7.8 Options exercisable at December 31, 2023 53,413 $ 63.51 7.3 F-18 Table of Contents The aggregate intrinsic value of options exercisable as of December 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 $ 0.61 per share. The intrinsic value of options outstanding and exercisable as of December 31, 2023, was zero. As of December 31, 2023, total unrecognized compensation cost related to stock options was approximately $ 0.6 million and the weighted average period over which this cost is expected to be recognized is 1.8 years. Restricted Stock Units During the year ended December 31, 2022, the Company issued 219,634 restricted stock units, or RSUs, as partial compensation to certain members of the Board for their services during 2022. The Company recognized stock-based compensation expense of approximately $ 0.2 million for the year ended December 31, 2022, related to the RSU awards. There were no RSUs issued or outstanding for the year ended December 31, 2023, and there is no unrecognized compensation expense related to RSUs as of December 31, 2023. 6. 401(k) Employee Benefit Plan 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 to the savings plan. 7. Commitments and Contingencies Clinical Trials During the fourth quarter of 2023, the Company initiated a Phase 3 clinical trial, STAR-1, which is expected to report data in 2025. The total contract amount with the clinical research organization is approximately $6.9 million, which will extend from the fourth quarter of 2023 to the first half of 2025, which has a 30-day termination notice period. Supplier Agreement As a result of Russia’s invasion of Ukraine, the United States, the United Kingdom, and the European Union governments, among others, have developed coordinated sanctions and export-control measure packages against Russian individuals and entities. The Company is currently a party to an exclusive supply agreement for the supply of the Spongilla raw material used in DMT310 and DMT410. The counterparty to this supply agreement is a Russian entity. 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 multiple shipments of raw material from its supplier subsequent to the implementation of export controls and sanctions, 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. F-19 Table of Contents License Agreements On March 31, 2017, the Company entered into a license agreement, as amended (the “License Agreement”) with Villani, Inc. whereby Villani has granted the Company an exclusive, sub-licensable, royalty-bearing license (the “License”) under the Licensed Patents (as defined in the License Agreement), to formulate, develop, seek regulatory approval for, make or sell products that contain Spongilla lacustris (alone or in combination with other active or inactive ingredients) for the treatment of diseases, disorders and conditions of the skin, including but not limited to acne, rosacea, psoriasis, atopic dermatitis, seborrheic dermatitis, actinic keratosis and eczema that were developed using certain licensed know-how (“Licensed Products”). 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. 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”). 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. As of December 31, 2023, the Company evaluated the likelihood of the Company achieving the specified milestones and determined that the likelihood is not yet probable and as such no accrual of these payments is required as of December 31, 2023. Legal Proceedings In the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. 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. 8. Income Taxes Dermata operates as a corporation, and accordingly, the Company is taxable at the entity level for U.S. federal and state tax purposes. A reconciliation between the provision for income taxes and income taxes computed using the U.S. federal statutory corporate tax rate is as follows: Years Ended December 31, (in thousands) 2023 2022 U.S. Federal statutory income tax rate $ ( 1,637 ) $ ( 2,018 ) Permanent and other differences 55 68 Stock-based compensation expense 86 89 Research and development credits ( 259 ) ( 219 ) Valuation allowance 1,755 2,080 Total tax provision $ - $ - Significant components of the Company’s net deferred tax assets are as follows: As of December 31, (in thousands) 2023 2022 Net operating loss carryforwards $ 2,980 $ 1,927 Research and development carryforwards 596 337 Capitalized research and development 1,508 1,068 Stock-based compensation expense 246 311 Intangible assets 5 49 Other, net 129 17 Gross deferred tax assets 5,464 3,709 Less: valuation allowance ( 5,464 ) ( 3,709 ) Total deferred tax assets $ - $ - F-20 Table of Contents The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred since inception. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s projections for future growth. Based on this evaluation, as of December 31, 2023, and 2022, a valuation allowance of $ 5.5 million and $ 3.7 million, respectively, or an increase of $ 1.8 million, has been recorded against all of the Company’s net deferred tax assets, as the Company has determined that none of the Company’s balance of deferred tax assets is more likely than not to be realized. The amount of deferred tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as estimates of future taxable income during carryforward periods and the Company’s projections for growth. As of December 31, 2023, the Company had federal net operating loss carryforwards, or NOLs, available of $ 14.2 million before consideration limitations under Section 382 of the Internal Revenue Code of 1986, or Section 382 of the Code, as further described below. The NOL will carryforward indefinitely and be available to offset up to 80 % of future taxable income each year. The Company had state NOL carryforwards available of $ 5.0 million as of December 31, 2023. The state NOL may be used to offset future taxable income and will begin to expire in 2041 , unless previously utilized. As of December 31, 2023, the Company had federal and state research and development tax credit carryforwards available of $ 0.7 million and $ 0.1 million, respectively. The federal credit carryforwards will begin to expire in 2041, unless previously utilized. The state research and development credits carry forward indefinitely. Utilization of the Company’s NOL and research and development credit carryforwards may be subject to substantial annual limitations in the event a cumulative ownership change has occurred, or that occur in the future, as required by Section 382 of the Code. In general, an ownership change, as defined by the Code, results from a transaction, or series of transactions over a three-year period, resulting in an ownership change of more than 50% of the outstanding common stock of a company by certain stockholders or public groups. Such an ownership change may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not completed such an ownership change analysis pursuant to Section 382 of the Code and therefore has established a full valuation allowance as the realization of such deferred tax assets has not met the more likely than not threshold requirement. If ownership changes have occurred or occurs in the future, the amount of remaining tax attribute carryforwards available to offset taxable income and income tax expense in future years may be restricted or eliminated. If eliminated, the related asset would be removed from deferred tax assets with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate. The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination by the tax authorities. The Company does not expect that there will be a significant change in the unrecognized tax benefits over the next twelve months. Further, due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the effective tax rate. F-21 Table of Contents The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the periods presented: Years Ended December 31, (in thousands) 2023 2022 Beginning balance of unrecognized tax benefits $ 557 $ 41 Additions based on tax positions related to the current year 64 81 Additions for tax positions of prior years 24 435 Reductions for tax positions in prior years - - Ending balance of unrecognized tax benefits $ 645 $ 557 The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized, none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal corresponding adjustment in the deferred tax asset valuation allowance. The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s balance sheets as of December 31, 2023, or 2022 and has not recognized interest and/or penalties in the statements of operations for the years ended December 31, 2023, and 2022. The Company is subject to taxation in the United States and various states. The Company is subject to examination by tax authorities in those jurisdictions from inception. 9. Subsequent Event In January 2024, the Company granted 410,000 stock option awards to employees of the Company, subject to four-year vesting, with an exercise price of $ 0.6099 . In January 2024, the Board unanimously approved to provide employees and directors of the Company the opportunity to cancel outstanding, out of the money, stock options without consideration, in accordance with an option cancellation agreement. Accordingly, 101,465 of the 102,074 stock options outstanding as of December 31, 2023, were cancelled in February 2024. F-22 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DERMATA THERAPEUTICS, INC. (Registrant) Date: March 21, 2024 /s/ Gerald T. Proehl Gerald T. Proehl Chief Executive Officer (Principal Executive Officer) Date: March 21, 2024 /s/ Kyri K. Van Hoose Kyri K. Van Hoose Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gerald T. Proehl President, Chief Executive Officer, Chairman (Principal Executive Officer) March 21, 2024 Gerald T. Proehl /s/ Kyri K. Van Hoose Chief Financial Officer (Principal Financial and Accounting Officer) March 21, 2024 Kyri K. Van Hoose /s/ David Hale Lead Director March 21, 2024 David Hale /s/ Wendell Wierenga, Ph.D. Director March 21, 2024 Wendell Wierenga, Ph.D. /s/ Mary Fisher Director March 21, 2024 Mary Fisher /s/ Andrew Sandler, M.D. Director March 21, 2024 Andrew Sandler, M.D. /s/ Steven J. Mento, Ph.D. Director March 21, 2024 Steven J. Mento, Ph.D. /s/ Kathleen Scott Director March 21, 2024 Kathleen Scott /s/ Brittany Bradrick Director March 21, 2024 Brittany Bradrick 109