0001654954-21-012206.txt : 20211115 0001654954-21-012206.hdr.sgml : 20211115 20211115160753 ACCESSION NUMBER: 0001654954-21-012206 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 52 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211115 DATE AS OF CHANGE: 20211115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Dermata Therapeutics, Inc. CENTRAL INDEX KEY: 0001853816 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-40739 FILM NUMBER: 211410469 BUSINESS ADDRESS: STREET 1: 3525 DEL MAR HEIGHTS RD., #322 CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: (858)-223-0882 MAIL ADDRESS: STREET 1: 3525 DEL MAR HEIGHTS RD., #322 CITY: SAN DIEGO STATE: CA ZIP: 92130 10-Q 1 drma_10q.htm FORM 10-Q drma_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2021

 

Commission File Number: 001-40739

 

DERMATA THERAPEUTICS, INC.

(Exact name of registrant as specified in the charter)

 

Delaware

 

82-1510982

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

3525 Del Mar Heights Rd., #322, San Diego, CA 92130

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: 858-800-2543

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 Par Value

 

DRMA

 

The Nasdaq Capital Market

Common Stock Purchase Warrants

 

DRMAW

 

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes     ☐ No.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes     ☐ No.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     ☒ No.

 

There were 8,328,629 shares of common stock, par value $0.0001 of Dermata Therapeutics, Inc. issued and outstanding as of November 10, 2021.

 

 

 

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Form 10-Q

Table of Contents

 

INDEX

 

 

 

 

Page No.

 

 

Special Note Regarding Forward-Looking Statements

 

 3

 

 

 

 

 

 

Part I

Financial Information

 

4

 

 

 

 

 

 

Item 1:

Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Balance Sheets

 

4

 

 

Condensed Statements of Operations

 

5

 

 

Statements of Stockholders’ and Members’ Equity (Deficit)

 

6

 

 

Condensed Statements of Cash Flows

 

8

 

 

Notes to Financial Statements

 

9

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

 

29

 

Item 4:

Controls and Procedures

 

29

 

 

 

 

 

 

Part II

Other Information

 

30

 

 

 

 

 

 

Item 1:

Legal Proceedings

 

30

 

Item 1A:

Risk Factors

 

30

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

Item 3:

Defaults Upon Senior Securities

 

30

 

Item 4:

Mine Safety Disclosures

 

30

 

Item 5:

Other Information

 

30

 

Item 6:

Exhibits

 

31

 

 

 

 

 

 

Signatures

 

32

 

 

 
2

Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

 

·

our plans to research, develop and commercialize our product candidates;

 

 

 

 

·

the initiation, progress, success, cost, and timing of our clinical trials and product development activities;

 

 

 

 

·

the therapeutic potential of our product candidates, and the disease indications for which we intend to develop our product candidates;

 

 

 

 

·

our ability and timing to advance our product candidates into, and to successfully initiate, conduct, enroll and complete, clinical trials;

 

 

 

 

·

our ability to manufacture our product candidates for clinical development and, if approved, for commercialization, and the timing and costs of such manufacture;

 

 

 

 

·

the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers;

 

 

 

 

·

our ability to obtain funding for our operations, including funding necessary to initiate and complete clinical trials of our product candidates;

 

 

 

 

·

the size and growth of the potential markets for our product candidates and our ability to serve those markets;

 

 

 

 

·

the potential scope, duration, and value of our intellectual property rights;

 

 

 

 

·

our ability, and the ability of our licensors, to obtain, maintain, defend, and enforce intellectual property rights protecting our product candidates, and our ability to develop and commercialize our product candidates without infringing the proprietary rights of third parties;

 

 

 

 

·

our ability to recruit and retain key personnel;

 

 

 

 

·

the effects of the COVID-19 pandemic on our operations; and

 

 

 

 

·

other risks and uncertainties, including those described under Part II, Item 1A, “Risk Factors” of this Quarterly Report.

 

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A, “Risk Factors” of this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

 
3

Table of Contents

  

Part I

 

Item 1: Financial Statements

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Condensed Balance Sheets

 

 

 

September 30,

2021

 

 

December 31,

2020

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$12,603,341

 

 

$530,400

 

Prepaid expenses and other current assets

 

 

1,082,446

 

 

 

75,053

 

Total current assets

 

 

13,685,787

 

 

 

605,453

 

Fixed assets, net

 

 

-

 

 

 

-

 

Total assets

 

$13,685,787

 

 

$605,453

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$769,863

 

 

$104,276

 

Accrued and other current liabilities

 

 

425,369

 

 

 

133,477

 

Convertible subordinated promissory notes, net of discount

 

 

-

 

 

 

1,848,495

 

Related party convertible subordinated promissory notes,

 

 

 

 

 

 

 

 

net of discount

 

 

-

 

 

 

1,140,984

 

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

 

 

-

 

 

 

556,160

 

Total current liabilities

 

 

1,195,232

 

 

 

3,783,392

 

Total liabilities

 

 

1,195,232

 

 

 

3,783,392

 

Commitments and Contingencies (see Note 10)

 

 

 

 

 

 

 

 

Stockholders’ and Members’ Equity (Deficit):

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

issued and outstanding at December 31, 2020

 

 

-

 

 

 

6,833,877

 

Series 1a Preferred Units, 5,018,750

 

 

 

 

 

 

 

 

units authorized, issued and outstanding at December 31, 2020

 

 

-

 

 

 

4,380,081

 

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

 

 

 

 

 

 

 

 

outstanding at December 31, 2020

 

 

-

 

 

 

723,431

 

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

 

 

 

 

 

 

 

 

issued and outstanding at December 31, 2020

 

 

-

 

 

 

4,119,595

 

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

 

 

 

 

 

 

 

 

authorized, issued and outstanding at December 31, 2020

 

 

-

 

 

 

6,491,592

 

Class A Common Units, 508,777 units authorized,

 

 

 

 

 

 

 

 

issued and outstanding at December 31, 2020

 

 

-

 

 

 

10,430

 

Class B Common Units, 1,767,477 units

 

 

 

 

 

 

 

 

authorized, issued and outstanding at December 31, 2020

 

 

-

 

 

 

2,342,853

 

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

 

 

 

 

 

 

 

 

8,328,629 shares issued and outstanding at September 30, 2021

 

 

833

 

 

 

-

 

Additional paid-in capital

 

 

45,919,140

 

 

 

-

 

Accumulated deficit

 

 

(33,429,418)

 

 

(28,079,798)

Total stockholders’ and members’ equity (deficit)

 

 

12,490,555

 

 

 

(3,177,939)

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

 

$13,685,787

 

 

$605,453

 

 

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

 
4

Table of Contents

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Condensed Statements of Operations

 

 

 

For the three months ended

September 30,

 

 

For the nine months ended

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$799,779

 

 

$120,466

 

 

$2,347,564

 

 

$1,493,520

 

General and administrative

 

 

912,490

 

 

 

419,596

 

 

 

2,956,444

 

 

 

1,187,906

 

Total operating expenses

 

 

1,712,269

 

 

 

540,062

 

 

 

5,304,008

 

 

 

2,681,426

 

Loss from operations

 

 

(1,712,269 )

 

 

(540,062 )

 

 

(5,304,008 )

 

 

(2,681,426 )

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

651

 

 

 

57,333

 

 

 

45,613

 

 

 

158,791

 

Net loss

 

$(1,712,920 )

 

$(597,395 )

 

$(5,349,621 )

 

$(2,840,217 )

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

 

$269,038

 

 

$-

 

 

$269,038

 

 

$-

 

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

 

$2,293,199

 

 

$-

 

 

$2,293,199

 

 

$-

 

Net loss attributable to common stockholders

 

$(4,275,157 )

 

$(597,395 )

 

$(7,911,858 )

 

$(2,840,217 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$(0.86)

 

$(0.31)

 

$(2.69)

 

$(1.49)

Weighted-average basic and diluted common units/shares

 

 

4,980,306

 

 

 

1,911,009

 

 

 

2,945,351

 

 

 

1,911,009

 

 

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

 

 
5

Table of Contents

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

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

Unaudited

 

 

 

Class A Common

 

 

Class B Common

 

 

Series 1 Preferred

 

 

Series 1a Preferred

 

 

Series 1a Warrants

 

 

Series 1b Preferred

 

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

508,777

 

 

$10,430

 

 

 

1,761,908

 

 

$2,342,853

 

 

 

6,906,244

 

 

$6,833,877

 

 

 

5,000,000

 

 

$4,361,331

 

 

 

1,437,978

 

 

$723,431

 

 

 

6,500,000

 

 

$4,119,595

 

Class B Common Units issued

 

 

 

 

 

 

 

 

 

 

2,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

508,777

 

 

$10,430

 

 

 

1,764,347

 

 

$2,342,853

 

 

 

6,906,244

 

 

$6,833,877

 

 

 

5,000,000

 

 

$4,361,331

 

 

 

1,437,978

 

 

$723,431

 

 

 

6,500,000

 

 

$4,119,595

 

Series 1c Preferred Units issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2020

 

 

508,777

 

 

$10,430

 

 

 

1,764,347

 

 

$2,342,853

 

 

 

6,906,244

 

 

$6,833,877

 

 

 

5,000,000

 

 

$4,361,331

 

 

 

1,437,978

 

 

$723,431

 

 

 

6,500,000

 

 

$4,119,595

 

Exercise of Series 1a Preferred Warrant Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,750

 

 

$18,750

 

 

 

(18,750)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2020

 

 

508,777

 

 

$10,430

 

 

 

1,764,347

 

 

$2,342,853

 

 

 

6,906,244

 

 

$6,833,877

 

 

 

5,018,750

 

 

$4,380,081

 

 

 

1,419,228

 

 

$723,431

 

 

 

6,500,000

 

 

$4,119,595

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

508,777

 

 

$10,430

 

 

 

1,767,477

 

 

$2,342,853

 

 

 

6,906,244

 

 

$6,833,877

 

 

 

5,018,750

 

 

$4,380,081

 

 

 

1,419,228

 

 

$723,431

 

 

 

6,500,000

 

 

$4,119,595

 

Series 1d Preferred Units issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B Common Units forfeited

 

 

 

 

 

 

 

 

 

 

(22,494)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Common Units to Common Stock

 

 

(508,777)

 

$(10,430)

 

 

(1,744,983)

 

$(2,342,853)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Preferred Units to Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,906,244)

 

$(6,833,877)

 

 

(5,018,750)

 

$(4,380,081)

 

 

 

 

 

 

 

 

 

 

(6,500,000)

 

$(4,119,595)

Conversion of Warrant Units to Preferred Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,419,228)

 

$(723,431)

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

Redemption of Series 1c preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Preferred Stock to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Preferred Stock Warrants to Common Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Convertible Debt to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Common Stock and warrants, net issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

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

 

 
6

Table of Contents

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

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

Unaudited

 

 

 

Series 1c Preferred

 

 

Series 1d Preferred

 

 

Preferred Stock

 

 

Preferred Stock Warrants

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

 

Units

 

 

Amount

 

 

Units

 

 

Amount

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

44,767,474

 

 

$6,241,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(24,843,268)

 

$(210,159)

Class B Common Units issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(1,421,173)

 

$(1,421,173)

Balance at March 31, 2020

 

 

44,767,474

 

 

$6,241,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(26,264,441)

 

$(1,631,332)

Series 1c Preferred Units issued

 

 

1,785,714

 

 

$250,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$250,000

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(821,649)

 

$(821,649)

Balance at June 30, 2020

 

 

46,553,188

 

 

$6,491,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(27,086,090)

 

$(2,202,981)

Exercise of Series 1a Preferred Warrant Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$18,750

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(597,395)

 

$(597,395)

Balance at September 30, 2020

 

 

46,553,188

 

 

$6,491,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(27,683,485)

 

$(2,781,626)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(396,313)

 

$(396,313)

Balance at December 31, 2020

 

 

46,553,188

 

 

$6,491,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(28,079,798)

 

$(3,177,939)

Series 1d Preferred Units issued

 

 

 

 

 

 

 

 

 

 

6,065,989

 

 

$5,034,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$5,034,801

 

Class B Common Units forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$-

 

Conversion of Common Units to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,911,009

 

 

$191

 

 

 

2,353,092

 

 

 

 

 

 

$-

 

Conversion of Preferred Units to Preferred Stock

 

 

(46,553,188)

 

$(6,491,592)

 

 

(6,065,989)

 

$(5,034,801)

 

 

71,044,171

 

 

$7,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,852,842

 

 

 

 

 

 

$-

 

Conversion of Warrant Units to Preferred Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,419,228

 

 

$142

 

 

 

 

 

 

 

 

 

 

 

723,289

 

 

 

 

 

 

$-

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,160,049

 

 

 

 

 

 

$1,160,049

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(2,304,908)

 

$(2,304,908)

Balance at March 31, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

71,044,171

 

 

$7,104

 

 

 

1,419,228

 

 

$142

 

 

 

1,911,009

 

 

$191

 

 

 

31,089,272

 

 

$(30,384,706)

 

$712,003

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

113,987

 

 

 

 

 

 

$113,987

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(1,331,792)

 

$(1,331,792)

Balance at June 30, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

71,044,171

 

 

$7,104

 

 

 

1,419,228

 

 

$142

 

 

 

1,911,009

 

 

$191

 

 

 

31,203,259

 

 

$(31,716,498)

 

$(505,802)

Redemption of Series 1c preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,221,156)

 

$(522)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(999,478)

 

 

 

 

 

$(1,000,000)

Conversion of Preferred Stock to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(65,823,015)

 

$(6,582)

 

 

 

 

 

 

 

 

 

 

3,813,973

 

 

$381

 

 

 

6,200

 

 

 

 

 

 

$-

 

Conversion of Preferred Stock Warrants to Common Stock Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,419,228)

 

$(142)

 

 

 

 

 

 

 

 

 

 

142

 

 

 

 

 

 

$-

 

Conversion of Convertible Debt to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,219

 

 

$3

 

 

 

180,430

 

 

 

 

 

 

$180,434

 

Issuance of Common Stock and warrants, net issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,571,428

 

 

$257

 

 

 

15,385,932

 

 

 

 

 

 

$15,386,189

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

142,655

 

 

 

 

 

 

$142,655

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$(1,712,920)

 

$(1,712,920)

Balance at September 30, 2021

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

-

 

 

$-

 

 

 

8,328,629

 

 

$833

 

 

 

45,919,140

 

 

$(33,429,418)

 

$12,490,555

 

 

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

 

 
7

Table of Contents

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

Condensed Statements of Cash Flows

 

 

 

For the nine months ended

September 30,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$(5,349,621 )

 

$(2,840,217 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,416,691

 

 

 

-

 

Amortization of debt discount costs

 

 

14,126

 

 

 

88,293

 

Depreciation of fixed assets

 

 

-

 

 

 

322

 

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

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,007,393 )

 

 

(5,300 )

Accounts payable

 

 

665,587

 

 

 

(256,601 )

Accrued and other current liabilities

 

 

371,127

 

 

 

20,936

 

License and settlement agreement

 

 

-

 

 

 

(500,000 )

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

 

 

1,460,138

 

 

 

(652,350 )

Net cash used in operating activities

 

 

(3,889,483 )

 

 

(3,492,567 )

Cash flows from financing activities:

 

 

 

 

 

 

 

 

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

 

 

15,386,189

 

 

 

-

 

Redemption of Series 1c preferred stock

 

 

(1,000,000)

 

 

-

 

Payments on debt

 

 

(556,482 )

 

 

(462,963 )

Proceeds from Paycheck Protection Plan loan

 

 

-

 

 

 

133,592

 

Net proceeds from issuance of convertible subordinated promissory notes

 

 

1,562,717

 

 

 

2,314,432

 

Proceeds from issuance of Series 1d preferred units

 

 

570,000

 

 

 

-

 

Proceeds from issuance of Series 1c preferred units

 

 

-

 

 

 

250,000

 

Proceeds from exercise of Series 1a preferred warrant units

 

 

-

 

 

 

18,750

 

Net cash provided by financing activities

 

 

15,962,424

 

 

 

2,253,811

 

Net increase (decrease) in cash

 

 

12,072,941

 

 

 

(1,238,756 )

Cash at beginning of period

 

 

530,400

 

 

 

1,991,802

 

Cash at end of period

 

$12,603,341

 

 

$753,046

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$1,420

 

 

$51,149

 

Cash paid for taxes

 

$1,400

 

 

$1,400

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

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

 

$29,936,660

 

 

$-

 

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

 

$4,464,801

 

 

$-

 

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

 

$2,293,199

 

 

$-

 

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

 

$180,434

 

 

$-

 

Conversion of preferred stock to common stock at IPO

 

$6,582

 

 

$-

 

 

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

 

 
8

Table of Contents

 

DERMATA THERAPEUTICS, INC.

(FORMERLY DERMATA THERAPEUTICS, LLC)

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. Any references in these Notes to Financial Statements to equity securities as “units” refer to pre-conversion equity securities and any references to “shares” or “stock” in these Notes to Financial Statements refer to post-conversion equity securities. The Company is a clinical-stage biotechnology company focused on the treatment of medical and aesthetic skin conditions.

 

Initial Public Offering

 

On August 17, 2021, the Company completed its initial public offering (“IPO”), in which it sold 2,571,428 shares of its common stock together with 2,571,428 warrants to purchase one share of common stock with an exercise price of $7.00 per share at a combined offering price of $7.00. Additionally, the underwriters exercised their option to purchase an additional 385,714 warrants to purchase common stock with an exercise price of $7.00 per share. The Company received net cash proceeds of approximately $15.4 million from the IPO after deducting underwriters’ discounts and offering expenses of approximately $2.6 million.

 

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

 

 

-

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

 

 

 

 

-

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

 

 

 

 

-

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

 

 

 

 

-

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

 

Each purchaser in the IPO received one share of common stock and one warrant to purchase one share of common stock at a combined offering price of $7.00. Each warrant to purchase common stock entitles the holder to purchase one share of common stock at an exercise price of $7.00 per share, are immediately exercisable, and expire five years from the date of issuance. The Company evaluated the terms of the warrants issued and determined that they should be classified as equity instruments.

 

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

 

After the IPO, there were no shares of preferred stock or preferred stock warrants outstanding. Prior to the IPO, the Company had 1,911,009 shares of common stock outstanding after the Company’s reverse stock split in July 2021. The Company’s total common stock issued and outstanding was 8,328,629 as of September 30, 2021.

 

Reverse Stock Split

 

On July 1, 2021, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-20.5 pursuant to an amendment to the Company’s certificate of incorporation approved by the Company’s board of directors and stockholders. The par value was not adjusted as a result of the reverse split. All issued and outstanding common stock shares and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented, and the conversion ratios for the Company’s outstanding preferred stock was adjusted accordingly. See Note 6 – Equity Securities for additional information.

 

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, 2021, cash totaled $12.6 million and the Company had an accumulated deficit of $33.4 million. For the year ended December 31, 2020 and the nine months ended September 30, 2021, the Company used cash of $4.0 million and $3.9 million, respectively, in operations. The Company’s cash balances are expected to fund operations into October 2022. 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.

 

 
9

Table of Contents

 

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

 

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. Additionally, the COVID-19 pandemic continues to evolve and has already disrupted global financial markets. The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the pandemic. If the disruption persists or deepens, the Company could experience an inability to access additional capital.

 

The Company has raised additional capital through the initial public offering of its common stock and warrants; however, management’s current plans do not alleviate substantial doubt about the Company’s ability 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.

 

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. The Company operates in only one segment.

 

 
10

Table of Contents

 

Deferred Financing Costs

 

The Company capitalizes certain legal, accounting, and other fees and costs that are directly attributable to in-process equity financings as deferred offering costs until such financings are completed. Upon the completion of an equity financing, these costs are recorded as a reduction of additional paid-in capital of the related offering. Upon the completion of the IPO in August 2021, approximately $2.6 million of offering costs related to the IPO were reclassified to additional paid-in capital. The Company had no deferred financing costs as of September 30, 2021.

 

Cash

 

The Company deposits its cash with reputable financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). This cash is held in checking and savings accounts. At times, deposits held may exceed the amount of insurance provided by the FDIC. The Company has not experienced any losses in its cash and believes they are not exposed to any significant credit risk.

 

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

 

Fixed Assets

 

Fixed assets consist of furniture and fixtures and computer equipment. Fixed assets are stated at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which is primarily three years. Depreciation and amortization expense for the nine months ended September 30, 2021 and 2020 were $0 and $322, respectively.

 

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

 

From inception until March 24, 2021, the Company operated as a limited liability company taxed as a partnership. Therefore, any income tax liability or benefit through that date accrued to the Company’s members. Since March 24, 2021, the Company has operated as 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 based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The 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. The Company records the difference between the benefit recognized and measured pursuant to the accounting guidance on accounting for uncertain tax positions taken or expected to be taken on the Company’s tax return. 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% likely to be realized upon ultimate settlement with the related tax authority. The liabilities are adjusted in light of changing facts and circumstances, such as the outcome of tax audits. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. There are no uncertain tax positions.

 

 
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Stock-Based Compensation

 

In March 2021, the Company’s board of directors and shareholders approved the 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. Refer to Note 7- Equity Incentive Plan for further discussion.

 

Net Loss Per Common Unit/Share

 

On March 24, 2021, the Company converted from an LLC to a C-corporation. Upon the conversion, each outstanding common unit and preferred unit was converted into one share of common stock and preferred stock, respectively. Common units had similar rights and characteristics of common stock issued upon the conversion. In calculating net loss per share, the Company retrospectively applied the effects of the conversion to the number of common units outstanding prior to the conversion. Net loss per share for periods prior to the conversion to a C-corporation refers to net loss per common unit.

 

Basic net loss per unit/share is calculated by dividing net loss attributable to common unitholders or shareholders by the weighted-average number of units or shares outstanding during the period, without consideration of common unit or share equivalents. Diluted net loss per unit or share is calculated by adjusting weighted-average shares outstanding for the dilutive effect of common unit or share equivalents outstanding for the period. For purposes of the diluted net loss per unit or share calculation, preferred units or shares, profit interests, and warrants to purchase preferred units or shares are considered to be common unit or share equivalents but are excluded from the calculation of diluted net loss per common unit or share if their effect would be anti-dilutive.

 

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(1,712,920)

 

$(597,395)

 

$(5,349,621)

 

$(2,840,217)

Deemed dividend upon redemption of 5,221,156 shares

of Series 1c convertible preferred stock

 

$269,038

 

 

$-

 

 

$269,038

 

 

$-

 

Deemed dividend upon amendment of the terms to the

Series 1d convertible preferred stock

 

$2,293,199

 

 

$-

 

 

$2,293,199

 

 

$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$(4,275,157)

 

$(597,395)

 

$(7,911,858)

 

$(2,840,217)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common unit/share

 

$(0.86)

 

$(0.31)

 

$(2.69)

 

$(1.49)

Weighted-average basic and diluted common units/shares

 

 

4,980,306

 

 

 

1,911,009

 

 

 

2,945,351

 

 

 

1,911,009

 

 

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

 

 

 

As of

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

 

 

 

 

 

 

Series 1 Preferred Units/Shares

 

 

-

 

 

 

336,882

 

Series 1a Preferred Units/Shares

 

 

-

 

 

 

244,811

 

Series 1a Preferred Warrant

 

 

-

 

 

 

69,212

 

Series 1b Preferred Units/Shares

 

 

-

 

 

 

317,058

 

Series 1c Preferred Units/Shares

 

 

-

 

 

 

2,270,866

 

Series 1d Preferred Units/Shares

 

 

-

 

 

 

-

 

Class B Common Units Profits Interests

 

 

-

 

 

 

365,245

 

Common Stock Options

 

 

523,199

 

 

 

-

 

Common Stock Warrants

 

 

3,091,657

 

 

 

-

 

Total potentially dilutive securities

 

 

3,614,856

 

 

 

3,604,074

 

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Account Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves the consistent application, and the simplification, of other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Adoption of this new guidance on January 1, 2021 did not have an impact on the Company’s financial position and results of operations.

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The amendments in ASU 2020-06 are effective for smaller reporting companies as defined by the U.S. Securities and Exchange Commission (“SEC”) for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020. Adoption of this new guidance on January 1, 2021 did not have an impact on the Company’s financial position and results of operations.

 

3. Balance Sheet Details

 

The following provides certain balance sheet details:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

 

 

 

 

Prepaid insurance

 

$1,082,446

 

 

$68,003

 

Prepaid research and development costs

 

 

-

 

 

 

7,050

 

Total prepaid expenses and other current assets

 

$1,082,446

 

 

$75,053

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

 

 

 

 

 

 

 

Furniture and office equipment

 

$59,382

 

 

$59,382

 

Computer equipment

 

 

17,225

 

 

 

17,225

 

 

 

 

76,607

 

 

 

76,607

 

Less: accumulated depreciation and amortization

 

 

(76,607)

 

 

(76,607)

Total fixed assets, net

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

Accrued and other current liabilities

 

 

 

 

 

 

 

 

Accrued interest payable

 

$-

 

 

$49,169

 

Accrued compensation and benefits

 

 

424,569

 

 

 

84,308

 

Accrued research and development costs

 

 

800

 

 

 

-

 

Total accrued and other current liabilities

 

$425,369

 

 

$133,477

 

 

 
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4. Subordinated Convertible Promissory Notes

 

In July and October 2020, the Company issued an aggregate of $3,000,000 of subordinated convertible promissory notes (the “Notes”). Notes in the amount of $1,145,000 were issued to existing investors who are also related parties (See Note 11 - Related Parties), $1,730,000 were issued to existing investors who are not related parties and notes in the amount of $125,000 were issued to new investors. The Notes bore interest at 4% per annum and were to mature on July 17, 2021. The Notes were subordinated to the Company’s long-term debt and were convertible into a qualified Series A financing of at least $10 million at a 20% discount to the lowest price per unit paid by investors for that financing. Under authoritative accounting guidance, this contingent beneficial conversion feature was to be measured and recognized when the contingency is resolved. The Notes were recorded upon issuance net of debt discount costs of $28,301. The Company recognized $497 and $16,888 of interest expense during the three and nine months ended September 30, 2021, respectively, and $155 and $14,126 of amortized debt discount costs during the three and nine months ended September 30, 2021, respectively, related to the Notes.

 

On January 27, 2021, the Company amended the terms of the Notes to increase the maximum amount of convertible promissory notes to be issued from $3,000,000 to $5,000,000, to allow for the conversion of the convertible promissory notes into shares of common stock upon a Qualified Initial Public Offering with aggregate gross proceeds to the Company of at least $10,000,000 at a 20% discount to the lowest price per share paid by investors for that financing and to extend the maturity date to December 31, 2021. In connection with this amendment, Notes in the amount of $1,255,000 were issued to existing investors who are also related parties (See Note 11 - Related Parties) and $311,000 were issued to existing investors who are not related parties.

 

In March 2021, the Company further amended the terms of the Notes to allow for the conversion of the Notes into Series 1d Preferred Units at the same price as purchasers of Series 1d Preferred Units. As of March 15, 2021, $4,391,000 of the Notes, along with related interest of $73,801, were converted to 5,379,247 Series 1d Preferred Units. Since the Notes did not convert at a discount, there was no beneficial conversion feature.

 

The Company considers the above modification of the Notes in March 2021 to be a substantial modification requiring extinguishment accounting under Accounting Standards Codification (“ASC”) 470-50-40-10. Based upon an independent valuation of the reacquisition price of the Notes, the difference between the reacquisition price and the net carrying amount of the Notes immediately prior to the modification is not material to the financial statements.

 

In connection with the Company’s IPO in August 2021, the outstanding principal of the Notes and accrued interest totaling $180,434 converted into 32,219 shares of common stock. Upon this conversion, since the conversion contained a 20% discount, the Company measured the beneficial conversion feature and determined that it was not material to the financial statements.

 

As of September 30, 2021, the Company had no promissory notes outstanding.

 

5. Long-Term Debt

 

In February 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) whereas SVB agreed to provide term loans to the Company in two tranches. The first tranche of $2,500,000 was drawn in February 2017 and bore interest at a rate of 1.5% above the prime rate, which was 3.25% as of December 31, 2020, with principal and interest payable monthly through February 9, 2021. The second tranche was not utilized.

 

In connection with the Loan and Security Agreement, SVB also received warrant units to purchase, at any time after February 9, 2017 and prior to February 9, 2027, 187,978 Series 1a Preferred Units or the equivalent Series A Preferred Units had they purchased Series 1a Preferred Units, if Series A Preferred Units are issued, at a price of $1.00 per unit. The estimated fair value of these warrant units of $104,630 (See Note 6 – Equity Securities), as well as costs associated with the term loan, including provision for a final payment of $225,000, were recorded as a discount to outstanding debt and amortized to interest expense utilizing the effective interest method over the underlying term of the loan.

 

In June 2019, the Company and SVB entered into a First Amendment to the Loan and Security Agreement whereby if the Company did not achieve certain capital milestones by December 1, 2019, term loan principal payments would be deferred from December 21, 2019 through May 1, 2020 with the deferred principal payments being payable in equal monthly installments, in addition to those principal payments already scheduled to be paid, starting on June 1, 2020 and extending through the February 9, 2021 maturity date of the term loan. In addition, if those principal payments were deferred for that six-month period, a non-refundable amendment fee of $100,000 would be due and payable on the earliest to occur of the maturity date, the prepayment of the term loan or the occurrence of an event of default. The capital milestones were not achieved by December 1, 2019 and, therefore, the defined principal repayments were deferred.

 

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

 

In January and February 2021, the company paid the final principal payments of $231,482 under the SVB Loan and Security Agreement. The Company also paid the final payment fee of $225,000 in February 2021 and the amendment fee of $100,000 in March 2021.

 

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

 

Paycheck Protection Program

 

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

 

6. Equity Securities

 

Common Stock and Preferred Stock

 

On March 24, 2021, the Company entered into a Plan of Conversion (“Conversion”) whereby the Company converted from an LLC under the laws of the State of Delaware to a Delaware C-corporation with the name Dermata Therapeutics, Inc. In connection with the Conversion, each fully paid Preferred and Common Unit in the LLC was converted into a like number of shares of Preferred and Common Stock of the Company with a par value of $0.0001 per share. The Shares issued had the same rights, preferences and privileges that had accrued to the pre-converted Units. Any references in these Notes to Financial Statements to equity securities as “units” refer to pre-conversion equity securities and any references to “shares” or “stock” in these Notes to Financial Statements refer to post-conversion equity securities.

 

On July 1, 2021, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-20.5 pursuant to an amendment to the Company’s certificate of incorporation approved by the Company’s board of directors and stockholders. The par value was not adjusted as a result of the reverse split. All issued and outstanding common stock share and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse split for all periods presented.

 

On August 17, 2021, the Company completed its IPO, in which it sold 2,571,428 shares of its common stock together with 2,571,428 warrants to purchase one share of common stock with an exercise price of $7.00 per share at a combined offering price of $7.00. Additionally, the underwriters exercised their option to purchase an additional 385,714 warrants with an exercise price of $7.00 per warrant. The Company received net cash proceeds of approximately $15.4 million from the IPO after deducting underwriters’ discounts and offering expenses of approximately $2.6 million.

 

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

 

 

-

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

 

 

 

 

-

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

 

 

 

 

-

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

 

 

 

 

-

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

 

After the IPO, there were no shares of preferred stock or preferred stock warrants outstanding. Prior to the IPO, the Company had 1,911,009 shares of common stock outstanding after the Company’s reverse stock split in July 2021.

 

The Company’s total common stock issued and outstanding was 8,328,629 as of September 30, 2021.

 

 
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Series 1 Preferred Units

 

From the Company’s formation on December 8, 2014 through 2016, the Company issued 6,906,244 Series 1 Preferred Units for net consideration of $6,833,877. The Company’s Series 1 Preferred Units were converted to preferred stock during the first quarter of 2021. Additionally, in August 2021, the Company converted all preferred stock into common stock. No Series 1 Preferred Units were outstanding as of September 30, 2021.

 

Series 1a Preferred Units

 

In 2016, the Company issued 5,000,000 Series 1a Preferred Units in exchange for cash of $5,000,000 and net of issuance costs of $19,868. Purchasers of the Series 1a Preferred Units also received 1,250,000 Warrant Units to purchase an additional amount of Series 1a Preferred Units. The estimated fair value of the warrant units was recorded as a separate component of members’ equity (deficit) in the accompanying balance sheet as of December 31, 2020 with an offset to the Series 1a proceeds. In June 2020, 18,750 of the warrants were exercised for consideration of $18,750, which consideration was received in July 2020. The Company’s Series 1a Preferred Units were converted to preferred stock during the first quarter of 2021. Additionally, in August 2021, the Company converted all preferred stock into common stock. No Series 1a Preferred Units were outstanding as of September 30, 2021.

 

Series 1b Preferred Units

 

In 2018, the Company issued 6,500,000 Series 1b Preferred Units in exchange for cash of $6,500,000 and net of issuance costs of $40,405. Purchasers of the Series 1b Preferred Units also received 1,268,279 Class B Common Units. The estimated fair value of the Class B Common units has been recorded as a component of members’ equity (deficit) in the accompanying balance sheet as of December 31, 2020 with an offset to the Series 1b proceeds. The Company’s Series 1b Preferred Units were converted to preferred stock during the first quarter of 2021. Additionally, in August 2021, the Company converted all preferred stock into common stock. No Series 1b Preferred Units were outstanding as of September 30, 2021.

 

Series 1c Preferred Units

 

On June 14, 2019, the Company closed participation in a $5,785,000 Series 1c financing from current and new investors. As of December 31, 2019, cash of $5,535,000, including $150,000 from the conversion of a convertible note issued to a Managing Member of the Company for a loan made to the Company, net of issuance costs of $25,857, had been received. The accrued interest on the convertible note in the amount of $1,487 was also converted into Series 1c Preferred Units. The remaining balance of $250,000 committed to the financing was paid in the amounts of $125,000 in May 2020 and $125,000 in June 2020.

                   

In June 2019, 5,221,156 Series 1c Preferred Units were issued in connection with the settlement and license agreement, and in July 2021, the Company redeemed these units/shares in connection with an amendment to the settlement and license agreement. See Note 9 – License Agreements for more information.

    

The Company’s Series 1c Preferred Units were converted to preferred stock during the first quarter of 2021. Additionally, in August 2021, the Company converted all preferred stock into common stock. No Series 1c Preferred Units were outstanding as of September 30, 2021.

 

Series 1d Preferred Units

 

In March 2021, the Company issued 686,742 Series 1d Preferred Units at a cost of $0.83 per unit for total proceeds of $570,000. In addition, as described in Note 4 – Subordinated Convertible Promissory Notes, as of March 15, 2021, $4,391,000 of convertible promissory notes, along with related interest of $73,801, were converted into 5,379,247 Series 1d Preferred Units. The outstanding Series 1d Preferred Units were converted to preferred stock during the first quarter of 2021. Additionally, in August 2021, the Company converted all preferred stock into common stock. No Series 1d Preferred Units were outstanding as of September 30, 2021.

 

Class A Common Units

 

During 2014 and 2015, the Company issued 508,777 Class A Common Units in exchange for consideration of $10,430. The Class A Common Units outstanding converted to common stock during the first quarter of 2021. No Class A Common Units were outstanding as of September 30, 2021.

 

Class B Common Units

 

The Company had 1,767,477 Class B Common Units outstanding as of December 31, 2020. This includes 133,953 Class B Common Units issued for consideration of $2,853 and 1,268,279 Class B Common Units issued in connection with the issuance of the Series 1b Preferred Units, which were assigned an estimated fair value of $2,340,000. The remaining 365,245 Class B Common Units were issued as a profits interest as that term is defined by Revenue Procedure 93-27, 1993-2 C.B. 343, as clarified by Revenue Procedure 2001-43, 2001-2 C.B. 191, with participation thresholds from $0.001 to $0.36. During the first quarter 2020, the Company issued 2,439 Class B Common Units, all of which represented a profits interest. During the first quarter of 2021, 22,494 Class B Common Units were forfeited as a result of employee resignations. The remaining Class B Common Units outstanding converted to common stock during the first quarter of 2021. No Class B Common Units were outstanding as of September 30, 2021.

 

 
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Liquidation Preference

   

Prior to the Company’s IPO in August 2021, the Company’s preferred units were subject to liquidation preferences contained herein. So long as there were no Series A Preferred Units outstanding at the time of a liquidity event, any liquidity event proceeds would have been distributed as follows: First, the Series 1d Preferred Units had a two times preference in liquidation over the Series 1c Preferred Units and then participated with the Series 1c, 1b and 1a Preferred Units once the Series 1c Preferred Unit preferences had been satisfied. Second, proceeds to Series 1c Preferred Unit holders sufficient to cover two times their Series 1c investment; third, proceeds to Series 1, Series 1a, Series 1b, Series 1c, and Series 1d Preferred Unit holders sufficient to cover interest at the rate of 8% per annum on the Series 1 Preferred Units, the Series 1a Preferred Units, the Series 1b Preferred Units, the Series 1c Preferred Units, and Series 1d Preferred Units; fourth, proceeds to the Series 1, Series 1a, Series 1b and Series 1c Preferred Unit holders sufficient to cover the unit value of Series 1 Preferred Units, Series 1a Preferred Units, Series 1b Preferred Units, Series 1c Preferred Units, and Series 1d Preferred Units; fifth, to Class A and Class B Common holders proceeds sufficient to cover their pro-rata portion of distributions made to Series 1, Series 1a, Series 1b, Series 1c, and Series 1d Preferred Unit holders, provided that no Class B Common Units would share in any distribution until after the point at which the amount per Class A Common Unit exceeds the amount of such Class B Common Unit’s Participation Threshold; and sixth, a pro-rata distribution of the remaining proceeds to all equity holders. Upon the issuance of Series A Preferred Units, each Series 1 Preferred Unit, each Series 1a Preferred Unit, each Series 1b Preferred Unit, each Series 1c Preferred Unit and each Series 1d Preferred Unit would have automatically converted into the number of Series A Preferred Units equal to the sum of the unit value of the Series 1, Series 1a, Series 1b, Series 1c or Series 1d Preferred Units plus all accumulated preferred return as of the conversion date that would have been due with respect to such Series 1, Series 1a, Series 1b, Series 1c or Series 1d Preferred Units in the case of a liquidity event. As of September 30, 2021, no Series A Preferred Units had been issued, and no preferred stock remained outstanding.

   

Conversion Rights

   

Prior to the Company’s IPO in August 2021, the Company’s preferred units were subject to conversion rights contained herein. Upon the first issuance by the Company of any Series A Preferred Units, each Series 1 Preferred Unit and each Series 1a Preferred Unit and each Series 1b Preferred Unit and each Series 1c Preferred Unit and each Series 1d Preferred Unit would have automatically been converted into the number of Series A Preferred Units equal to the sum of the Unit Value with respect to such Series 1 Preferred Unit or Series 1a Preferred Unit or Series 1b Preferred Unit or Series 1c Preferred Unit or Series 1d Preferred Unit as of the conversion date divided by the product of 0.80 multiplied by the Unit Value of the Series 1 Preferred Units or Series 1a Preferred Units or Series 1b Preferred Units or Series 1c Preferred Units or Series 1d Preferred Unit issued on the conversion date. The Series A Preferred Units issued to the Series 1 Preferred Members and Series 1a Preferred Members and Series 1b Preferred Members and Series 1c Preferred Members and Series 1d Preferred Members upon conversion of such Series 1 Preferred Units and Series 1a Preferred Units and such Series 1b Preferred Units and Series 1c Preferred Units and Series 1d Preferred Units would have had the same rights, privileges and preferences as the other Series A Preferred Units issued by the Company on the conversion date. The Company considered the classification of the Preferred Units and concluded that they were appropriately included as a component of equity since each class of Preferred Units participates in the same form of consideration received upon a change in control. As of September 30, 2021, no preferred units or stock remained outstanding.

    

Stockholders’ Agreements

    

On March 24, 2021, in connection with the conversion of Dermata Therapeutics, LLC into a Delaware corporation, the Company entered into a Stockholders’ Agreement (as amended, the Stockholders’ Agreement) with all of its then-existing stockholders, including Proehl Investment Ventures, LLC and Hale Biopharma Ventures, LLC. The Stockholders’ Agreement among other things, provided for certain restrictions on transfer of the Company’s shares of capital stock, set forth agreements and understandings with respect to how shares of its capital stock held by the stockholders party thereto will have been voted on, or tendered in connection with, an acquisition of the Company and provided for certain voting rights with respect to the election of directors. In addition, pursuant to the Stockholders’ Agreement, holders of the Company’s Series 1a Preferred Stock were entitled to purchase, at any time prior to March 14, 2026, such number of shares of the Company’s Series 1a Preferred Stock as such Series 1a Stockholder shall request, up to an aggregate number of shares of Series 1a Preferred Stock not to exceed the product of 25% and the aggregate number of shares Series 1a Preferred Stock then held by such Series 1a Stockholder (or the Series 1a Preferred Warrant Rights). The shares of Series 1a Preferred Stock purchased pursuant to any Series 1a Preferred Warrant Right had a per share purchase price of $20.50 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization). Upon the consummation of the Company’s IPO of common stock, each Series 1a Preferred Stock Warrant became exercisable for the same number of shares of Common Stock with the same per share exercise price of $20.50 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization). The Stockholders’ Agreement would have automatically terminated upon the earliest of (a) immediately prior to the consummation of the Company’s initial public offering of common stock, and (b) the consummation of a sale of the Company, subject to certain conditions. The Company completed the IPO of common stock in August 2021, thereby terminating the Stockholders’ Agreement.

 

 
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On June 29, 2021, with effectiveness on July 1, 2021, the Company’s board of directors amended its Certificate of Incorporation to adjust the conversion price and certain conversion mechanics of the Company’s issued and outstanding Series 1d Preferred Stock, whereby each share of Series 1d Preferred stock would convert into such number of Common Stock as determined by dividing (i) the product of (a) the Original Issue Price for the Series 1d Preferred Stock, multiplied by (b) 1.2, rounded to the nearest whole cent, by (ii) the 80% of the initial public per share offering price in the IPO. The Series 1d conversion shall not be subject to further adjustment for any stock split.

 

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

 

On June 29, 2021, the Company’s board of directors approved a 1-for-20.5 reverse split of all outstanding shares of common stock, effected on July 1, 2021 (no fractional shares were issued). Except as otherwise noted, all references to share and per share amounts related to common stock and common units have been restated to reflect the reverse stock split.

 

On July 12, 2021, the Company’s board of directors amended its Certificate of Incorporation to further adjust the conversion price and certain conversion mechanics of the Company’s issued and outstanding Series 1d Preferred Stock. The two amendments to the Series 1d Preferred Stock conversion terms were combined for purposes of accounting for the amendments. In order to determine if these amendments resulted in a modification or extinguishment of the Series 1d Preferred Stock, pursuant to the related authoritative guidance, the Company engaged an independent third-party valuation firm to assist with determining the fair value of the Series 1d Preferred Stock immediately before the change in conversion terms, as well as immediately after the change in conversion terms. This resulted in a substantive increase in fair value, and as such, the Company determined the amendments resulted in extinguishment accounting. Accordingly, the Company applied ASC 260, Earnings per Share, and ASC 470, Debt, by analogy to determine the appropriate measurement and presentation. The Company compared the fair value of the Series 1d Preferred Stock, as amended, to its carrying value and recorded the resulting difference of approximately $2.3 million as a deemed dividend for the Series 1d preferred shareholders. The Company recorded the deemed dividend to additional paid-in capital because the Company is in an accumulated deficit position, thereby increasing the net loss attributable to the common shareholders for the three and nine months ended September 30, 2021. 

 

On July 30, 2021, the Company entered into a Second Amendment to the License and Settlement Agreement (or, the Second License Amendment), whereby, for the settlement of certain disputes arising under the License Agreement, the Company agreed to exchange the shares of Series 1c Preferred Stock owned by Villani, Inc. (“Villani”) for an increase of milestone payments and royalty rates due to Villani under the License Agreement. On July 30, 2021, Villani surrendered 5,221,156 shares of Series 1c Preferred Stock to the Company and on August 17, 2021, the Company paid to Villani $1.0 million upon the close of the Company’s initial public offering for the redemption of the Series 1c shares. The Company determined that the deemed dividend to Villani for the Series 1c preferred share redemption was the difference between the $1.0 million paid for the shares and the carrying value of the shares of $730,962, resulting in a deemed dividend of $269,038. This deemed dividend of $269,038 was recorded to additional paid-in capital because the Company is in an accumulated deficit position, thereby increasing the net loss attributable to common shareholders for the three and nine months ended September 30, 2021.

 

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

 

Warrants

 

Warrants issued at IPO

 

On August 17, 2021, the Company completed its IPO, in which it sold 2,571,428 shares of its common stock together with 2,571,428 warrants to purchase one share of common stock with an exercise price of $7.00 per share at a combined offering price of $7.00. The underwriters exercised their option to purchase an additional 385,714 warrants, increasing the number of warrants issued at IPO to 2,957,142. Each warrant is immediately exercisable at the option of the holder and expires five years from the date of issuance.

 

The Company evaluated the terms of the warrants issued at the IPO and determined that they should be classified as equity instruments based upon accounting guidance provided in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. Since the Company determined that the warrants were equity classified, the Company recorded the proceeds from the IPO, net of issuance costs, within common stock at par value and the balance of proceeds to additional paid in capital. The fair value of each warrant on August 17, 2021 was $0.9995 based on the closing trading price on that day. As of September 30, 2021, the outstanding warrants are exercisable into 2,957,142 shares of common stock whose fair value was $4.49 per share, based on the closing trading price on that day.

 

As of September 30, 2021, the Company had 2,957,142 warrants outstanding resulting from the IPO with an exercise price of $7.00 and which expire August 17, 2026.

 

 
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Warrants issued with Class B Common Units

 

In March 2021, the Company granted Class B Common Units Profits interests to certain former employees and consultants. In connection with the conversion from an LLC to a C-Corporation, the Company converted 65,303 of vested Units to fully vested Common Stock Warrants with an exercise price of $5.74. These Common Stock Warrants issuances were considered a modification under ASC 718, Stock Compensation, in which the fair value of the Class B Common Units profits interests were measured at the modification date and compared to the fair value of the common stock warrants, with the difference of $279,812 recorded as stock-based compensation expense in the first quarter of 2021.

 

As of September 30, 2021, the Company had 65,303 common warrants outstanding related to the prior Class B Common Units with an exercise price of $5.74 and which expire December 31, 2024.

 

Warrants issued with Series 1a Preferred Units

 

In connection with the issuance of 5,000,000 Series 1a Preferred Units in November 2016, each Series 1a Preferred Member received Warrant Units to purchase from the Company, at any time after November 15, 2016 and on or prior to November 15, 2021, such number of Series 1a Preferred Units as such Series 1a Preferred Member shall request, up to an aggregate number of Series 1a Preferred Units not to exceed the product of 25% and the aggregate number of Series 1a Preferred Units then held by such Series 1a Preferred Member, which was 1,231,250 units at December 31, 2020. The exercise price for each Warrant Unit was $1.00, subject to adjustment for unit splits and combinations. The warrants had a 5-year term. The Company received total proceeds of $5,000,000 for the Series 1a Preferred Units and warrants which were allocated on a relative fair value basis to the Units and warrants resulting in a relative fair value of $4,381,199 and $618,801, respectively. The estimated fair value of the Series 1a Warrant Units was recorded as a separate component of members’ equity (deficit) in the accompanying financial statements as of December 31, 2020. In June 2020, 18,750 of the warrants were exercised for consideration of $18,750, which consideration was received in July 2020.

 

In connection with the Loan and Security Agreement, SVB also received Warrant Units to purchase, at any time after February 9, 2017 and prior to February 9, 2027, 187,978 Series 1a Preferred Units or the equivalent Series A Preferred Units had they purchased Series 1a Preferred Units, if Series A Preferred Units are issued, at an exercise price of $1.00 per unit. On March 24, 2021, in connection with the conversion from an LLC to a C-Corporation, each warrant to purchase Series 1a Preferred Units in the LLC was automatically converted into a warrant to purchase, upon the same terms and conditions, shares of Series 1a Preferred Stock of the Company.

 

In July 2021, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-20.5, and the conversion ratio of the preferred stock was adjusted accordingly. In August 2021, in connection with the Company’s IPO, the outstanding Series 1a preferred warrants were converted into 69,212 common warrants.

 

As of September 30, 2021, the Company had 69,212 common warrants outstanding related to the prior Series 1a preferred warrants with an exercise price of $20.50 and which expire November 15, 2026.

 

7. Equity Incentive Plan

 

Under the Company’s 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), the Company may grant options to purchase 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. The 2021 Plan provides for the issuance of up to 1,648,213 shares, all of which may, but need not, be issued in respect of Incentive Stock Options. Options 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, 2021, there remain an additional 1,125,014 shares reserved for issuance under the 2021 Plan.

 
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Stock Award Activity

 

A summary of the Company’s Equity Plans 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, 2020

 

 

-

 

 

$-

 

 

 

-

 

Options granted

 

 

523,199

 

 

 

5.84

 

 

 

9.0

 

Options exercised

 

 

-

 

 

 

-

 

 

 

-

 

Options cancelled

 

 

-

 

 

 

-

 

 

 

-

 

Balance at September 30, 2021

 

 

523,199

 

 

$5.84

 

 

 

9.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2021

 

 

233,686

 

 

$5.80

 

 

 

9.3

 

 

The aggregate intrinsic value of options exercisable as of September 30, 2021 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 $4.49 per share. The intrinsic value of options outstanding and exercisable as of September 30, 2021 was zero due to the underlying options exercise price above market value.

 

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. In the absence of a public trading market for the Company’s common stock, before the initial public offering, on each grant date, the Company developed an estimate of the fair value of its common stock based on the information known to the Company on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock and in part on input from an independent third-party valuation firm. After the Company’s initial public offering, 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. Because of the limitations on the sale or transfer of the Company’s common stock as a privately held company, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience as a publicly traded company. The Company plans to continue to use the SAB 110 simplified method until it has sufficient trading history as a publicly traded company.

 

 

 

 

·

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.

 

 
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The following table presents the weighted-average assumptions used for the stock option grants for the three and nine months ended September 30, 2021:

 

 

 

Three Months Ended
September 30, 2021

 

 

Nine Months Ended September 30, 2021

 

Grant date fair value

 

$4.54

 

 

$4.87

 

Risk-free interest rate

 

 

0.98

%

 

 

0.92

Dividend yield

 

 

0.00

%

 

 

0.00

Expected life in years

 

 

5.8

 

 

 

5.7

 

Expected volatility

 

 

125

%

 

 

122

 

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.

 

On March 24, 2021, in connection with the conversion from an LLC to a C-Corporation, the Company converted 277,448 of Class B Common Units profits interests, for which no consideration had been received, into 277,448 options to purchase common stock at an exercise price of $5.74 to $6.314 per share. The fair value of common stock prior to IPO was determined in part based upon input from an independent third-party valuation firm. The Company considered the conversion of these Class B Common Units profits interests as a modification under ASC 718, Stock Compensation, in which the fair value of the Class B Common Units profits interests was measured at the modification date and compared to the fair value of the common stock options, with the difference of $1,339,993 resulting in incremental stock-based compensation expense recorded in the first quarter of 2021.

 

The following table summarizes the total stock-based compensation expense included in the Company’s statements of operations for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Research and development

 

$30,075

 

 

$-

 

 

$310,046

 

 

$-

 

General and administrative

 

 

112,580

 

 

 

-

 

 

 

1,106,645

 

 

 

-

 

 

 

$142,655

 

 

$-

 

 

$1,416,691

 

 

$-

 

 

As of September 30, 2021, total unrecognized compensation cost related to stock options was approximately $1.4 million and the weighted average period over which this cost is expected to be recognized is 2.9 years.

 

8. 401(k) 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 into the savings plan.

 

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

 

The original License Agreement was amended in 2019 and, in consideration of the receipt of certain know-how and patents, the Company issued to Villani 5,221,156 Series 1c Preferred Units equal to 5% of the Company’s fully diluted capitalization, valued at $730,962. Pursuant to the amended License Agreement, the Company was required to make future milestone payments to Villani in an aggregate amount of up to $20.25 million upon the achievement of specified development and sales milestones, payable in cash or in equity, at the option of Villani, as well as single-digit royalty payments on net sales.

 

 
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On July 30, 2021, the Company further amended the license agreement with Villani in the Second Amendment to the License and Settlement Agreement (“Second Amendment”). In consideration of the Second Amendment, Villani exchanged the 5,221,156 Series 1c Preferred Shares issued to Villani in 2019 for an increase in milestones and royalty rates and the Company paid Villani $1 million after the close of the IPO. Pursuant to the Second Amendment, the Company is required to make future milestone payments to Villani in an aggregate amount of up to $40.5 million upon the achievement of specified development and sales milestones, payable in cash or in equity, at the option of Villani, as well as single-digit royalty payments on net sales. The Second Amendment includes customary terms relating to, among others, indemnification, intellectual property protection, confidentiality, remedies, and warranties. See Note 6 – Equity Securities for additional information regarding the Company’s redemption of the Series 1c Preferred Shares from Villani.

 

10. Commitments and Contingencies

 

Coronavirus Pandemic

 

On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (COVID-19) pandemic. Significant uncertainties may arise with respect to potential shutdowns of operations or government orders to cease activities due to emergency declarations, inability to operate, employee shortages, or claims for business interruption insurance, etc. Each of these matters may have a significant impact on the future results of the Company.

 

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.

 

11. Related Parties

 

Prior to the Company converting from an LLC to a C corporation in March 2021, the Company had two Managing Members. One of the Managing Members remained the Company’s majority stockholder upon the close of the Company’s IPO and serves as the Company’s President, Chief Executive Officer, and Chairman of the Board of Directors. The other Managing Member remained a beneficial owner upon the close of the Company’s IPO and serves as the Company’s Lead Director of the Board of Directors. Hereinafter these two Managing Members, and their affiliates, are referred to collectively as the Principal Stockholders after the completion of the IPO.

 

During 2020, the Managing Members and other related parties loaned the Company $1,145,000 as subordinated convertible promissory notes. Additionally, during the first quarter of 2021, the Managing Members and other related parties loaned the Company $1,255,000 as subordinated convertible promissory notes. Refer to Note 4 – Subordinated Convertible Promissory Notes for further discussion.

 

During the third quarter of 2021, the Company amended the conversion terms of its Series 1d preferred stock, as described in Note 6 – Equity Securities. As a result of the Series 1d preferred stock amendments, the Company presented a deemed dividend of approximately $2.3 million during the three and nine months ended September 30, 2021, approximately $1.2 million of which related to Series 1d preferred shares owned by the Company’s Principal Stockholders and their affiliates.

 
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly those under “Risk Factors.”

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties, and other factors, which may be beyond our control, and which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.

 

There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

 

our lack of operating history;

 

the expectation that we will incur significant operating losses for the foreseeable future and will need significant additional capital;

 

our current and future capital requirements to support our development and commercialization efforts for our product candidates and our ability to satisfy our capital needs;

 

our dependence on our product candidates, which are still in various stages of clinical development;

 

our, or that of our third-party manufacturers, ability to manufacture cGMP quantities of our product candidates as required for pre-clinical and clinical trials and, subsequently, our ability to manufacture commercial quantities of our product candidates;

 

our ability to complete required clinical trials for our product candidates and obtain approval from the FDA or other regulatory agencies in different jurisdictions;

 

our lack of a sales and marketing organization and our ability to commercialize our product candidates if we obtain regulatory approval;

 

our dependence on third parties to manufacture our product candidates;

 

our reliance on third-party CROs to conduct our clinical trials;

 

our ability to maintain or protect the validity of our intellectual property;

 

our ability to internally develop new inventions and intellectual property;

 

interpretations of current laws and the passages of future laws;

 

acceptance of our business model by investors;

 

the accuracy of our estimates regarding expenses and capital requirements;

 

 
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our ability to adequately support organizational and business growth; and

 

the continued spread of COVID-19 and the resulting global pandemic and its impact on our preclinical studies and clinical studies.

 

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipate in our forward-looking statements. Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance.

 

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs, or projections will result or be achieved or accomplished.

 

Overview

 

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

 

Dermatological diseases such as acne vulgaris (or acne), psoriasis vulgaris (or psoriasis), papulopustular rosacea (or rosacea), hyperhidrosis and various aesthetic indications affect millions of people worldwide each year and may negatively impact their quality of life and emotional well-being. While there are multiple current treatment options for these indications on the market, we believe that most have significant drawbacks, including cumbersome application regimens and varying negative side effects. While a majority of these indications are first treated with topical products, many patients frequently switch treatments or discontinue treatment altogether due to patient dissatisfaction with slow and modest response rates, early onset of negative side effects, onerous application schedules and typically long duration of therapy. A small percentage of patients may be candidates for biologic or systemic therapies, but these patients are typically required to try topical or oral treatment options prior to qualifying for these expensive systemic therapies. Given the limitation with current topical therapies and the restricted usability of systemic therapies, we believe there is a significant opportunity to address the needs of frustrated patients searching for effective topical products that satisfy their dermatological and lifestyle needs.

 

Our lead product candidate, DMT310, incorporates our proprietary, multifaceted, Spongilla technology to topically treat a variety of dermatological conditions with an expected once-weekly treatment application regimen. DMT310 is a multifactorial, naturally derived product that is applied once-weekly to treat inflammatory skin diseases. The product candidate consists of two grams of powder processed from a wholly naturally grown freshwater sponge, Spongilla lacustris (or Spongilla), which powder is then mixed with a fluidizing agent immediately prior to application by the patient to form an easily applicable paste. Spongilla is a unique freshwater sponge that only grows in commercial quantities in select regions of the world and under specific environmental conditions, all of which give it its distinctive anti-microbial, anti-inflammatory, and mechanical properties. The combination of these ideal environmental conditions, the proprietary harvesting protocols developed with our supplier, and our post-harvest processing procedures produce a pharmaceutical product candidate that optimizes the mechanical component as well as the chemical components of the sponge for a product candidate with multiple mechanisms of action for the treatment of inflammatory skin conditions.

 

We believe our Spongilla technology platform will enable us to develop and formulate singular and combination products that target topical delivery of chemical compounds into the dermis for maximum treatment effect for a variety of indications. One mechanism of our technology is its mechanical ability to allow for the intradermal delivery of a variety of large and small molecules to a targeted treatment site, through topical application. In addition to this mechanical component, the technology also utilizes multiple naturally occurring chemical compounds which we believe have demonstrated, in-vitro, anti-microbial, and anti-inflammatory properties. We believe the combination of these mechanical and chemical components can make our platform extremely versatile for the treatment of a wide variety of medical and aesthetic skin conditions and diseases.

 

Critical Accounting Policies and Use of Estimates

                    

We have based our management’s discussion and analysis of financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses, stock-based compensation expense, and the fair value of equity instruments which result in deemed dividends. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

 
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While our significant accounting policies are more fully discussed in Note 2 - Summary of Significant Accounting Policies to our unaudited financial statements contained within this Form 10-Q, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

 

Research and Development Expenses

 

We rely on third parties to conduct our clinical studies and to provide services, including data management, statistical analysis, and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved, and other criteria related to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to these costs.

 

Fair Value of Common Stock and Stock-Based Compensation

 

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The company’s policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date.

 

Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the fair value of our common shares for awards prior to our IPO, and for options, the expected life of the option and expected share price volatility. We use the Black-Scholes option pricing model to value our option awards. The assumptions used in calculating the fair value of share-based awards represents our best estimates and involve inherent uncertainties and the application of judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.

 

Results of Operations

 

Fluctuations in Operating Results

 

Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the progress and timing of expenditures related to our development of our product candidates. We cannot predict with certainty what the full impact of the COVID-19 pandemic may have on our business, results of operations, financial condition, and prospects. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.

 

Three Months Ended September 30, 2021 and 2020

 

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020:

 

 

 

Three Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

Difference

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$799,779

 

 

$120,466

 

 

$679,313

 

General and administrative

 

 

912,490

 

 

 

419,596

 

 

 

492,894

 

Total operating expenses

 

 

1,712,269

 

 

 

540,062

 

 

 

1,172,207

 

Losses from operations

 

 

(1,712,269 )

 

 

(540,062 )

 

 

(1,172,207 )

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

651

 

 

 

57,333

 

 

 

56,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(1,712,920 )

 

$(597,395 )

 

$(1,115,525 )

 

 
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Research and Development Expenses

 

Research and development expenses increased by $0.7 million from $0.1 million for the three months ended September 30, 2020 to $0.8 million for the three months ended September 30, 2021. The increase was the result of increased clinical trial expenses of $0.3 million and increased salaries, benefits, and stock-based compensation of $0.4 million.

 

General and Administrative Expenses

 

General and administrative expenses increased by $0.5 million from $0.4 million for the three months ended September 30, 2020 to $0.9 million for the three months ended September 30, 2021. The increase was the result of $0.2 million in increased insurance costs, $0.2 million related to professional fees and public company costs, as well as $0.1 million of increased salaries, benefits, and stock-based compensation.

 

Other Income and Expenses

 

Other income and expenses decreased by $56,682 from $57,333 for the three months ended September 30, 2020 to $651 for the three months ended September 30, 2021. The decrease was the result of decreased debt discount amortization of $15,979 and decreased interest expense, net, of $40,703.

 

Nine Months Ended September 30, 2021 and 2020

 

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020:

 

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

Difference

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$2,347,564

 

 

$1,493,520

 

 

$854,044

 

General and administrative

 

 

2,956,444

 

 

 

1,187,906

 

 

 

1,768,538

 

Total operating expenses

 

 

5,304,008

 

 

 

2,681,426

 

 

 

2,622,582

 

Loss from operations