Dermata Therapeutics, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS DERMATA THERAPEUTICS, INC. Balance Sheets September 30, 2024 December 31, 2023 (unaudited) Assets: Cash and cash equivalents $ 6,143,752 $ 7,438,135 Prepaid expenses and other current assets 543,592 540,499 Total assets $ 6,687,344 $ 7,978,634 Liabilities and Stockholders’ Equity: Liabilities: Accounts payable $ 863,595 $ 866,028 Accrued and other current liabilities 1,082,521 757,588 Total liabilities 1,946,116 1,623,616 Commitments and Contingencies (see Note 6) Stockholders’ Equity: Common Stock, par value $ 0.0001 per share, 250,000,000 shares authorized; 1,677,768 shares issued and outstanding as of September 30, 2024; 261,998 shares issued and outstanding as of December 31, 2023. 168 26 Additional paid-in capital 67,265,462 59,742,870 Accumulated deficit ( 62,524,402 ) ( 53,387,878 ) Total stockholders’ equity 4,741,228 6,355,018 Total liabilities and stockholders’ equity $ 6,687,344 $ 7,978,634 The accompanying notes are an integral part of these financial statements. 3 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Operations (unaudited) For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Operating expenses: Research and development $ 2,401,359 $ 902,977 $ 6,011,201 $ 2,934,541 General and administrative 824,294 909,001 3,301,753 2,887,533 Total operating expenses 3,225,653 1,811,978 9,312,954 5,822,074 Loss from operations ( 3,225,653 ) ( 1,811,978 ) ( 9,312,954 ) ( 5,822,074 ) Other income and expenses: Interest income, net 52,497 92,767 176,431 161,357 Net loss $ ( 3,173,156 ) $ ( 1,719,211 ) $ ( 9,136,523 ) $ ( 5,660,717 ) Net loss per share of Common Stock, basic and diluted $ ( 2.04 ) $ ( 8.09 ) $ ( 10.22 ) $ ( 36.91 ) Weighted-average basic and diluted Common Stock 1,554,680 212,544 894,168 153,380 The accompanying notes are an integral part of these financial statements. 4 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Stockholder’s Equity (unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Par Value Capital Deficit Equity Balance at December 31, 2023 261,998 $ 26 $ 59,742,870 $ ( 53,387,878 ) $ 6,355,018 Stock-based compensation - - 587,234 - 587,234 Issuance of abeyance shares 182,000 18 ( 18 ) - - Net loss - - - ( 3,134,262 ) ( 3,134,262 ) Balance at March 31, 2024 443,998 $ 44 $ 60,330,086 $ ( 56,522,140 ) $ 3,807,990 Issuance of Common Stock upon exercise of warrants, net of issuance costs 249,336 25 2,320,438 - 2,320,463 Stock-based compensation - - 19,608 - 19,608 Settlement of fractional shares paid in cash ( 159 ) - ( 828 ) - ( 828 ) Net loss - - - ( 2,829,106 ) ( 2,829,106 ) Balance at June 30, 2024 693,175 $ 69 $ 62,669,304 $ ( 59,351,246 ) $ 3,318,127 Issuance of pre-funded warrants and warrants, net of issuance costs - - 3,093,038 - 3,093,038 Issuance of Common Stock upon exercise of pre-funded warrants 167,569 17 151 168 Issuance of Common Stock from ATM sales, net of issuance costs 550,024 55 1,482,004 1,482,059 Issuance of abeyance shares 267,000 27 ( 27 ) - - Stock-based compensation - - 20,992 - 20,992 Net loss - - - ( 3,173,156 ) ( 3,173,156 ) Balance at September 30, 2024 1,677,768 $ 168 $ 67,265,462 $ ( 62,524,402 ) $ 4,741,228 The accompanying notes are an integral part of these financial statements. 5 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Stockholder’s Equity (unaudited) Additional Total Common Stock Paid-in Accumulated Stockholders’ Shares Par Value Capital Deficit Equity Balance at December 31, 2022 51,338 $ 5 $ 51,615,037 $ ( 45,593,188 ) $ 6,021,854 Stock-based compensation - - 131,260 - 131,260 Issuance of Common Stock and warrants, net of issuance costs 5,666 1 4,174,984 - 4,174,985 Issuance of Common Stock upon exercise of pre-funded warrants 102,208 10 143 - 153 Settlement of fractional shares paid in cash ( 59 ) - ( 40 ) - ( 40 ) Net loss - - - ( 2,240,142 ) ( 2,240,142 ) Balance at March 31, 2023 159,153 $ 16 $ 55,921,384 $ ( 47,833,330 ) $ 8,088,070 Stock-based compensation - - 131,177 - 131,177 Issuance of Common Stock and warrants, net of issuance costs 30,570 3 1,512,099 - 1,512,102 Issuance of Common Stock upon exercise of pre-funded warrants 22,821 2 32 - 34 Net loss - - - ( 1,701,364 ) ( 1,701,364 ) Balance at June 30, 2023 212,544 $ 21 $ 57,564,692 $ ( 49,534,694 ) $ 8,030,019 Stock-based compensation - - 131,177 - 131,177 Issuance costs - - ( 35,419 ) - ( 35,419 ) Net loss - - - ( 1,719,211 ) ( 1,719,211 ) Balance at September 30, 2023 212,544 $ 21 $ 57,660,450 $ ( 51,253,905 ) $ 6,406,566 The accompanying notes are an integral part of these financial statements. 6 Table of Contents DERMATA THERAPEUTICS, INC. Statements of Cash Flows (unaudited) For the nine months ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 9,136,523 ) $ ( 5,660,717 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 627,834 393,614 Increase (decrease) in cash resulting from changes in: Prepaid expenses and other current assets ( 3,095 ) 11,294 Accounts payable ( 10,324 ) ( 22,244 ) Accrued and other current liabilities 272,774 16,427 Total adjustments to reconcile net loss to net cash used in operations 887,189 399,091 Net cash used in operating activities ( 8,249,334 ) ( 5,261,626 ) Cash flows from financing activities: Proceeds from issuance of Common Stock, pre-funded warrants, and warrants, net of issuance costs 6,955,611 5,651,668 Proceeds from exercise of pre-funded warrants 168 187 Payment for fractional shares in reverse stock split ( 828 ) ( 40 ) Net cash provided by financing activities 6,954,951 5,651,815 Net increase (decrease) in Cash and cash equivalents ( 1,294,383 ) 390,189 Cash and cash equivalents at beginning of period 7,438,135 6,241,294 Cash and cash equivalents at end of period $ 6,143,752 $ 6,631,483 Non-cash financing activities: Issuance of abeyance shares $ ( 45 ) $ - Incremental fair value of May 2024 warrant inducement $ 1,526,232 $ - Issuance costs in accounts payable or accrued expenses $ 60,051 $ - Incremental fair value of March 2023 warrant modification $ - $ 144,765 Supplemental disclosure: Cash paid for taxes $ 950 $ 950 The accompanying notes are an integral part of these financial statements. 7 Table of Contents DERMATA THERAPEUTICS, INC. Notes to Financial Statements (unaudited) 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. Reverse Stock Splits 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 and stockholders. The par value was 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. On May 7, 2024, the Company held its annual meeting of stockholders at which time the stockholders approved the adoption of an amendment to its Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of its issued and outstanding shares of Common Stock, at a specific ratio, ranging from one-for-five to one-for-thirty, with the exact ratio determined by the Company’s board of directors without further approval or authorization of its stockholders. On May 16, 2024, the Company effected the reverse split of its shares of Common Stock at a ratio of 1-for-15, as approved by the Company’s board of directors. The par value was not adjusted as a result of the May 2024 reverse stock 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 September 30, 2024, cash and cash equivalents totaled $ 6.1 million and the Company had an accumulated deficit of $ 62.5 million. For the nine months ended September 30, 2024, and the year ended December 31, 2023, the Company used cash of $ 8.2 million and $ 6.4 million, respectively, in operations. The Company’s cash and cash equivalents are expected to fund operations into the second quarter of 2025. 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. 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. 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 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 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 unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations, cash flows, and stockholders’ equity for the interim periods presented. Interim results are not necessarily indicative of results for a full year. 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. The unaudited financial statements included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with Securities and Exchange Commission (the “SEC”) on March 21, 2024, which includes a broader discussion of the Company’s business and the risks inherent therein. 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. 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. 9 Table of Contents 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. Deferred Financing Costs The Company capitalizes certain legal, accounting, and other fees and costs that are directly attributable to in-process equity financings as deferred offering costs until such financings are completed. Upon the completion of an equity financing, these costs are recorded as a reduction of additional paid-in capital of the related financing. 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 is a C-Corporation 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. 10 Table of Contents 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. 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 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 granted under the Company’s 2021 Omnibus Equity Incentive Plan (the “2021 Plan”) are measured at the grant date fair value of the Common Stock, with corresponding compensation expense recognized ratably over the requisite service period. Refer to Note 5 - Equity Incentive Plan for further discussion. 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 Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) , and ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815-40”) . The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480-40 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. 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 periods presented, comprehensive loss was equal to the net loss. 11 Table of Contents 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) pre-funded warrants because their exercise requires only nominal consideration for the delivery of shares, and (ii) shares held in abeyance because there is no consideration required for delivery of the shares, (collectively, “basic shares”), without consideration of common stock equivalents. Diluted net loss per share is calculated by adjusting basic shares outstanding for the dilutive effect of common stock equivalents outstanding for the period. For purposes of the diluted net loss per share calculation, stock options and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per common stock if their effect would be anti-dilutive. The common share equivalents that are not included in the calculation of diluted net loss per share of Common Stock but could potentially dilute basic earnings per share in the future are as follows: As of September 30, 2024 2023 Common Stock options 52,341 6,763 Common Stock warrants 5,068,723 309,549 Total potentially dilutive securities 5,121,064 316,312 Recent Accounting Pronouncements For the nine months ended September 30, 2024, the Company has reviewed recent accounting standards and identified the following as relevant to the Company. In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) , which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU No 2023-07 is effective for annual reporting periods beginning after December 15, 2023, and for interim reporting periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statement disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”) . 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. In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses (“ASU 2024-03”) . ASU 2024-03 requires additional disclosures and disaggregation of certain costs and expenses presented on the face of the income statement. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements. 3. Balance Sheet Details The following provides certain balance sheet details: September 30, December 31, 2024 2023 Prepaid expenses and other current assets: Prepaid insurance $ 488,562 $ 426,413 Prepaid research and development costs 18,000 91,232 Prepaid other and other current assets 37,030 22,854 Total prepaid expenses and other current assets $ 543,592 $ 540,499 Accrued and other current liabilities: Accrued research and development costs $ 655,989 $ 40,596 Accrued compensation and benefits 327,235 716,490 Accrued other 99,297 502 Total accrued and other current liabilities $ 1,082,521 $ 757,588 12 Table of Contents 4. Equity Securities A summary of the Company’s equity securities as of September 30, 2024, is as follows: Description Authorized Issued Pre-funded Warrants Reserved Outstanding Common Stock, par value $0.0001 250,000,000 1,677,768 1,745,000 - 1,677,768 Preferred Stock 10,000,000 - - - - Warrants (excluding pre-funded warrants) - 5,068,723 - - 5,068,723 2021 Omnibus Equity Incentive Plan - 53,255 - 26,675 52,341 Total equity securities 260,000,000 6,799,746 1,745,000 26,675 6,798,832 Common Stock On September 17, 2024, the Company closed a private placement (the “September 2024 PIPE”) priced at the market under Nasdaq rules, in which it sold 1,912,569 pre-funded warrants to purchase up to an aggregate of 1,912,569 shares of Common Stock with an exercise price of $0.001 per share (the “September 2024 Pre-Funded Warrants”), and 1,912,569 series A warrants (the “September 2024 PIPE Series A Common Warrants”) to purchase up to an aggregate of 1,912,569 shares of Common Stock and 1,912,569 series B warrants (the “September 2024 PIPE Series B Common Warrants” and together with the September 2024 PIPE Series A Warrants, the “September 2024 PIPE Warrants”) to purchase up to an aggregate of 1,912,569 shares of Common Stock. The September 2024 PIPE Warrants have an exercise price of $ 1.58 . In connection with the September 2024 PIPE, the Company entered into a registration rights agreement with the investor, pursuant to which the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) registering the resale of the shares of Common Stock underlying the securities sold in the September 2024 PIPE financing. The Company filed a Form S-3 on September 19, 2024, which was declared effective by the SEC on September 24, 2024. The Company received net cash proceeds of approximately 3.1 million from the September 2024 PIPE after deducting underwriters’ discounts and offering expenses of approximately $ 0.4 million. During the third quarter of 2024, 167,569 of the 1,912,569 September 2024 Pre-Funded Warrants were exercised by the investor. As of September 30, 2024, 1,745,000 September 2024 Pre-Funded Warrants remained outstanding. In June 2024, the Company entered into an At The Market Offering Agreement (the “ATM Agreement”) with a sales agent (the “Sales Agent”), providing for the sale of up to $ 1,157,761 of its shares of Common Stock as set forth in the ATM Agreement. The Sales Agent will be entitled to compensation at a fixed commission rate of 3.0 % of the gross sales price of the shares of Common Stock sold pursuant to the ATM Agreement, as well as other transactional fees. During July 2024, the Company issued 355,806 shares of Common Stock under the ATM Agreement resulting in gross proceeds of $ 1,157,248 before deducting issuance costs. After issuance of the 355,806 shares during July 2024, $ 513 remained registered under the ATM Agreement. On August 2, 2024, the Company increased the maximum aggregate offering amount of Common Stock issuable under the ATM Agreement by $ 505,000 , from $1,157,761 to $1,662,761. During September 2024, the Company issued 194,218 shares of Common Stock under the ATM Agreement resulting in additional gross proceeds of $ 504,894 before deducting issuance costs. During the quarter ended September 30, 2024, the Company issued a total of 550,024 shares from its ATM resulting in net proceeds of $ 1.5 million after deducting issuer costs and other expenses related to setting up and issuing shares from the Company’s ATM. As of September 30, 2024, the Company does not have any remaining capacity under its ATM Agreement. 13 Table of Contents On May 21, 2024, the Company closed on inducement agreements (the “May 2024 Inducement”) with certain holders (the “Holders”) of certain of the Company’s existing warrants to purchase up to an aggregate of 516,336 shares of the Company’s Common Stock, issued to the Holders on (i) May 26, 2023 (the “May 2023 Warrants”), having an exercise price of $32.40 per share, and (ii) November 2023 New Warrants (as defined below), which were issued in two separate series, each having an exercise price of $9.7665 per share (together with the May 2023 Warrants, the “May 2024 Existing Warrants”). Pursuant to the May 2024 Inducement, the Holders agreed to exercise for cash their May 2024 Existing Warrants at a reduced exercise price of $ 5.16 per share in consideration for the Company’s agreement to issue in a private placement (i) new Series A Common Stock purchase warrants (the “New May 2024 Series A Warrants”) to purchase up to 601,174 shares of Common Stock, and (ii) new Series B Common Stock purchase warrants (the “New May 2024 Series B Warrants” and together with the New May 2024 Series A Warrants, the “New May 2024 Warrants”) to purchase up to 431,498 shares of Common Stock. The Company received net proceeds of approximately $ 2.3 million from the exercise of the May 2024 Existing Warrants by the Holders, after deducting placement agent fees and other offering expenses payable by the Company. Related to the May 2024 Inducement, during July 2024, the balance of 267,000 of abeyance shares related to the May 2024 Warrant Inducement were released to the investor . Accordingly, shares outstanding increased by 267,000 during the third quarter of 2024 related to the issuance of the 267,000 abeyance shares from the May 2024 Warrant Inducement, leaving no further abeyance shares outstanding as of September 30, 2024. On November 20, 2023, the Company closed on an inducement agreement (the “November 2023 Inducement”) with a holder (the “Holder”) of certain of its existing warrants to purchase up to 231,473 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 “November 2023 Existing Warrants”). The November 2023 Existing Warrants had an exercise price of $ 42.30 . Pursuant to the November 2023 Inducement, the Holder agreed to exercise for cash its November 2023 Existing Warrants at a reduced exercise price of $ 9.7665 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 247,196 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 “November 2023 New Warrants”) to purchase 215,749 shares of Common Stock. The November 2023 New Warrants were 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 November 2023 Inducement after deducting underwriters’ discounts and offering expenses of approximately $ 0.3 million. Related to the November 2023 Inducement, as of December 31, 2023, the Holder left 182,000 shares in abeyance at the Company’s transfer agent to be delivered to the Holder at their request, which were then delivered to the Holder on January 8, 2024 . Accordingly, as of December 31, 2023, 182,000 shares were held in abeyance, which were not issued and not outstanding. Since all the abeyance shares from the November 2023 Inducement were pulled by the Holder in January 2024, there were no remaining November 2023 Inducement shares held in abeyance as of September 30, 2024. On May 26, 2023, the Company closed a private placement (the “May 2023 PIPE”) priced at the market under Nasdaq rules, in which it sold 30,570 shares of its Common Stock together with 22,821 pre-funded warrants to purchase up to an aggregate of 53,391 shares of Common Stock with an exercise price of $ 0.0001 per share (the “May 2023 Pre-Funded Warrants”), and 53,391 warrants to purchase up to an aggregate of 53,391 shares of Common Stock with an exercise price of $ 32.40 per share (the “May 2023 PIPE Common Warrants”) at a combined offering price of $ 34.275 . The May 2023 PIPE Common Warrants were set to expire on November 27, 2028. The Company received net cash proceeds of approximately $ 1.5 million from the May 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. The May 2023 PIPE Common Warrants were exercised as part of the May 2024 Inducement. 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) 5,666 shares of Common Stock, (ii) pre-funded warrants (the “March 2023 Pre-Funded Warrants”) to purchase up to an aggregate of 102,208 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 107,874 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 107,874 shares of Common Stock. The March 2023 Offering Warrants had an exercise price of $ 42.30 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 November 2023 Inducement. 14 Table of Contents 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 September 30, 2024, or December 31, 2023, respectively. Warrants Summary of Warrants Outstanding The table below lists outstanding warrants for the dates presented, excluding 1,745,000 pre-funded warrants with an exercise price of $ 0.001 . The warrants outstanding as of September 30, 2024, are exercisable into 5,068,723 shares of Common Stock which had a fair value of $ 1.64 per share, based on the closing trading price on September 30, 2024, the last trading day prior to September 30, 2024. The aggregate intrinsic value of warrants outstanding as of September 30, 2024, 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 September 30, 2024, was $ 0.2 million. Quantity of Warrants Outstanding as of Description September 30, 2024 December 31, 2023 Exercise Price Expiration Date Pre-IPO Series 1a Warrants 279 279 $ 4,920.00 11/15/2026 Pre-IPO Class B Common Warrants 268 268 1,377.60 12/31/2024 IPO Warrants 12,320 12,320 1,680.00 8/17/2026 IPO Underwriter Warrants 535 535 1,932.00 8/17/2026 March 2023 Offering Series A Common Warrants - 107,874 42.30 3/20/2028 March 2023 Offering Series B Common Warrants - 107,874 42.30 7/20/2025 March 2023 Offering Placement Agent Warrants 7,549 7,549 57.94 3/16/2028 May 2023 PIPE Common Warrants - 53,391 32.40 11/27/2028 May 2023 PIPE Placement Agent Warrants 3,736 3,736 42.84 5/23/2028 November 2023 Series A Common Warrants - 247,196 9.7665 11/20/2028 November 2023 Series B Common Warrants - 215,749 9.7665 3/20/2026 November 2023 Placement Agent Warrants 16,202 16,202 12.21 11/20/2028 May 2024 Series A Common Warrants 601,174 - 4.91 11/21/2029 May 2024 Series B Common Warrants 431,498 - 4.91 5/21/2026 May 2024 Placement Agent Warrants 36,144 - 6.45 11/21/2029 September 2024 PIPE Series A Common Warrants 1,912,569 - 1.58 3/18/2030 September 2024 PIPE Series B Common Warrants 1,912,569 - 1.58 3/17/2026 September 2024 PIPE Placement Agent Warrants 133,880 - 2.29 3/18/2030 Total warrants outstanding 5,068,723 772,973 15 Table of Contents Warrant Inducements In May 2024, the Company completed the May 2024 Inducement with the Holders who agreed to exercise 516,336 warrants to purchase Common Stock at a reduced exercise price of $ 5.16 per share in exchange for 601,174 New May 2024 Series A Warrants and 431,498 New May 2024 Series B Warrants with an exercise price of $ 4.91 per share. The May 2024 Inducement, which resulted in the lowering of the exercise price of the May 2024 Existing Warrants and the issuance of the May 2024 New Warrants, is considered a modification of the May 2024 Existing Warrants under the guidance ASC 815-40. 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 May 2024 Existing Warrants to cash exercise their warrants, which raised equity capital and generated net proceeds of approximately $ 2.3 million. As the May 2024 Existing Warrants and the May 2024 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 $ 1.5 million as an equity issuance cost. In November 2023, the Company completed the November 2023 Inducement, in which a Holder agreed to exercise 231,472 common warrants to purchase Common Stock at a reduced exercise price of $ 5.16 per share in exchange for 247,196 November 2023 Series A Warrants and 215,749 November 2023 Series B Warrants with an exercise price of $ 9.7655 per share. The November 2023 New Warrants were exercisable subject to stockholder approval, which the Company received at a stockholder meeting on January 12, 2024. The November 2023 Inducement, which resulted in the lowering of the exercise price of the November 2023 Existing Warrants and the issuance of the November 2023 New Warrants, is considered a modification of the November 2023 Existing Warrants under the guidance of ASC 815-40. The modification is consistent with the equity issuance classification under that guidance as the reason for the modification was to induce the holder of the November 2023 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 November 2023 Existing Warrants and the November 2023 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. 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 $318.00 to $42.30 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. The April 2022 PIPE Warrants were exercised as part of the November 2023 Inducement. 5. Equity Incentive Plan Under the Company’s 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. At the Company’s 2024 Annual Meeting of Stockholders held on May 7, 2024, 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 from 41,937 shares to 79,930 shares. Further at the Company’s 2024 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the Company’s 2021 Plan, to increase the evergreen provision from one percent to five percent of the total number of the Company’s Common Stock outstanding starting on January 1, 2025. The one percent evergreen provision resulted in an additional 2,620 and 513 shares of Common Stock issuable pursuant to the 2021 Plan as of January 1, 2024, and 2023, respectively. Stock awards may be granted at an exercise price per share of not less than 100% of the fair market value at the date of grant. Stock awards granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years for employees and one year for directors of the Company’s Board and consultants . As of September 30, 2024, there remain 26,675 shares reserved for issuance under the 2021 Plan, as amended. 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 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 for stock-based awards granted to employees, 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. As permitted under ASC 718, the Company has elected to use the contractual term as the expected term for certain non-employee awards, on an award-by-award basis. · 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: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Grant date fair value $ 1.60 $ 63.4 5 $ 4.78 $ 63.45 Risk-free interest rate 3.7 % 3.9 % 3.9 % 3.9 % Dividend yield 0.00 % 0.00 % 0.00 % 0.00 % Expected life in years 10.0 6.1 7.9 6.1 Expected volatility 102.8 % 112 % 106.7 % 112 % 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. 17 Table of Contents The following table summarizes the total stock-based compensation expense related to stock options included in the Company’s statements of operations: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Research and development $ 4,677 $ 48,425 $ 246,637 $ 145,275 General and administrative 16,315 82,752 381,197 248,339 Total $ 20,992 $ 131,177 $ 627,834 $ 393,614 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, 2023 6,763 $ 609.81 7.8 Options granted 52,325 5.61 - Options exercised - - - Options cancelled ( 6,747 ) 607.99 - Balance at September 30, 2024 52,341 $ 6.03 9.6 Options exercisable at September 30, 2024 3,124 $ 16.16 9.2 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, 6,747 of the 6,763 stock options outstanding as of December 31, 2023, were cancelled in February 2024 . In accordance with accounting guidance provided in ASC 718, since the stock option cancellations were not accompanied by a concurrent grant, or offer to grant, a replacement award, any unrecognized compensation cost was recognized at the cancellation date. Accordingly, the Company recognized stock-based compensation expense of $ 568,372 resulting from the stock option cancellation during the first quarter of 2024. The aggregate intrinsic value of options outstanding and exercisable as of September 30, 2024, 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 September 30, 2024, the last trading day prior to September 30, 2024, which was $ 1.64 per share. The intrinsic value of options outstanding and exercisable as of September 30, 2024, was zero. As of September 30, 2024, total unrecognized compensation cost related to stock options was approximately $ 0.2 million and the weighted average period over which this cost is expected to be recognized is 2.6 years. 6. 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 top-line data in 2025. The total contract amount with the clinical research organization is approximately $ 7.0 million, which will extend from the fourth quarter of 2023 to the first half of 2025, and which has a 30-day termination notice period. As of September 30, 2024, the Company has recognized $ 4.7 million in expense for the STAR-1 trial. 18 Table of Contents 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. 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 September 30, 2024, 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 September 30, 2024. 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. 7. Subsequent Events Subsequent to September 30, 2024, the Company has issued 363,000 shares of Common Stock related to the exercise of the September 2024 Pre-Funded Warrants, leaving 1,382,000 of the September 2024 Pre-Funded Warrants outstanding. 19 Table of Contents